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TUESDAY, JUNE 15, 1999
U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Bereuter, Campbell, Lucas, Kelly, Cook, Ose, Biggert, Green, Toomey, LaFalce, Vento, Frank, Waters, Bentsen, James H. Maloney of Connecticut, Sherman, Lee, Goode, Mascara, Schakowsky, Moore, and Jones.

    Chairman LEACH. The hearing will come to order. On behalf of the committee let me extend a warm welcome to Under Secretary Geithner and our distinguished panel of private witnesses.

    Today the committee holds the fourth in a series of hearings on key issues of international finance. Whereas earlier hearings dealt with issues of signal import to the industrial and developing countries most deeply integrated in the global financial system, today's hearing will focus on the burdens of the heavily indebted poor countries least integrated in the world economy.

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    Relieving the debt burdens of the world's poorest countries is one of the foremost economic, humanitarian, and moral challenges of our time. Seldom has there been such a compelling conjunction between abstract economics, ethics, and public policy.

    In 1996, the World Bank and International Monetary Fund identified forty-one countries in Africa, Latin America, and Asia as heavily indebted poor countries. These nations are home to almost one-fifth of the world's population; 32 are located in sub-Saharan Africa. By the end of the decade, over one-half the region's population, some 300 million people, will be living in poverty. Incredibly, many African governments are spending four times more on debt service payments than education.

    In recent years, creditors sought to address the problem of poor country debt by rescheduling loans and in some cases providing limited debt relief. Despite these efforts, the cumulative debt of many of the world's poorest countries continued to grow well beyond their ability to repay it. That is why in 1996 the World Bank and IMF crafted the HIPC Initiative, which represented a commitment by all creditors, including the international financial institutions, to act together in a comprehensive way to reduce poor country debts to a sustainable level.

    But HIPC has yet to fulfill its early promise. As many nongovernmental organizations and religious groups have long recognized, and as the U.S. and creditor governments increasingly recognize, progress under HIPC has been too slow. Only seven countries have qualified for assistance under HIPC and only three countries have received debt relief. Moreover, many critics contended that the objective of the initiative was too narrow and that it should encompass broader issues of development and poverty reduction. As the London Financial Times commented in a trenchant editorial this spring, ''The rules have been too rigid. HIPC needs a kick-start.''
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    To help provide that start, I introduced, along with seven other cosponsors, including Mr. LaFalce, Mr. Bachus, Ms. Waters, Mr. Bereuter and Mr. Frank on this committee, the Debt Relief for Poverty Reduction Act, H.R. 1095. The goal of the bill is simple: to provide faster and deeper debt relief to more countries, provided they are committed to reform, as well as translating the savings from debt relief into poverty reduction and sustainable development.

    The bill is the result of extensive collaboration and dialogue between this committee and a number of non-governmental organizations and religious groups, which have united under the banner of ''Jubilee 2000.'' The term ''Jubilee'' is appropriate, since it invokes an Old Testament Biblical concept of restoration, and providing a fresh start to these countries at the beginning of the new millennium.

    The Most Reverend Frank Griswold, Presiding Bishop of the Episcopal Church in the United States, perhaps said it best, and I quote: ''The essence of Jubilee is related to suspending patterns—patterns of work, patterns of domination, patterns of acquisition. It recognizes the need for things to rest, to restore 'right relationship,' and recover equilibrium in the world. This notion . . . remained an important element of early teaching and shaped Jesus' ministry in his time and beyond. It remains a challenge for us today.''

    Faith-based groups and churches around the world are among Jubilee supporters. In addition to the Episcopalians, they include: Bread for the World, Catholic Relief Services, Center of Concern, Church World Service, the Evangelical Lutheran Church in America, Lutheran World Relief, the Mennonite Central Committee, National Council of the Churches of Christ in the U.S.A., Oxfam America, Presbyterian Church (U.S.A.), United Church of Christ, United Methodist Church and the United States Catholic Conference. As a result of their extraordinary efforts, H.R. 1095 has already gathered 61 co-sponsors and it received the endorsement of over 140 NGO and religious groups.
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    In this regard, it should also be noted that these and other groups have been engaged in an intensive dialogue with the international financial institutions, the U.S. and other governments on revising HIPC. Indeed, shortly after the introduction of H.R. 1095, President Clinton issued a constructive call for a major new international effort on debt-related programs, asking the international community to take actions that could result in $70 billion in nominal new assistance.

    As G–7 leaders at this weekend's Cologne Summit consider principles for changing HIPC, American leadership is critical. We have demonstrated to the world our capacity to lead in the use of force; now we must show an equal commitment to leading in the delivery of compassion. While this decade has produced an unprecedented number of people living in prosperity, there is also an unprecedented number of the world's population living in hardship.

    I would like to ask unanimous consent to extend these remarks and, at this point, would turn to Mr. LaFalce. Before doing that, I would also like to ask unanimous consent to put the statement of the Reverend Griswold in the record immediately following our panelists.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. And let me again commend you for the series of hearings on very important international economic, financial and banking issues. And I also want to compliment Mr. Bachus and the Majority staff who have spent many weeks putting together the hearings and providing excellent background materials and fully cooperating with the Democratic staff. This has been an excellent example of bipartisan cooperation on a very difficult issue.
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    I would also like to express my appreciation to so many of the non-governmental organizations whose staffs have also provided us with extremely useful information on international debt. Indeed, I really think it is the NGOs that have taken the lead on this issue. I have long had an excellent working relationship with the National Conference of Catholic Bishops. They, as well as so many other religious organizations, such as the staff from the United Church of Christ and others have been especially helpful.

    Under Secretary Geithner, I think this is your maiden voyage in your new position; is that correct?

    Mr. GEITHNER. It is.

    Mr. LAFALCE. Baptism by fire. OK. We welcome you to your new position and we welcome you to the Banking Committee.

    The Administration has taken an important first step in proposing new initiatives on international debt relief. Some of us would wish to go even further than the Administration, and that should embolden the Administration to perhaps consider going even further. And I look forward to working with the Administration and the NGOs to push for legislation for the world's poorest countries. We are going to have to work together if we are going to accomplish this.

    I am absolutely delighted that debt relief now appears to be one of the primary issues at the upcoming G–7 meeting in Cologne.
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    I was especially delighted when this morning I was reviewing Congress Daily A.M., saw the headline that Gene Sperling said yesterday that, in Europe, President Clinton will propose at least a $65 million debt relief plan. I find that very encouraging, and we intend to be as supportive as possible.

    As you know, a number of Members of this committee, led by Chairman Leach, myself, Mr. Bachus, Mr. Frank, Mr. Bereuter, and so forth, have introduced H.R. 1095, which could do very much to alleviate suffering in many parts of the world.

    Mr. Chairman, I hope that at some early point in time in this Congress, this session, we will be able to move forward to markup of it, and I hope we can work with the Administration, that they might be supportive of it.

    The last two years have brought severe economic and financial problems in many parts of the world and the real prospect of global economic recession. Fortunately, we got past that situation with relative success, but there are very real problems that remain in many parts of the world. Some countries not in difficulty previously are now showing signs of weakness; and the global problems have revealed faults in our international financial architecture.

    The economic, social and political situation in Russia is most bleak. Financial and economic recovery in Brazil is still moot; it is still a real question. And I, for one, am also worried that Germany's apparent economic recession, and problems in the Italian economy will substantially dampen economic and financial growth in the European Monetary Union, which prior to this year was so promising for global economic recovery.
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    I will be questioning you and others, such as Professor Sachs, on those issues.

    Another concern I have is whether the considerable efforts to address the international financial crises by the IMF, the World Bank, and the other multilateral banks were the best we could have achieved. I think mistakes were made, and in some instances serious mistakes, by the multilaterals in responding to various international financial crises; and it will be interesting to see what lessons we think we have learned that we can utilize prospectively.

    And although of a slightly different nature, the multilateral response to countries in financial crisis is indicative of how the multilaterals approach international debt relief. Often the conditions imposed were inappropriate and contrary to recovery. Moreover, some countries which received relief, and which continue to do so, did not comply with the imposed conditions, and yet for geopolitical reasons and other reasons, continue to receive assistance.

    Now, what does this say to the highly indebted poorest countries that have needed debt relief for decades?

    Although economic and financial conditions need to be negotiated with countries receiving debt relief from our Government and from the multilateral banks, we also need to ensure that efforts to improve social and humanitarian conditions are equally important requirements for relief. And those two should be essential negotiated conditions.

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    Certainly I will have questions on the issues of conditionality for members of our panels.

    Mr. Chairman, as you introduced Mr. Griswold's statement, I would ask unanimous consent to have introduced into the record with my opening remarks a copy of a portion of a publication produced by the Catholic Campaign on Debt. I think their section on ''Criteria for Evaluating Debt Relief Programs'' is most useful for developing principles of conditionality and the debt relief process.

    In addition, Mr. Chairman, I would like to talk with you and explore in the future the possibility of requesting that the Congressional Budget Office provide an economic analysis of conditionality for debt relief and offer us some guidance on how it should be properly used. If we truly are coming out of global financial crisis, then now more than ever is the time for the United States to take the lead on international debt relief to the world's poorest countries as well as those we assisted last year in the international financial crisis.

    I thank the Chair.

    Chairman LEACH. Thank you. And without objection, the publication, Jubilee Call for Debt Forgiveness, will be placed in the record.

    Mr. Bachus, in recognizing you, let me thank you for all your work on this.

    Mr. BACHUS. Thank you, Mr. Chairman.
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    Chairman LEACH. It was spectacular.

    Mr. BACHUS. And I thank the panel.

    And what are we talking about? We are talking about the first necessary steps of raising the standard of living of those living in the most impoverished countries, those in most need, the most vulnerable, the most helpless. Without debt relief these nations, their citizens are overwhelmed by debt far exceeding their ability to pay, admittedly, amounts which the prosperous nations of the world might consider small.

    These nations do not have the ability to both repay the debt and offer necessary social and economic support to their own people. Debt relief is not an end in itself. It is a means to an end. It is not a total solution to poverty, hunger, and disease, but it is the necessary first step. It is where the journey should begin.

    What is that journey? What is that objective? To free these countries of the burden of debt, the chains of poverty, the shackles of despair, to give these nations debt forgiveness, to enable them to minister to the severe economic and social needs of their people.

    We find ourselves presented with a decision. What will we do? When the need is so great and the opportunity so unique, cost by no means should be the overriding factor in making this decision. Doing the right thing, whatever the material cost, should always be the imperative.

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    Nevertheless, let us attempt to count the cost, the cost of acting and the cost of not acting. When we do, I cannot in good faith fail to embrace this unique opportunity to help so many at such a small cost to ourselves.

    What is the cost of debt relief? And at this time, Mr. Chairman, I would like to introduce into the record what that cost would be for each citizen this year. And it is $1.20. And I would actually like to introduce that into the record.

    Chairman LEACH. Without objection, that will be placed in the record. And we will find a place to put this $1.20.

    Mr. BACHUS. It is a nominal amount. It is a minimal amount. But it is not an insignificant amount or an inconsequential amount when you realize what it can do.

    It is the cost of an ice cream cone, it is the cost of a gallon of gas. It is the cost of the Sunday paper. Against this minuscule sacrifice, what is the cost of not acting? Today, in dozens of poor countries all over the world, little boys and girls are born into poverty, disease and hunger.

    We in America are fond of saying, ''I had a bad day.'' We should realize that even on our worst days we are blessed with so much more—more food, more shelter, more clothes, more security—than our poor brothers and sisters on their best days. We truly can't comprehend what their day is like.

    However, I am going to attempt to do so with one quote, and it is from Sister Rebecca Trujillo of the Sisters of Notre Dame in Nicaragua. Here is what she writes about the plight of the poor:
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    ''Often in my life when I talk about the needs of the poor with whom I work, people say, 'how do they survive?' Since being in Nicaragua, I have taken to answer in a matter-of-fact way, 'often they don't.' ''

    Let me illustrate the cost of not acting as it applies to fifteen baby boys or girls born into the poorest of countries. Of those fifteen, three will die before his or her first birthday. Of the remaining twelve, four will suffer the scourge of malnutrition with permanent consequences to their physical and mental development. Of the remaining eight, they are in no way fortunate. Their chances of not graduating from high school, of drinking unclean water, of suffering disease and deprivation, of being orphaned are great. Sometimes as much as 50–50. Their burdens are day-to-day. They are painful. They are heavy.

    We in America have been blessed with a period of almost unparalleled economic prosperity. Never in our history has one country had so much progress, wealth and luxury. Now, with the start of the new millennium, we can do so much for the 700 million of the poorest at such a small cost to each of us. What a shame if history should look back on us and say that we passed up so great an opportunity.

    In conclusion, Mr. Chairman, I would like to say that this decision is three things: First, it is a decision that will follow us. For the people living in these poor countries, their suffering is temporary; it will end with their lives. For us, this decision will follow us. We will not only live with it in this life, but we will live with it in the next life.

    Second, this decision will define us. It will define us as either a loving people, a people filled with grace and compassion, or it will define us as a people focused on the monetary, the temporal.
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    And third, and I think this is most important, this is not a decision that the poor countries of the world will make; it is our decision. We have the responsibility, we have the obligation, and we have the direction as to what is the right thing to do. For it—whether you are a follower of the Islam religion, whether you are a Muslim, whether you are Christian, whether you are Jewish, all those religions give us a moral imperative in such a case, and that is to act. And to me, there is really only one decision.

    Thank you.

    Chairman LEACH. Well, thank you for the extraordinary statement.

    Mr. LaFalce.

    Mr. LAFALCE. Mr. Chairman, I simply want to commend Mr. Bachus for one of the most moving statements I have ever heard given in the House Banking Committee. I commend him for his great leadership role, and I want to associate myself fully with his remarks as I believe almost every Member of this committee would want to. I thank him very much.

    Chairman LEACH. Mr. Frank.

    Mr. FRANK. Mr. Chairman, I also want to say, first, that the moral force of Mr. Bachus' statement I hope will set the tone for this Congress. It really is an extraordinary act of leadership, and we are all indebted to him for setting this tone and setting a standard that we have an obligation to live up to. And I say that because I appreciate your accommodating me.
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    The Judiciary Committee today is marking up legislation dealing with religious liberty, abortion and civil asset forfeiture, and I am therefore going to have to leave. But I did want to explain my absence, because I do believe this is the single most important issue we will be dealing with.

    You get into a kind of ratio. I have a more important role in less important business over there because we are actually voting on it. If we were marking up this bill, I would be here today. So I want to explain the fact that I will be absent for most of it, and that is why I asked for the time.

    But I did again want to close, as I opened, by expressing my admiration for the extraordinary passion and eloquence that Mr. Bachus brought to what I think is the single most important issue before us; and the only one substantive issue for people in the financial community they should understand is that cooperating in this happening is a sine qua non if they want our cooperation in leading with globalization, if they want our cooperation in opening trade, in funding the international financial institutions, in facilitating the mobility of capital, this is the price they have to pay for it. And they should understand that there will not be business as usual, I believe; and I think there is a pretty strong sense of this in this committee, unless we get their cooperation in doing this and doing it well.

    Chairman LEACH. Thank you.

    Mr. McCollum.

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    Mr. MCCOLLUM. Thank you, Mr. Chairman.

    Just like Mr. Frank, I have to be much of the day in the markup of the Judiciary Committee. I too join in commending Mr. Bachus for his comments. They were extraordinary. I would suggest that perhaps the key thought that we have here as we sit today, beyond concern, of course, for those in other countries that we are primarily discussing, is Ronald Reagan's phraseology that seems so appropriate today, ''The United States is that shining city on a hill that provides the beacon of hope to others.'' And we need to further that.

    I, for one, believe the economic pie can be grown around the world. But it does take creativity and it takes a lot of effort on the part of those of us who are fortunate enough to live in this great country to assist others who aren't so fortunate to find their way. And I certainly commend the efforts going on today. And I will hear some of the hearing, but not all of it.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. McCollum.

    Mr. Vento.

    Mr. VENTO. Mr. Chairman, I put my statement in the record and would like to comment that the debt relief effort obviously is a very significant one.

    On the economics and numbers, our banking and international institutions have found a way to be very exact in keeping track of this. In fact, it is obvious, as a nation, almost impossible to avoid the type of accumulation and reality of these debts. Such debts, for all practical purposes, completely prevent the nation from, in fact, exercising policy and seeking the general welfare of the nations that are affected by that burden. Debt takes away, in essence, a country's ability to self-govern and to seek the type of general welfare that any nation needs to command.
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    I think we need, in this case, to move outside the box, look for agreements; and also to look for the means available that the international institutions, whether they be the IMF, the World Bank or the private lenders, will not slip down the same slope again in terms of how we deal with these nations.

    I do not look just to the act of resolving these issues, but also whether or not the goal that we seek will be predicated on a new policy path for the institutions to not, in fact, move right back into the same groove that has led to policies that for decades have led us here. Specifically, this deals with some of the trade policies, World Bank policies, IMF policies and the private lender policies that have brought us to this particular circumstance. It is necessary to completely extinguish, or at least largely extinguish, these debts which are impossible for these nations to, in fact, exercise reasonable economic and social policy under the burden of overwhelming debt.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Vento.

    Mr. Bereuter.

    Mr. BEREUTER. Mr. Chairman, I want to very briefly commend you for your initiative and to thank you and the Ranking Member, Mr. LaFalce, Mr. Bachus and Ms. Waters for your leadership in bringing this legislation. I think Mr. Bachus' comments graphically and very eloquently crystallize our responsibilities, the task before us. I think this issue has been too long delayed for active serious consideration.
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    I want to say that I will be focusing a little bit on the nuts and bolts of the eligibility section, Section 902. I want to understand whether or not the group of 41 countries is the right definition to use and whether it is consistent with Section 902.

    I have focused, for example, on the problems for Bangladesh for some time. They have a huge debt burden, mostly to the United States in bilateral assistance, yet Bangladesh has fallen through the cracks—definitely an extraordinarily poor country, but not covered in the group of 41. I will be looking at that issue in regard to whether we have the right definition here.

    And finally, I want to welcome Under Secretary Geithner in his first appearance and I say we look forward to a very cooperative relationship with you on this committee and look forward to your response and your statement, as well as our distinguished and diverse second panel.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Bereuter. I would say that we have added four countries, in essence, to our bill, one of which would be Bangladesh, covered under our terms.

    Ms. Waters, who has been so extraordinary in her leadership on this.

    Ms. WATERS. Thank you, Mr. Chairman.
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    I would like to begin by first expressing my appreciation to you for all of the work that you have put into this legislation. I am extremely appreciative of the effort that you have put forward in bringing all of our non-governmental organizations together so that we could have an united front in dealing with this issue of debt relief.

    I would also like to thank Mr. Bachus for his care and concern on this issue. He has indicated more than once, and in a consistent way, that debt relief may be one of the most important issues that this committee will deal with, and his voice has been well heard; and I think we have the makings of a great bipartisan effort.

    I am very pleased and proud to work with my colleagues on this committee to do something about debt relief. This bill will provide substantial debt relief to heavily indebted poor countries and ensure that the savings from debt relief will be targeted to the poorest people in these countries. I am proud to be an original co-sponsor of this bill.

    Mr. Chairman, I would like to address these next few comments to you. I have introduced some additional legislation. That does not in any way take away from what you have done with this legislation, that I am so much a part of. I am especially concerned about Africa, and for that reason, I am introducing legislation today to provide comprehensive debt relief to poor countries in Africa. My bill, the Debt Relief and Development in Africa Act of 1999 would establish a comprehensive program to relieve the debts of sub-Saharan African countries.

    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, such as health and education, in order to make payments on their debts. In Zambia, Niger, Mozambique and Uganda, government spending on debt service payments is greater than government spending on health and education combined. Tanzania spends four times as much money on debt payments as it does on health and education combined.
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    The people of heavily indebted African countries already live in extreme poverty. Mozambique, for example, is one of the world's poorest countries. This country's average per capita income is less than $100 per year. Almost 200,000 children die annually in Mozambique from preventable illnesses such as malaria, measles and respiratory infection. Only half of the rural population has access to safe water; and diarrhea, cholera and dysentery epidemics are very common. Primary school enrollment rates are only 60 percent for boys and 50 percent for girls. School buildings are often little more than huts with crumbling walls, and there are often over 50 or 60 children in a classroom with only two or three books and pencils to be shared by the entire class.

    In addition to being one of the world's poorest countries, Mozambique is one of its most indebted. The total amount of Mozambique's debt is $5.3 billion. Scheduled repayments on debt for 1997 were $196 million, or $13 for every Mozambican citizen. Debt relief is essential for countries like Mozambique to be able to end the crushing poverty that is afflicting their populations.

    The heavily indebted poor countries, the so-called HIPC Initiative of the International Monetary Fund—IMF—is clearly inadequate to address the needs of poor countries. Many poor countries do not even qualify for the HIPC Initiative, although their debts are a tremendous burden on their impoverished populations.

    Furthermore, the HIPC Initiative does 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.
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    These countries, or those countries that do qualify for debt reduction under the HIPC Initiative, are required to adopt the most painful structural adjustment programs and to implement these programs continuously over a six-year period as a condition for receiving debt relief. Those programs normally require further cuts in health care, education and other social services.

    The bill that I am introducing today expands the number of countries that qualify for debt relief programs, provides deeper debt relief and allows debt relief to begin immediately for all countries that qualify. Further, my bill completely delinks debt relief from the IMF's structural adjustment programs, which many Africans believe have done more harm than good.

    My bill conditions debt relief on policies that will enable African countries to develop in ways that benefit their people. Countries will be required to establish a Human Development Fund to ensure that the savings that result from debt relief will be used to reduce poverty and provide health care. I am particularly concerned about AIDS. This debt relief will be used not only to reduce poverty and provide health care, education, and other social services to the poorest members of society, but the countries will also be required to establish a Natural Resource Development Plan for the purpose of developing their natural resources in a manner that will benefit their populations and ensure a fair return for the use of their resources. My bill will also establish monitoring panels to ensure that grass-roots organizations in Africa have an opportunity to participate in the development and implementation of these plans.

    Let me just stop here, because as we talk about this debt relief, I want to point to this health problem that I have alluded to, that goes beyond some of the ordinary health concerns that we all have for these countries. And I am going to force us to deal with AIDS in Africa.
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    Since the early 1980's, more than 47 million people have been struck by AIDS. In 1998, new infections numbered close to six million, four million of whom were in sub-Saharan Africa. Therapies benefit the sick only in rich countries. In Africa: twelve million deaths since the beginning of the pandemic; today, 5,500 AIDS related funerals daily; 21 million people in Africa are infected today, two-thirds of the world's total.

    Seventy percent of women attending some African prenatal clinics are HIV positive. HIV has hit children in Africa harder than anywhere else in the world. African countries are particularly prone to the spread of HIV because the virus has existed on the continent longer than anywhere else. There are many subtypes of the illness.

    Low levels of literacy make public education difficult. The epidemic could threaten reconstruction and development efforts as a result of social and economic burdens. Lack of a proper prevention policy has helped to spread AIDS. Prevention programs will achieve only limited results unless cultural attitudes change and unless the countries can be hauled out of chronic poverty and debt.

    I have not heard a discussion of AIDS in Africa as it relates to debt relief. I have not heard anyone talk about the drain on these societies because of AIDS. I have not heard, and certainly probably won't ever hear, IMF talk about what it means to have to dedicate a significant portion of the revenue of these countries to begin to deal with this issue.

    Now, Mr. Chairman and Members, my main reason for striking out to say—in addition to the wonderful work that you are doing—we have got to pay special attention, because if we don't, sub-Saharan Africa will be no more. It will literally be wiped out unless special attention is paid to Africa. We can't do it under these structural adjustment programs.
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    I will stop because you have been very generous with the time that you have allotted me. But I have got to create some discussion about AIDS in Africa and structural adjustment.

    Chairman LEACH. I will thank the gentlelady.

    Mr. Campbell.

    Mr. CAMPBELL. Mr. Chairman, thank you.

    My colleague and friend from California, I would like your attention and that of the Chairman on this point. I applaud both your efforts. Mr. Chairman, just after you introduced your bill, I introduced H.R. 1305, with which you may be familiar, and here is the structure of it.

    I would like, in working together with you, to bear in mind the following question: Why do the countries newly emerging from tyranny have any obligation to pay the debt incurred by the tyrants? If you ask it that way, you get to Mozambique, you get to The Congo. If you start from the premise of, well, they do owe it and therefore it is appropriate to impose terms on repayment, you will get to a very sensible and moderate kind of bill, I understand, but you will not really get to the moral point that the folks there now don't owe it if it was incurred by a previous government over which they had no control.

    And so I am worried to the extent that the bill that you proposed, or the bill—I would love to read it today, Maxine, and I would love to be a sponsor. I will just read it first.
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    Ms. WATERS. Thank you.

    Mr. CAMPBELL. And I would like you to take a look at H.R. 1305.

    But I don't impose the restrictions; I say, write it off. Even if your intention is wonderful, you then have a monitoring mechanism and you have got some bureaucracy, well intentioned. But write it off if it isn't their obligation.

    You know, the money is not big. We all know that, OK?

    Then, second, what do you do about IMF? Why are we recapitalizing IMF? I am troubled by this immensely. Instead, we ought to say, no recapitalizing IMF until IMF writes off the heavily indebted poor countries. Let the money that we would have spent for recapitaalization go to this purpose instead.

    The amount of debt owed by the heavily indebted poor countries to the U.S. is under $6 billion. How much of that is going to be collected anyway? Come on, Spence, you have figured $1.20 per American. I bet 10 cents on the dollar would be a high rate of return on collecting that debt; I bet 10 percent would be a more correct rate. It is probably more like a collectible $600 million. But if you took the $6 billion—and this is not a partisan comment, but let me just compare it with the $100 million a day we spent in fighting the war for Yugoslavia. We bombed for 79 days. That is $7.9 billion.

    So I urge Mr. Chairman and Chairman Bachus and my good friend and colleague from California, as we go forward, if you would be so kind, give some thought to H.R. 1305. As a sign of my good faith and admiration, I would like you today to put me on as a co-sponsor of H.R. 1095, but to wonder seriously, should we be adding conditions at all?
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    And, lastly, I will just put on the record, I think—as the Chairman knows because of his great interest in Africa, it is my privilege to serve on the Subcommittee on Africa of the International Relations Committee, and I am going off to Africa during the July 4th break. So I hope to have some new lessons to share with my colleagues with that.

    Ms. WATERS. I like your bill better than mine.

    Mr. BACHUS. Would the gentlemen yield?

    Mr. CAMPBELL. I would be please to yield.

    Mr. BACHUS. I think when you read the legislation, H.R. 1095, I think you will see what we are attempting to do is make sure that this debt relief is not squandered, that that it is used—that it is saved to alleviate poverty, to protect the environment, to go to educational functions in those countries. I think we have an obligation not only to relieve the debt, but also to at least make an effort to see that the money is well-spent.

    Mr. CAMPBELL. I would like to reclaim my time. Nobody has a purer motive than you, Spence. I am with you on that. But let me just consider what you said.

    It is not new money; it is the canceling of an obligation by that country to pay to us. And so you are going to have us monitoring, ''now we may not cancel it this week, because you didn't spend enough for education, environment, or AIDS.''

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    If it was new money, I would see your point. But if it is ending their obligation to pay what is due to us, write it off and don't have any more bureaucracy.

    However, I am with you on your bill. If your bill is the vehicle, I want to be on that train.

    Chairman LEACH. Does anyone else seek recognition?

    Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman, Ranking Member LaFalce. I want to thank you both for agreeing to hold this hearing today. I think this is a very important issue.

    The burden that international debt places on the poorest nations is such that the nations really have no way to provide for proper investment in education, health care and infrastructure. This abject poverty that these people have to cope with every day is so harsh that the smallest kind of relief I believe would have far-reaching effects.

    I am a strong supporter of Chairman Leach's bill. I look forward to working on it in this committee, but I also expect to spend a certain amount of my time exploring the issues that surround the Enhanced Structural Adjustment Facility, the ESAF. I think this mechanism through which the IMF provides assistance on concessional materials, really needs to have the bright light of day put upon it. I think having debt relief go through ESAF may waste critical funds that are best spent directly on debt relief.
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    I hope our witnesses are willing to share with me some of their considerable knowledge on this issue. And I look forward to continuing to work on the issue with all of my colleagues. And I thank you, Mr. Chairman, for letting me have this time.

    Chairman LEACH. Thank you, Mrs. Kelly.

    Does anyone else seek recognition?

    Mrs. Lee.

    Ms. LEE. Thank you, Mr. Chairman. And I want to thank you also for holding both the subcommittee and the full committee hearings on our policy regarding the heavily indebted countries. And I also want to thank Mr. LaFalce and Ms. Waters for their leadership on this and their deep concern for the profound social and political problems that these debts impose on these countries.

    I have personally witnessed the effects of the enormous debts in many African countries that I have visited, as they attempt to develop a real workable mix of economic approaches that would enable them to be independent politically as well as economically. Some of us viewed debt relief as we would bankruptcy domestically.

    There is now a substantial social and legal tradition in some countries of some stability of allowing people and organizations who are seriously in debt to be allowed to restructure, to reduce their debts, or if hopelessly indebted, to be forgiven their debts, to be allowed to be bankrupt.
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    Many societies have learned that it is not socially or economically helpful to imprison debtors or to allow debtors to be permanently crippled by debt and unable to function, that they should be assisted in being able to return to economic society, to full function.

    So bankruptcy laws, of course, have to be balanced and they are balanced against the rights of the lenders and the borrowers. I think the profound basis, though, of bankruptcy common law is that it is based upon allowing a member of society to rearrange their finances, even if it is a negative sum, to begin a new financial life.

    So we recognize that the heavily indebted countries are in the condition of a family that cannot afford inadequate food or health care or education because of the payment on the interest, because of the fact that this interest alone absorbs a significant portion of the national budget. The debt payments in these cases are made at the expense of basic physical survival and with full knowledge on the part of the lender that the impact on these indebted countries will be very negative.

    And I want to thank Ms. Waters for laying out the whole issue of the HIV-AIDS crisis in Africa and the fact that millions and millions of people have died in Africa, and yet Africa countries are strapped in their efforts to address this crisis because of the huge burden of debt. So thank you again for the opportunity to really weigh in on these bills in an effort that will hopefully raise the standard of living for people living in extreme poverty.

    Thank you, Mr. Chairman.
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    Chairman LEACH. Thank you very much, Ms. Lee.

    We will now turn to our witness, and we have the distinguished Under Secretary of the United States Treasury, Under Secretary Geithner.

    Please proceed, and without objection, your full statement will be placed in the record.


    Mr. GEITHNER. Thanks. I will summarize my statement for you.

    Mr. Chairman, Mr. LaFalce and Members of the committee, I am pleased to be here today. We very much welcome the leadership you have shown in this area. It is nice to get a kick in this direction; we are often kicked in the other direction. And we are very pleased by the efforts you have made to put together constructive solutions that have the prospect of broad bipartisan support in this Congress.

    We are very supportive of the broad objectives and much of the approach as laid out in the Leach/LaFalce legislation. We look forward to working with the committee to shape a bill and to find the financial resources to make it possible.

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    And it is our hope that the moral imperative for substantially reducing the debt of the poorest countries will translate into political support, not just to finance a debt initiative, but to make sure we have the capacity to continue to finance adequate concessional flows of assistance to the poorest countries, which will be necessary, independent of what we do on the debt front.

    I should say, by introduction, that I spent most of my youth living in some of the poorest countries in the world, and that is an experience that cannot be dulled by ten years at the Treasury Department.

    This debate about how to strengthen the debt initiative for the poorest countries takes place in the context of a series of previous initiatives to alleviate the debt burdens of the world's poorest countries. Over the past ten years, about 35 of the poorest countries have received debt relief through the Paris Club with programs designed to provide up to 67 percent, up to two-thirds, debt reduction on eligible bilateral debt. And three years ago, the international community launched a new approach to reduce the debt burdens of the poorest countries, that for the first time brought in the international financial institutions that hold much of the debt. Late last year we began to take a look at how to strengthen this initiative. In March, the President outlined a new approach that offers the promise of deeper, broader and faster relief to the poorest highly-indebted countries. This proposal would provide a greater focus on poverty reduction and strengthen the connection between the resources freed through debt relief and the resources available to meet the basic human needs of people in these countries.

    I am going to outline the specific approach we have tried to develop, but before I do so, let me touch on some of the broad principles which shape our approach.
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    First, reducing debt and freeing resources from debt service for investment in basic human needs are not just a moral or humanitarian imperative; they can be good economic policy. Debt reduction can complement development assistance by reducing the overhang of debt permanently. By contributing to a more sustainable debt profile, carefully designed debt reduction can help improve the capacity of governments to meet the needs of their people. It can help create a more attractive environment for private investment and improve the conditions for sustainable development in general.

    Second, debt relief programs need to be designed carefully to avoid the risk that they create adverse incentives then reduce the capacity of governments in the poorest countries to access adequate levels of finance in the future. The capacity to borrow responsibly is critical to any government's ability to finance the needs of its people, and to any country's capacity to grow over time. Finance will not flow in a world in which we systematically relieve governments of debt obligations without regard to their capacity to meet those obligations. The systematic forgiveness of all debt would, in our view, be counterproductive, despite its compelling moral appeal. Whatever short-term savings it might provide would, in our view, be offset by the costs in terms of lost future access to finance.

    Third: Debt relief needs to be designed to reinforce economic reform and to generate new resources for investment to meet basic social needs. As my boss, Secretary Rubin, puts it, ''Debt reduction can have no lasting benefit if not accompanied by meaningful reform. The country itself must act to address the underlying causes of poverty or the funds freed up by debt relief will not have a lasting effect.''

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    Secretary Summers puts it a different way:''We can't want poverty reduction in these countries more than the governments in the countries want it and are able to deliver it themselves.''

    Fourth, the final principle is that coordinated and concerted action among creditors is necessary to ensure that the benefits flow to the beneficiary countries, and are not simply used to enhance the payment prospects of other creditors. Unilateral action by the United States would achieve little, not just because we have already forgiven a substantial portion of our claims on the poorest countries, but primarily because it would leverage little, if any, action by other bilateral creditors, and we would diminish future prospects for inducing meaningful relief.

    Earlier this spring, the President laid out a general framework for substantially reforming the Highly Indebted Poor Countries Initiative, and we have been working since that time to build support among the other major creditors in the G–7 on an approach that we hope will be adopted later this week.

    The broad elements of our approach are the following:

    First, a greater emphasis on poverty reduction. Our view is that we need to reform the basic policy framework that is the foundation of any effective debt program. We want to see the IMF and the World Bank develop, with input from the creditor governments, civil society, the beneficiary countries, and the NGO community, a new framework that combines realistic, growth-oriented, macro-economic policies with a greater emphasis on poverty reduction.

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    Our hope is that this framework would provide greater transparency and accountability concerning the fiscal policy choices that these governments make. Our framework would help ensure that the resources saved through debt relief actually result in increased investment in health, in education, in child survival, in AIDS prevention, and in poverty reduction in general.

    The second key element in our approach is deeper debt reduction. We believe the international community should be prepared to provide substantially deeper relief to countries that commit to this new policy framework. Toward this objective, we have proposed that donor governments and the international financial institutions provide the relief necessary to achieve sustainable debt targets for eligible countries.

    We have also proposed that donor governments fully forgive all bilateral concessional debt on top of the debt reduction they provide under this modified HIPC Initiative.

    The third piece of our proposal is faster relief. We believe the new program needs to provide earlier relief in a way that does not undermine the incentives for sustained reform that are absolutely essential to successful development efforts.

    To achieve this, we proposed first, that the international financial institutions provide interim relief, cash flow relief that is equivalent to the stock reduction provided at the end of the performance period; and second, giving eligible countries the ability to accelerate the point at which they benefit from debt reduction by implementing certain pre-agreed policy reforms.

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    These proposals are very similar to many of the provisions of the Debt Relief for Poverty Reduction Act. Both the Administration's proposals, and your proposals, call for a program built on full forgiveness of ODA debt, substantial deeper reduction of non-ODA claims, faster relief and a greater focus on poverty reduction.

    There are some differences, however, in the approaches we have adopted, but we are closer together than we are apart.

    Our hope is that we will be able to achieve a broad-based consensus later this week at the G–7 summit and then later this fall among the full membership of the IMF and World Bank, around a set of proposals that are consistent with these objectives.

    I can't say with confidence what the outcome of the summit will be, but I can tell you more about the proposal that we are pursuing. And I can say that we are reasonably confident at this stage that we will achieve agreement on a program that will provide much greater relief sooner to a broader range of countries than is now possible under current programs.

    Let me talk briefly about finance. Any new initiative in this area that wants to provide substantial relief will have significant implications for donor governments and for the international financial institutions. It is hard to fully measure or estimate those costs at this early stage. In looking at how to try to meet those costs however, we have taken the sensible step of examining the resources of the institutions themselves. Our view, for which we have requested authorization, is that it would be appropriate for the IMF, in a carefully phased approach, to sell a modest amount of its gold reserves. We have also identified a few other internal resources within the IMF that would help finance the IMF's portion of the enhanced program.
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    In the multilateral development banks, which also hold substantial claims on these countries, we are looking at a variety of methods to make greater use of their own internal resources, but the cost to those institutions will be substantial. As your bill recognizes, those costs must be met by additional bilateral contributions to the HIPC trust fund.

    The costs to the United States come in two forms. The first form is the direct cost of deeper bilateral debt reduction. The second form is the indirect cost. We, with other countries, are going to have to bear a portion of the cost to the international financial institutions. These indirect costs are unavoidable and will be quite substantial.

    Any judgment you make about those costs will depend on a number of factors. It will depend on the full scope of the program we adopt internationally. It will depend on the speed at which countries become eligible. It will depend on the scope we identify for mobilizing the resources of the IMF and the other international financial institutions themselves, and it will depend a lot on the state of the world as it develops over time. But we would be happy to give you a more definitive sense about how to quantify those costs as we go forward.

    I would like to highlight one point: The White House said yesterday that the Administration is prepared to work with the Congress to provide a significant contribution to an expanded HIPC trust fund to help meet the cost of these initiatives. We very much welcome the recognition and authorization the bill provides toward that objective, because additional assistance will be central.

    In conclusion, I want to say something that is sort of obvious. There is a paradox around debt with two dimensions. One dimension is the sense that although debt is a burden to countries, it is also true, as I said, that a government's continued capacity to borrow responsibly is essential to its capacity to meet the needs of its people, and we need to be very careful when designing a sensible debt reduction program not to undermine that capacity in the future.
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    The second paradox is that although any realistic estimate of the true value of these claims would be quite low, it is expensive to finance debt reduction. It is difficult to explain, but it is expensive. We need to find ways to do this that don't come at the expense of and undermine our capacity to finance adequate flows of concessional relief to these countries going forward. It is important to recognize that we as a Nation have demonstrated very little willingness to provide meaningful relief and assistance, on a scale commensurate with our wealth or our size as a country.

    We look forward very much to shaping legislation with the committee in this area. Your efforts have been quite helpful to our efforts internationally. They have given credibility to our efforts to build support for a broader program. We very much welcome that and we look forward to working with you going forward.

    Chairman LEACH. Well, thank you, Mr. Secretary. Let me just begin with a question of proportionality.

    The United States has a role in this system both in terms of leadership and percentages. But most of the debt in the world from the poorest-of-the-poor that is owed to others. Can you allocate this out—what percentage is owed to the U.S. directly, what percent to the international institutions, what percent to other nation-states?

    Mr. GEITHNER. I have rather prodigious amounts of numbers I would happy to give the committee, so you can look at it yourself, but let me see if I can give you the broad order of magnitude.
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    The universe of countries which we believe should be eligible for relief under the debt relief program we have outlined owe about $110 billion to the governments of the world and the international financial institutions in nominal terms. Roughly $57 billion is owed to other countries and roughly $53 billion is owed to the financial institutions.

    We have outstanding to this universe of countries only $3.5 billion. We have a very small share of the total outstanding debt, and that is why it is so important to make sure that we act in concert with other countries so that the resources we free up by forgiving claims owed to the United States do not make it easier for countries whole debt we reduce to remain current to other creditors.

    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. Mr. Geithner, there are a great many principles that I articulated today that individuals have common ground on; there are some that you have articulated where we may have areas of disagreement. But if this committee were to move to markup at the end of today's testimony on the bill that Mr. Leach and I have introduced, would you support it as is, or would you support it in principle, but with some caveat?; and if the latter, then what would those caveats be?

    Mr. GEITHNER. We are completely supportive of the general objectives of the bill, however we do have reservations in three broad areas. One is that your bill, as I understand it, would have us move alone by a certain point of time. As I tried to explain, it is very important that we move multilaterally. We have made enough progress internationally so that I can say with some confidence that we will pull the world to a position that will go substantially beyond the current program. But it is very important that our actions be coordinated with the actions of others.
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    Second, the policy framework you identify in your bill is in many ways very close to our framework. The one possible difference, although it is hard to tell, is that we still believe that much of what determines whether countries can grow and meet the needs of their people is affected by the quality of their macro-economic policy framework. So we believe that any effective program must be based on some realistic, but well-designed, framework for macro-economic policy, not just on governments' criteria or other sets of conditions.

    As I indicated in my statement, we are trying to move the international community to take a fundamental look at how ESAF programs are designed and how the basic World Bank-IMF policies are framed, so that we can respond to the legitimate criticisms made about those programs.

    The third area is how you define how much debt relief we will provide. Your bill establishes two thresholds. They are very close to ours in many ways, but some of them are different for technical reasons; and the way those conditions are framed in your bill could create perverse incentives for the beneficiary governments. We want to convince you that there is an alternative approach that would also provide meaningful relief.

    Mr. LAFALCE. Mr. Geithner, I will not pursue any of those three issues, but I will ask the next panel—and I ask them to anticipate this as part of their presentation—to address in particular the three points that you have raised and to comment on them.

    Second, I would ask you to submit to this committee in writing specific legislative language that you would like offered addressing those three discrete issues so that we could at least have a yardstick to use when we advance the bill to either accept or reject or perhaps find some common ground.
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    Mr. GEITHNER. I would be happy to do that.

    Mr. LAFALCE. Thank you.

    Chairman LEACH. Well, that is appreciated.

    John, let me just say that I have talked with Mr. Geithner. He is under some constraints because we haven't formally produced the American plan, which will be out in the next week or two, I guess; and at that point we will expect a lot more.

    Mr. Bereuter.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    Secretary Geithner, one of the goals of the HIPC initiative was to increase recipient spending on social areas. For the three countries, Uganda, Bolivia and Guyana, that have completed HIPC initiative, how much money has actually been freed up for social spending? Is that something you can provide us or you happen to have with you?

    Mr. GEITHNER. I would be happy to provide it in writing. I could read it to you now, but it would take me a little bit of time to find the numbers.

    Mr. BEREUTER. We will take it in writing. we appreciate it. Thank you.
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    Mr. Campbell raised this issue a few minutes ago.

    Some observers have argued that there should be no performance requirements for countries to receive debt relief. And we talked about the tyrants and the people subjected to tyranny. It occurs to me that maybe we ought to go after the tyrants' money if that is possible, since there is so much accumulated out of Africa. Complete or unconditional debt cancellation of poor countries would be in that category. Does the Treasury have a position on this? It relates to our H.R. 1095, for example.

    Mr. GEITHNER. As I indicated in my statement, we do not believe that unconditional relief is a good approach. If you examine the scale of resources that have been provided to these countries over the last 50 years and if you look at the amount of debt reduction that has already been provided bilaterally, you can see that what truly determines how well countries have fared in the world is whether they have had competent governments that have been able to deliver, over a sustained period of time, a sensible set of policies.

    So our view is very much that we need to design relief programs in ways that will reinforce incentives for sensibly designed reforms.

    Mr. BEREUTER. All right. Under the current HIPC framework, debt sustainability is defined as reaching a level of debt-to-exports of 200 percent. What do you know about the rationale for that kind of index, as it was established? Whether it is relevant today is a question that we ought to consider, I would suggest.

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    Mr. GEITHNER. I am not sure I could fully capture the rationale for those levels. It is difficult to find a scientific or purely objective basis for defining what is a sustainable level of debt or determining a level of debt that is consistent with a country's capacity to pay over time. But I will say, we believe we should go lower, quite substantially lower, and we should find ways to do so that will provide meaningful cash flow relief, so the beneficiaries can increase investment in basic human needs.

    In general, we accept the basic charge that it is justifiable to go lower.

    I did not have the privilege of shaping the initial plan, so I can't capture the elegance of the initial design. But I think it is time to do more.

    Mr. BEREUTER. Thank you.

    Secretary Geithner, with the statistics you gave us a few minutes ago, the group of countries that would broadly be thought to be eligible for debt relief, it is striking how little is owed the U.S. Government; $3.5 billion was your estimate out of over $110 billion total. Much of that debt is owed to governments and banks in members of the European community—European Union now. What do we know about their receptivity? These are countries that have a long history, for example in Africa, where most of these countries are located.

    Mr. GEITHNER. Consistent with H.R. 1095 we built our plan around a proposal to forgive 100 percent of ODA debt and substantially deeper reduction of non-concessional bilateral debt. That strategy has been quite effective in pulling the rest of the world to a similar position, and at this stage, all of the G–7 countries are publicly committed now to complete forgiveness of ODA debt and to going substantially deeper on non-concessional debt. Therefore, the $3.5 billion in U.S. bilateral debt reduction will actually leverage somewhere in the range of $70 billion in reduction in claims by other governments and by the international financial institutions.
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    Mr. BEREUTER. Does that commitment relate to the IFI debt which was $45 billion, or so you estimated; or is it only direct bilateral?

    Mr. GEITHNER. No, the approach we have supported, which as I said, is very consistent with the approach in the bill, will provide total forgiveness of ODA loans, substantial reduction of non-concessional debt, and significant reduction of debt owed to the international financial institutions. So, overall, the debt level that these countries will be left with if the Administation's plan becomes reality and if we can find ways to finance it, would reduce the debt of these countries by something in the realm of 70 percent, leaving them with 30 percent of the debt they previously had.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    Thank you, Mr. Secretary.

    Chairman LEACH. Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman.

    Mr. Geithner, in terms of dealing with putting together a debt relief package for an individual country, you have to capture all of the participant creditors and make certain that the debt relief provided by any one institution isn't, in essence, diverted to one of the other creditors. There has to be an across-the-board agreement.

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    Obviously, many conferences are attempting to achieve that. Do you have any insight on the progress with regard to the countries we are dealing with or the example that occurred in the two instances where HIPC did provide relief?

    Mr. GEITHNER. We have made substantial progress toward an agreement which would include all of the other major creditors and would make sure that, as we led, they would follow, or we would move together. We are quite optimistic that at the G–7 Summit on Friday and Saturday, and later this fall as the full membership of the World Bank and the IMF consider these reform proposals, we will be able to get agreement on a comprehensive approach which has all creditors acting together to provide substantially deeper relief. That deeper relief will be available to countries that have already begun to benefit from relief under the HIPC program. So that countries like Uganda, that have already started to see some of the benefits of the lower relief will be entitled, if they meet this modified policy framework, to benefit from even greater cash flow relief.

    Mr. VENTO. How would you characterize the problem of debt owed to others like suppliers or short-term private sector debts and debts owed to non-DAC bilateral donors? How big a problem is that? Because that is not necessarily embraced in this agreement and any such agreement you have anticipated. Do you agree with that? And how do you characterize that as a problem?

    Mr. GEITHNER. I am looking for those numbers. They are not significant relative to the scale of claims owed to the governments and international financial institutions. And in some ways they are more difficult to deal with. But we would be happy to walk you through those numbers.
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    Mr. VENTO. I don't expect you to do a definitive—obviously. It is obvious that numbers are somewhat gray in terms of their precision. But I think we would like to know what the magnitude of such numbers are, so it doesn't end up being a black hole that completely defeats the purpose of what is being done here, or substantially impacts it.

    Mr. GEITHNER. That is very much on our radar screen. It is a standard operating procedure when governments of the world reschedule debt of the poorest countries that they do so on the condition that bank creditors provide similar treatment. And so we are very focused on that basic issue and would be happy to walk you through that.

    Mr. VENTO. You talked about the expense of debt relief. Debt relief is not something that is just $1.20 a person in this country, as our colleague had alluded to. Obviously, if you could do it on a per capita basis that would be great.

    Could you give us at least some indication of what you are referring to? I know administrative costs and other factors. I assume part of it is whether or not credit costs in the future would be higher in those individual nations. You obviously hope to avert that.

    Mr. GEITHNER. I don't know if I can do justice to the complexity of the issue, but let me give some rough orders of magnitude.

    The broad approach which we have outlined would provide about $49.5 billion in present value in terms of reducing non-concessional debt. In some ways, that is just the reciprocal of the cost; $49.5 billion present value debt reduction is equivalent in some sense to the cost to the governments and multilaterals. The multilateral portion of that reduction is something in the range of $28 billion.
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    Those are not costs that the international financial institutions have to bear immediately. There are creative ways to find resources within the institutions to meet a part of those costs, but not a substantial fraction of those costs. There is a big hole out there that grows over time in the balance sheets of the international financial institutions, and we are going to have to find a way to fill it if we are going to provide relief of the magnitude we have proposed today.

    Mr. VENTO. Well that is just the debt right now on cost. But, for instance, this discussion of gold sales, would that be one?

    Mr. GEITHNER. Gold sales are absolutely essential. The resources you are able to generate by using the interest income on a portion of the proceeds of selling gold would mobilize roughly $2.8 billion for the IMF over a multiyear period of time. That is $2.8 billion of real money.

    That, in and of itself, is not enough to cover the IMF's cost of this more ambitious initiative, so we have also looked at a way of using the IMF's reserves and other some new ideas to try and do so, but we will probably be short there as well.

    But there is an even bigger hole in the balance sheets of the multilateral development banks. Simply stated, multilateral development banks, in part, lend against the reflows they expect from borrowers; and so if you take away those reflows by reducing the debt of these countries, that means the multilateral development banks will have less money to lend in the future. Since many of the poorest countries in the world are going to need access to concessional sources of finance into the future, you need to find some way of financing that effect, because I think we are unlikely to find the rest of the world very enthusiastic about an approach that would finance debt relief directly at the expense of the future concessional lending capacity of multilateral development banks.
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    Mr. VENTO. The interest income plus the corpus you are talking about actually creates a larger loss in the flow of capital to these institutions than what is immediately apparent just from the debt.

    Mr. GEITHNER. I am not a real economist or an accountant, but you have some formidable talent on the panels coming and you can work through the details of that with them if you like.

    Mr. LAFALCE. Point of information, Mr. Chairman.

    Chairman LEACH. Of course, Mr. LaFalce.

    Mr. LAFALCE. Mr. Geithner, could you tell me what you refer to specifically when you referred to ODA?

    Mr. GEITHNER. ODA is Official Development Assistance which is a technical term which defines part of the universe of financial assistance we provide the poorest countries. And the criterion is the degree of concessionality in the finance.

    Chairman LEACH. One more clarification, when you list $3.5 billion as the U.S. figure, is that the net present value or the nominal debt owed?

    Mr. GEITHNER. Nominal.

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    Chairman LEACH. Thank you.

    Mrs. JONES. Mr. Chairman, just on this point, might I ask him to explain ODA a little bit, what is non-ODA as compared to what ODA is based on Mr. Leach's question.

    Chairman LEACH. That is true. And by the way, on the nominal, I am not real comfortable with your figure. We have been presented with figures that about double that.

    Mr. GEITHNER. If you take the universe of countries that would be eligible for the program we have outlined, that would be roughly 33 countries; ours is a slightly narrower class of countries than yours.

    And again we would be happy to walk you through the details.

    Chairman LEACH. So you are leaving out Central America and Bangladesh in your program?

    Mr. GEITHNER. It depends a little bit on where we come out on the ratios. But the assumptions that underlie the numbers I gave you have a slightly narrower universe; we would be happy to show you the comparison.

    Regarding a more precise definition of ODA, it is basically aid. ODA stands for Official Development Assistance, which has a sufficient grant element, or a sufficient degree of concessionality, meaning it is a combination of grants and very low-interest loans.
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    Chairman LEACH. I would like to turn to the committee's religious scholar, Mr. Bachus.

    Mr. BACHUS. I didn't quote any scripture verses.

    I want to talk to you about three or four points. First of all is, that time is of the essence. And let me say this, time has been of the essence. We have known about this problem for twenty years. When I came here in 1992 it was one of the first issues that was discussed. And I keep getting the same answer from the State Department, they are ''working on a solution.''

    It is snail-paced and the solutions haven't worked; I think we all agree with that, any serious observer of the process. You have 34,000 children dying each day of hunger and hunger-related problems in these nations. And as I said, although debt relief doesn't solve the problem of hunger or disease, it frees up human and financial resources to address those problems. I mean, there is a cause and effect; and that is something that we all also agree.

    Now, I will also say to the gentleman from California that I am going to agree with you on one thing whether the approach is total forgiveness of the debtor, whether the approach is, as we have designed into this bill, to have the money paid in local currency into social programs in those countries to address a number of problems ranging from sanitation to education, to health, either way, it has the potential to free up that financial and human capital. So it is just—it is a matter of, do you think we can be successful—once you free it up, does it go to military spending or does it go to social programs? And I would say that if we don't at least make an attempt to have it paid in local currency to social programs with the supervision of national humanitarian groups, a lot of it is going to go right to the military budget and right to bank accounts in Switzerland.
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    But you know, this is something we can discuss. I would say this: What may be appropriate would be a percentage of the debt to be forgiven outright and a percentage to be directed into social programs.

    Second, we keep talking about leadership is the essence. That is why I am so disappointed with the United States' approach. Canada and the United Kingdom have taken the leadership in debt forgiveness, not the United States. We are hanging on the tail of that effort, retarding it at every turn. So, you know, we talk about the leader. You know, we are the leaders of the free world; that is why it is so embarrassing to me that it is these other countries that are proposing to write off the debt, and it is the United States that is saying, ''No, we can't afford it.'' The richest country in the world can't afford it.

    Someone mentioned gold sales. $6 billion is owed to the IMF; sell one-third of the gold and you take care of the problem. Talk about how we pay for it. That is just one way. Now, I do want to talk about the costs because people say we don't know what the cost is. That is true, but in that regard let me say this: Whether the cost is $2.67 a year for three years, or $1.19 a year for three years, it is right in that neighborhood. You can debate whether it is $3 or $1.50, but you can't say that the amount owed to us is $6 billion and drop it there, when it is carried on the books at 10 percent of that.

    Mr. GEITHNER. Absolutely right.

    Mr. BACHUS. It is a $600 million asset in our view. So, you know—and the bank—you talk about what is owed to the banks, is it $19-, $18-, $20 billion? A lot of that has been written off. About, I think, the total amount that is the true value is something less than that, but I think even the amount that is carried on the books is $45 billion for all of that. And the true cost of forgiving it is something less than that, because—what has been your approach—not your approach, what has been our approach in the past?
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    We make new loans to pay old debts. That is not the solution. So I would say to you, I would say carry this back to the State Department or the Treasury or whatever. I know I am not only speaking for myself; we want leadership on debt forgiveness not on—well, we want to be leaders.

    Mr. GEITHNER. Can I respond to that?

    Mr. BACHUS. And the one thing we should never say is that we can't afford to do it, because, you know, at the end of the day we are all going to agree that it is about $1.50 to $3 a year for three years.

    Mr. GEITHNER. Could I respond to a few of those?

    Chairman LEACH. Of course.

    Mr. GEITHNER. Regarding leadership, I think you slightly misperceived where we are relative to the rest of the world.

    Mr. BACHUS. Well, maybe I have.

    Mr. GEITHNER. I would like to clarify it for you.

    Mr. BACHUS. I think more important is where we are tomorrow as opposed to yesterday.
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    Mr. GEITHNER. For example, we have been quite far ahead of Germany, Japan, France and Italy.

    Mr. BACHUS. Right.

    Mr. GEITHNER. The U.K. may have been a little bit——

    Mr. BACHUS. Ahead of us?

    Mr. GEITHNER. I am not sure I would say ahead of us. The U.K.'s position was a little unclear, because they never laid out a full plan. Canada followed us with something which was different at the margin. However, we are the only country that laid out a full, detailed program anchored around a new policy framework for reforming ESAF around poverty reduction with full ODA forgiveness and much deeper non-concessional debt relief. And we have pulled other creditors to our position by defining a sensible, but ambitious program.

    It is unfortunate, but we are the only country in the world that has the capacity to take the lead.

    Public perception of our role has not fully captured the reality. Sometimes that is the way it goes and sometimes people in the beauty contest will get a little more credit. But it is fundamentally true that we have taken the lead. I want to make a comment about the cost. As I said in my statement, the costs to us are not only the bilateral costs. You are absolutely right that the costs to us bilaterally are a very small fraction of the total debt these countries owe us. But the costs to the multilateral institutions are quite substantial, and not all of those will be covered creativity within the institutions.
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    The problem with selling gold, apart from the fact that it is facing a lot of opposition in the Congress at the moment, is that we have got to be careful not to deplete the reserves of the IMF. As you may recall from the debate over the IMF legislation last year, we want to find a better way for the IMF to use its reserves that would generate funds to cover the costs of debt reduction without undermining the reserves of the IMF. We have substantial claims on the IMF, and we want to make sure those claims are backed by adequate reserves. So there are limits to balance sheet innovations that will not reduce IMF reserves.

    I think you are right to be frustrated about the pace of our past efforts, but we are going to move very quickly to put this new program in place. And the proposal will, if adopted by the international community, offer the prospect of much more immediate and dramatic relief to these countries.

    Chairman LEACH. Will the gentleman yield on this point?

    Mr. BACHUS. Yes. I want to ask one final.

    Chairman LEACH. Of course.

    Let me just stress on leadership, but I mean, Mr. Bachus said something very profound, that the issue isn't so much yesterday as tomorrow. And I am convinced the United States is beginning to lead as a Government, but there should be no doubt in terms of leadership, that governments of the world have not led and that the institutions that have led are from the private sector; and the importance of Oxfam, of Bread for the World, in leading this initiative is one of relative importance and governments are following. And I think this is one of the greatest examples of government accountability to people, because the people are ahead of their governments.
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    I am personally pleased that the United States Government is now on track. But there has been a little bit of an indication here that it not as on track as reflected in this bill. I mean, if you are talking 33 countries instead of 45, that is very significant in terms of distinctions in the national interest as well as the interest of poor people in the world.

    And that does leave out potentially a great part of Central America, for instance. So I hope as you are reviewing what is going to be placed on the table in the next few days that this is reviewed very seriously.

    Mr. LAFALCE. Would the Chairman yield?

    Chairman LEACH. Well, that is Mr. Bachus.

    Mr. BACHUS. Yes.

    Mr. LAFALCE. I want to associate myself with the Chairman's remarks both in praising the NGOs and in giving his evaluation of the Administration's response. But I also think it is important to understand how far we have come.

    I remember waging a very lonely battle in the 1980's for debt relief. My chief ally at that time was Congressman Bruce Morrison; my chief ally on the outside world was Professor Sachs. We went through money crises in the early 1980's, the later 1980's. It was a difficult fight. I was able to get debt relief provisions within the 1986 Omnibus Trade Bill and saw the bill vetoed by the President with specific mention of the debt relief provisions.
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    We have come a long way; we have a long way to go. We wouldn't be there without the support of the NGOs, to be sure, without the good fortune of having this referred to as Jubilee 2000, without the support of the Administration. I think the Administration support and their leadership can be even greater in the future than it has been; and we hope to embolden you to provide even greater support and leadership. I just I felt we ought to put it in some type of context.

    Chairman LEACH. Final question for Mr. Bachus.

    Mr. BACHUS. Yes. Let me address or let me try to burst two final balloons that you sort of put up there.

    The first one is that somehow debt relief is bad for these countries because it affects their credit line. Now, this is our decision, not theirs. And you know, if there is unilateral debt forgiveness, I can't imagine that someone is going to say, ''They accepted our offer, they are a poor credit risk.'' Now, this is our decision.

    And the second thing is that—as I said before, this is our decision, and the second balloon—and let me say this, it is very important that our contribution is leveraged in every way it can be to bring the rest of the countries on board. I fully appreciate that. But we can't use that as an excuse for our inaction because, as I said, the decision is ours. The responsibility is ours to act and act right and act morally. And our moral imperative isn't qualified by the rest of the world failing to do what is right.

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    Mr. GEITHNER. Could I just respond to those two points?

    Chairman LEACH. Of course, then we will turn to another. Please.

    Mr. GEITHNER. The U.S. has, I think, already forgiven some $14 billion, both universally and——

    Mr. BACHUS. But, you know, most of that wasn't going to be paid back anyway.

    Mr. GEITHNER. I think that is a fair point. I agree with that. It is not as if we have been——

    Mr. BACHUS. Sort of like, you forgive a bad debt. You know, hospitals do that every day. It is quite a generous thing.

    Mr. GEITHNER. I agree with your fundamental critique. However, we are in a similar place. We want to find a way to design a program that gives the maximum leverage to what we do. And we want to decide what is right and to do what is right in the context of something that is going to have the maximum benefit to these countries.

    Regarding the costs of debt relief to the countries concerned, there are countries in the world who are quite poor and who are quite indebted, who have made the choice to stay current on their obligations to creditors because they believe that the consequences of potential lost access to finance are not worth the benefits that they receive from reduced short term debt service. It is a non-trivial consideration.
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    It is a difficult balance to strike, but many countries will strike a balance themselves. A significant number of countries have chosen not to ask for debt relief because they believe there is a cost.

    Mr. BACHUS. But, you know, that is the whole idea of Jubilee. I mean, some are trying to repay the debts, some are not. We forgive.

    Again, I come back. This is our decision; it shouldn't be motivated by them. It should come from us. It should originate from us, because it is the right thing to do.

    We can certainly afford this. It is a small amount of money. Not to them.

    Chairman LEACH. Thank you, Mr. Bachus.

    Mr. BACHUS. We can't afford not to do it.

    Chairman LEACH. Ms. Waters.

    Ms. WATERS. Thank you very much.

    Mr. Geithner, I appreciate your being here, and I am going to try and be as gentle as I can.

    Mr. GEITHNER. No need to be gentle.
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    Ms. WATERS. I don't want you to take this personally.

    Mr. GEITHNER. That is a scary introduction though.

    Ms. WATERS. First, we have received the message from Mr. Rubin and Mr. Summers that you brought about the need for reform and not wanting the United States to lead with total debt relief because of the harm we will bring to these poor countries if we totally relieve their debt, because they won't be creditworthy in the future.

    First, Mr. Rubin—he is leaving, and so I guess there is not a lot we can say to him, except I am afraid that Mr. Rubin at this point in time is cutting the deals on debt relief as we sit here. And I am worried that the work of this committee in some ways will be undermined because of the leadership or lack of leadership, or whatever, that we are given.

    Now, I saw in the newspapers that Mr. Rubin had been part of the deal that decided how much gold would be sold, and I understand there is about $2 billion that will be realized from the sale of gold. I don't know how much else is being done and what decisions have already been made; but you may say to Mr. Rubin that if the United States is proceeding in its negotiations with the G–7, regardless of what we are doing here, and that if there won't be any room for really influencing our Administration in the ways that we handle debt relief, that none of us will take that kindly; and that if the work of this committee is undermined in that fashion, there will never be any replenishment for IMF, because the left and the right will team up and make sure that that does not happen.

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    And for Mr. Summers, with all due respect, he is not confirmed yet, and we want to see his real concern for Africa demonstrated in this debt relief, because he is being questioned based on past activities. So a good way for him to show his real concern for Africa and wipe out his past mistakes would be to stop talking nonsense about debt relief somehow making a country less creditworthy. I am with Mr. Bachus. I don't buy it. And I am trying to be gentle in sending that message. That is number one.

    Number two, when you talk about reform Mr. Summers, Mr. Rubin implies that somehow the support of this country for tyrants and dictators in no way impacts the way that the resources are spent in these countries. For example, I don't think that Mr. Rubin or Mr. Summers or anybody else would ever want anybody to believe that we did not know what Mobutu was doing in Zaire. He was our boy, he could do anything that he wanted; he was all right with the United States as long as he carried out our political agenda.

    And that is the kind of thing that Mr. Campbell is referring to, that we support tyrants and dictators and allow them to spend our assistance, allow them to do whatever they want to do. So we don't want to hear any mindless talk about reform. We all want the right thing to be done. But when the political agenda supersedes reform, we don't want you guys to pretend you don't know what is going on.

    We also want you to send the message that there are a number of countries that should be—that debt relief should be expanded to, and that includes Angola, and that Angola is spending a disproportionate amount of its budget on fighting Mr. Savimbi and Mr. Savimbi again belongs to us. He was created by us. He is still in the bush. He has not complied even after we discovered—well, ''discovered''—admitted we were wrong in supporting Mr. Savimbi. We have done nothing to dislodge him. We have done nothing about allowing him to be up there with more war machinery to create more problems and more expenditures of the revenue of Angola.
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    So I want to mention these two so that you can understand that we know that this stuff is not in a vacuum. And please don't talk to us about reform as if we are naive. We do understand that our country is playing a bigger role in some of this than we should be.

    Also I want to just mention that Ghana has done an awful lot to comply with structural adjustment, and I don't think they have gotten any debt relief. I think, as you look at this bill, you will find that Mr. Leach is trying to not only expand it to other countries, but do some other things with the debt to export ratios in reducing that. But Angola, I am concerned about; Ghana, I am concerned about, and some of these other countries.

    Now, you have not mentioned anything about AIDS that I am feeling so strongly about. And it seems to me that that should be a special factor in looking at debt relief. And make sure that we understand it does no good to do ceremonial things like send the AIDS czar to Africa to look around. If the AIDS czar never gets to Africa the deaths are occurring every day, and we don't need any ceremony, we need real relief. And one of best ways to deal with that is to make sure that these poor countries are not trying to deal with AIDS and AIDS treatment with their meager revenues and, at the same time, trying to repay debt.

    Let me just finally say that according to the officials at the GAO, the IMF offers more loans to relatively affluent countries, such as Russia. However, most of the time of the staff of IMF is spent monitoring the economic performance of poor countries, such as Uganda. Why is it necessary to micromanage the economies of poor countries when they are not receiving a proportionate share of the IMF loans?

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    And number two, when the IMF evaluates whether a HIPC country has a sustainable debt, the IMF looks at the country's debt-to-export ratio. Last fall, the GAO completed a study on the status of HIPC Initiative. This study was also based in part on the export earnings of HIPC countries. GAO officials have said that most of the exports of poor countries are owned by the private sector, not the government. Many of the products that are exported are produced and exported by multinational corporations. In order for the governments of HIPC countries to be able to make debt payments, using exports, they must be able to collect taxes or other revenues from the companies that export them.

    Now, what does the United States do in its global trade initiatives? They say, ''No, it is not good for trade.'' And they don't want these countries to tax the multinationals. And I don't see any change in that direction anytime soon.

    So even though I said a lot, some of it you don't have to respond to. Just take the message back, the rest of this, particularly the last two as it relates to the loans to foreign countries such as Russia, and the debt-to-export ratio. Maybe you can respond to that. And AIDS.

    Mr. GEITHNER. Regarding AIDS, part of the reason why the international community advocates substantial debt relief is because it frees resources to meet basic health needs, such as fighting the spread of AIDS. I would be happy to induce State Department and Treasury officials to provide you with more detail about what we are encouraging bilaterally through the G–7, through the World Bank, and through institutions in providing resources to fight the spread of AIDS.

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    I would be also happy to talk to you about ways the U.S. can provide even more confidence that some of the benefits of debt relief would go to fighting the spread of AIDS.

    Regarding Ghana, one of the benefits of the approach the Administration has outlined is that it would capture countries like Ghana, thus enabling them to benefit from debt relief. Regarding Russia, I don't actually know the numbers, but if you look at the scale of resources the international community provides to sub-Saharan Africa, relative to the size of their economies, you will find it exceeds, by a significant margin, the resources the international community has given Russia.

    So I am not sure the basic charge is right, but I would be happy to provide you with a table that makes the comparison.

    Ms. WATERS. Why don't you just tell us what you just said and what that means?

    Mr. GEITHNER. The international community gives a substantial sum of money to sub-Saharan Africa each year. I do not have the exact fugures, but the scale of the resources provided to sub-Saharan Africa in relative terms, exceeds what the international community provides as a group to Russia.

    Concerning the debt-to-exports ratio, our proposal additionally examines a country's debt burden relative to its revenues in order to reduce the level of debt a country owes as to make it compatible with its revenues. I would be happy to walk you through these calculations. In short, the approach we are pursuing is quite responsive to your concern.
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    Ms. WATERS. So you support Leach's change to the 150 debt-to-export ratio rather than 250?

    Mr. GEITHNER. We have supported reducing the debt-to-export ratio to 150 and to going lower on the debt-to-revenues ratio.

    Ms. WATERS. My bill is 100. Would you go that far, 100, the debt-to-export ratio?

    Mr. GEITHNER. Our approach benefits from the inspiration of the Leach-LaFalce bill and has 150 as the debt-to-exports ratio. We have a reduction of the ratio on debt-to-revenues as well, which will translate into lower debt service burdens relative to revenues.

    Ms. WATERS. And finally, if I may Mr. Leach, what is happening in the negotiations, how far have you—what deals have been cut and what decisions have been made? And are we just playing with this hearing because you know what you are doing already?

    Mr. GEITHNER. There is a two-stage process to this discussion internationally. The first stage has been occurring over the last three months in the G–7 where we have been building a broad consensus on a sensible policy. The next stage is that consensus to get agreement with the rest of the members of the IMF and the World Bank.

    The approach we embrace at the summit will leave open a number of very important considerations including how we reform the ESAF program and how we provide a more credible connection between the resources we free from debt relief to the basic human needs of people in these countries and the broad policy initiatives that apply.
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    Conditionality is is something that we have consciously decided to leave open, because we think that debate about reform in this area would benefit from a broader discussion. I join you, Mr. Chairman, in complimenting the work of the NGO community in this area, because the ideas they have generated, such as the human development fund, among other proposals, and the criticisms they provided about the framework for reform have a fair amount of merit. We are quite serious about addressing the concerns of the NGO's going forward.

    Ms. WATERS. Is the United States leading the other countries on debt relief in saying that we are going to, no matter what they do?

    Mr. GEITHNER. We are following the U.S. Congress, leading other countries and we are inclined to make what we do conditional on what other countries do. In the end you will find that the international community is going to do what we want them to do, what we think is right.

    Ms. WATERS. Mr. Chairman, if I may, and thank you for your generosity, have you been kept informed on the negotiations and the decisions that are being made thus far? Do you feel comfortable that you understand that the work of this committee is not being undermined in any way by decisions that are being made in advance of the vote of Congress?

    Chairman LEACH. Well, you are asking a very direct question. Let me say that I am very cognizant that the Executive Branch has been watching us, and we have been talking with them, and that at the moment we are in a very constructive perspective. And this is very important because we have seen a lot of tension in the last year or two between Congress and the Executive Branch and it is my strong hope that this will be an example of the obverse of that. And I think, as this hearing indicates, that there are some very constructive ideas on the Executive side; and we are trying to present some alternatives here. And I think together we are going to come down in the direction that is compatible. What the Secretary has indicated today is pretty strong agreement with the goals that we are establishing; and we recognize there is more than one way to skin a cat, and we are all going to have to listen to each other.
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    In this circumstance, we have also reflected—I know of very few public policy issues where outside groups have played as significant a role, and in this way—we think of lobbying organizations and Government in general, but seldom when you use the word ''lobby'' do you think of the word ''Mennonites.'' But the role of the faith-based communities that will be reflected later by the Catholic Church and, as testimony, will be presented in the record by the Episcopal Church and other groups is very significant. And I think the Executive is listening to them as well.

    Also, very interestingly, on this issue, because it is a rather remarkable issue, you are seeing other foreign governments and at the same time these governments are being talked to by very similar groups. And the European church movement is very significant, I think, in changing the direction of their governments, and it is a basis, I think, for action.

    And then, intriguingly, in all of this is this word Jubilee, which is pre-Christian. And it has fundamental meaning, and among other things, it adds a moral dimension. And also what strikes me as very impressive, it is a dimension that is outside the framework of normal contractual relationships in terms of the fact that the precept is every 50 years, which means it is not to be repeated next year or the following year. This is once in, actually, two lifetimes in terms of generation definitions movement.

    But I just would like to stress the wide inner relationship of all of this. And even though all of us may have differences in judgment, the gentlelady with the gentleman, to some degree some of us with the Administration, Mr. Campbell with some differences in judgment, we are all on the same track. And the big picture, I think, is togetherness rather than separateness. I hesitate to——
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    Ms. WATERS. I think what you just said, in short, is, you are trying to trust your Government to do the right thing. I am too, and I certainly hope so.

    Chairman LEACH. I thank the gentlelady.

    Mr. Campbell.

    Mr. CAMPBELL. Thank you, Mr. Chairman.

    Mr. Secretary, you said something that troubles me. I am going to draw attention to it. And then you might withdraw it.

    Mr. CAMPBELL. Absolutely. If you don't choose to, that is OK too, Lord knows. You are entitled to your view on public policy.

    But when asked by my colleague from California about our commitment, you responded—and I got it almost precisely right, I think—that ''the world's commitment relative to the size of the economies in sub-Saharan Africa was high relative to what we are paying to Russia.'' And I see you are getting advice whispering in your ear now. That is great. I would like you to take advice. But let me make my statement first, and then see if you do not agree with me.

    It is outrageous, outrageous for our Treasury Department to be referring to a commitment in the concept of assistance to underdeveloped countries as a ratio relative to the size of the economy. If you take that approach, the poor get less, the wealthy get more.
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    So I will pause now to allow you to perhaps correct that statement.

    Mr. GEITHNER. Since I would rather give you the facts, I am reluctant to say this, but just to give you orders of magnitude, many countries in Africa are benefiting from aid flows that are as high as 15 percent of their GDP. Who benefits from those resources?

    That depends primarily on the quality of the government involved, its commitment to the people of its country and the wisdom of its policies. This is why we believe that the only meaningful difference you can make in providing financial assistance is if you marry that assistance to a set of conditions to ensure it is used well.

    You slightly misinterpreted me in terms of the scale I was using. I need to check the figures, but I do not believe that is is entirely accurate to say that Russia has been benefiting from substantially greater generosity by the international community than have the African countries over the past few years or the past several decades.

    Who benefits from financial assistance depends primarily on the credibility of the government, the quality of its policies, the wisdom of its leaders, that the leaders value and the competence of the government in responding to the needs of its people.

    Mr. CAMPBELL. Mr. Secretary, it is wise of you to move the focus away from my question, and that is what you did. My question is, do you agree that it is irrelevant—I used the word ''outrageous''—to define the public policy of the United States regarding assistance to poor countries as a fraction of their GNP the way you did?
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    Mr. GEITHNER. That hasn't been our policy. I am simply saying that the facts on the ground are that the scale of assistance has been quite meaningful.

    Mr. CAMPBELL. Well, I will try it again. You didn't answer it the first time.

    I am more troubled by this than by virtually anything, Mr. Chairman. I don't get troubled that often. You know me. I am mellow. I asked the question, and you tell me, we have got to be worried about whether the money gets to the people truly in need. Absolutely right.

    I asked the question again; you tell me the facts on the ground are that we have a substantial amount of commitment to the sub-Saharan countries. But if your earlier answer betrays your way of thinking and that of Mr. Summers and that of Mr. Rubin—you say it is relative to the size of the economy as opposed to relative to the needs of the people—that is a perverse interpretation.

    Now, I again pause and let you correct it.

    Mr. GEITHNER. You shouldn't blame Rubin and Summers for my failings, by the way; it would be unfair to them.

    I agree with you fundamentally that the right way to measure what is adequate in terms of assistance to these countries is a judgment relative to need.

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    Mr. CAMPBELL. All right.

    Mr. GEITHNER. I was responding to what difference of point, essentially a comparative scale. You are right, the adequacy of assistance should be measured relative to need. Fundamentally we are in the same place.

    And I have one more point I would——

    Mr. CAMPBELL. It takes a big man to admit a mistake.

    Mr. GEITHNER. I would never claim, by the way, that what the international community does is adequate relative to need. To give you another example you will not like, is is very important that you recognize that we as a country, as a share of our wealth and resources, provide a disproportionately trivial share of that assistance.

    Mr. CAMPBELL. I welcome that comparison. I don't object to it. And it is an indictment of the leaders of our country that that is so.

    Well, look, I am glad. I pointed out what I thought was a very significant insight into your policy, if you really believed it. I take it you do not really believe it, and that is great. Like I said, anybody can make a mistake.

    Mr. Chairman, the bells have gone off, and I want to respect the other Members, so let me pause at this moment.

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    Ms. WATERS. Before—if the gentleman would yield.

    Mr. CAMPBELL. I can't. Other folks have been waiting here. The bell is off. I yield back to the Chairman. It is his choice.

    Ms. WATERS. No problem.

    Chairman LEACH. Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. I have a few questions, and I will try to get through them quickly because we do have a vote going on.

    This may be simplistic, but a year ago when a number of us were heeding to the Treasury's request that we recapitalize the IMF to deal with the Asian financial situation, some of our colleagues on the right and even some on the left argued that rather than increase the United States' share in the IMF and other countries commensurately with that, that the IMF should sell some of its gold reserves. We were advised that that was a bad idea, that that would actually deplete the assets of the IMF, make them less capable both to deal with the current situation and future crises.

    Now, the U.S. and the G–7 are advocating that the IMF sell some gold, a small amount, not $18 billion worth, but not an insignificant amount of their—maybe 10 percent of their total gold assets, to be used to buy back IFI debt, or IMF debt in this case.

    Is there a difference there that I am missing somewhere that these are apples and oranges?
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    Mr. GEITHNER. Yes. The agreement that Congress approved last year to increase the IMF quotas and finance the IMF supplemental reserve tank provided an additional roughly $95 billion to the IMF in loanable resources they could lend.

    You could not have sold enough IMF gold without substantially undermining the IMF's reserves to come close to meeting that scale of need. The current proposal we support is not to sell the gold and use the proceeds fully to finance relief, but to mobilize resources from the sale of gold without undermining the reserves of the IMF.

    What we propose to do is to a sell a portion of the IMF's gold in a carefully-phased approach over time. The IMF would invest the proceeds from the sale in interest-bearing assets and use the interest income, or a portion of the interest income, over time to generate additional resources for debt relief, thus ensuring that we raise money for debt relief in a way that preserves the IMF reserves. The IMF reserves aren't reduced by our proposal; we are just using the reserves in a way that helps generate income.

    Mr. BENTSEN. Converting some of your fixed assets to an interest-bearing asset for an arbitrage play to leverage more dollars; I understand that. But I still have some constituents who are going to say, ''Well, gee, even if you couldn't have sold $18 billion worth of gold last year, maybe you could have sold, you know, $2 billion worth of gold and not had to increase the United States' share by $16 billion.''

    I just think that is something you all need to think about. Because I was involved in some of these debates, I thought that was the right decision last time. But you expose some of your allies on that when you make a reverse, and it is not as easy to explain that.
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    Mr. GEITHNER. It is hard to explain. But the two proposals are quite different. However, I understand the tension you see between them.

    Mr. BENTSEN. If it is an idea you are just trying to convert to less secure, but interest-bearing assets to generate some revenue, you might be a little more specific about that in your discussions.

    Let me also say that I don't disagree with Treasury on the issue that there is a potential downside in the long run on debt forgiveness without some strategy associated with it. I think that it does create a potential for moral hazard that this committee has been concerned about. So I don't necessarily fault you on that.

    H.R. 1095, which I am a co-sponsor of and I support the broad goals of, addresses in part non-concessional debt, Eximbank debt, OPIC debt, addresses where the U.S. has guarantees that we score according to a certain formula.

    The $3.5 billion that you believe is the amount of U.S. debt, is that direct debt or does that include guarantees and non-concessional debt?

    Mr. GEITHNER. The $3.5 billion number is highly notional. It depends on many other factors, but it does include the guarantees.

    Mr. BENTSEN. It does include the guarantees. And one of the problems I have had with the bill, or concerns I've had is, it is one thing I think to deal with official development assistance and where it is government-to-government debt.
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    I have some concerns where we might be forgiving debt or guarantees or effectively forgiving debt which involves a third-party private-sector element, particularly if the debt is being serviced. I have two questions:

    One, does the G–7 proposal look at that with respect to the United States' participation in it? And two, what is Treasury's interpretation of H.R. 1095 and how that is addressed?

    I don't think anybody would inadvertently want to forgive debt that is guaranteed by the U.S., as is being financed through third-party private-sector participants. And I may be misunderstanding how all this non-concessional debt works, but that is a concern that I have.

    Mr. GEITHNER. I need to look at the bill a little more carefully and come back to you on that. Can I do that?

    Mr. BENTSEN. Yes, that would be fine.

    Mr. GEITHNER. There are two sets of claims here. One is a direct loan by creditor governments and the other are loans that, in a sense, the U.S. Government has underwritten partially.

    Mr. BENTSEN. Right. That involve Acme Corporation or whoever, and that I have a concern with, if you would get back to me.
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    With the Chairman's indulgence, I would just ask, our colleague from Alabama made the point that it is a small amount of money in the scheme of things; and I don't disagree with that in a $1.7 trillion annual budget. Nonetheless, could you provide for the committee specifically how the U.S. participation is scored on an annual basis and what forgiveness would result in both budget authority and budget outlays? Because I believe that forgiveness would affect caps going forward. And while there may be a near-infinite supply of resources, we still have budget rules that we have to live under here. And that has some impact that I think we should be aware of as we move forward.

    Mr. GEITHNER. You are right, and I am happy to provide you the methodology.

    Chairman LEACH. Thank you.

    Let me just mention to Mrs. Jones, we have a bill, several votes on the floor; and if we excuse this witness, we will resume after the vote, and I will turn to you first or if you desperately want to speak to this witness, you tell me.

    Mrs. JONES. Mr. Chairman, I can be very short and you could start with someone else since no one else is here. I could be real short, like two seconds—two minutes.

    Chairman LEACH. One minute.

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    Mrs. JONES. OK. One minute.

    Can you tell me, if you allow me short answers to my questions, what effort is there to encourage the private sector for debt relief other than the G–7s? Because we keep talking about debts to someone other than governments. What effort is there to encourage the private sector?

    Short answer because I have another question.

    Mr. GEITHNER. In general, as a matter of policy, we believe that when official governments provide debt relief, we seek to induce private creditors to do so too. How that applies specifically in the program would take a longer answer.

    Mrs. JONES. Could you send something to me? Stephanie Jones, Ohio 11.

    Chairman LEACH. I apologize just because of the vote. I promise to turn to you next, Mrs. Jones, but is it OK if we dismiss this witness and then——

    Mrs. JONES. Can I ask him to send me something?

    Mr. GEITHNER. You send me as long a list as you want.

    Mrs. JONES. Efforts to collect outstanding debt as a result of corrupt governments where people are being housed in other countries, how can we help them collect that money to reduce debt?
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    Chairman LEACH. I would like to ask unanimous consent that those responses be placed in the record.

    Mrs. JONES. Thank you, Mr. Chairman. Thank you very much. I would like that also.

    Chairman LEACH. Mr. Secretary, we thank you for coming and we appreciate your testimony. And I also would like to ask a response in writing on the role of Russia and how much debt you expect them to write off.

    Mr. GEITHNER. Good question.

    Chairman LEACH. There are a series of votes on the floor. So for the other panelists, let me say I think it might be wise to be very precise that we will reconvene at 1:00. And there are cafeterias that you can take advantage of.

    The hearing is in recess until 1:00.


    Chairman LEACH. The hearing will come back to order.

    Our next panel of witnesses is composed of the Reverend J. Bryan Hehir. Reverend Hehir is a Professor of the Practice of Religion and Society at the Center for International Affairs, Harvard University. He also serves as Counselor to Catholic Relief Services, which is a relief and development agency of the Catholic bishops of the United States.
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    And I might say, Father Hehir, there has been a new term of reference, a kind of new occupation in life, called an ethicist. And I think of the term ''ethicist'' is pretty much like you.

    Our second witness is Salih Booker, who is a Senior Fellow and Director of the Africa Studies Program with the Council on Foreign Relations. He is also a consultant for the Asia Society, the African Development Foundation, and many others.

    Our third witness is Lydia Williams, who has served for five years as Policy Advisor for Oxfam America. Lydia is responsible for policy analysis and advocacy and parity issues for Oxfam, which currently include debt relief for poor countries, World Bank, gender policy, and the promotion of universal access to basic education.

    And our final witness is Jeffrey D. Sachs. Dr. Sachs is the Director of both the Harvard Institute for International Development and the Center for International Development, Professor of International Trade at Harvard and a Research Associate at the National Bureau of Economic Research; and has been an advisor, I think, to more foreign economists than anyone in history in the field of economics.

    We will begin with Father Hehir. Please proceed.

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    Fr. HEHIR. Thank you, Mr. Chairman. As you know, I am here to present the testimony of Archbishop Theodore McCarrick, Chairman of the International Policy Committee of the U.S. Catholic Bishops Conference, and Bishop John Ricard, who is the Chairman of Catholic Relief Services; and with your permission I submit their statement for the record.

    Chairman LEACH. Without objection. And I must say I have never read a statement in advance as adroitly written as a representation of others and of institutions in such a thoughtful way.

    Fr. HEHIR. Well, I need to invoke a number of other people who have been part of this process. And so I appreciate your remarks. Thank you very much.

    Basically, it did occur to me that the first time I came before this committee to talk about debt relief was in fact ten years ago. So the committee has been engaged in this process over time, as have the bishops, along with many other religious communities.

    Our involvement of course in the Catholic Bishops Conference and Catholic Relief Services was moved significantly ahead by Pope John Paul II's engagement in the issue of Third World debt around the theme of the Great Jubilee, which the religious communities, as you have indicated, have taken as a thematic approach to the issue.

    What I will do is simply try to summarize the joint statement of the two bishops on debt relief, and I thought the best way to do that is to say three things about it:

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    What is the vision that animates the statement?;

    Second, what is the experience that informs the statement?; and

    Third, what is the policy advice about the bill before this committee that flows from the vision?

    Essentially, the vision that informs the approach of Catholic Relief Services to debt reduction is a vision that has four major component elements. The first one is that the basic moral community in the world is the human community.

    We live in a world of states, we live in a world of international institutions, but those are secondary to a primary assertion that we live in a human community and that each member of that human community is meant to count for one. Third World debt relief attempts to address the human community and its most vulnerable members.

    The second piece of the vision is that at the center of the human community is the human person. And it is the dignity of the human person that is most directly threatened by failure to address debt relief. That is because every human person must have access to what we today call human rights, moral claims to basic necessities that are necessary for human dignity. So we essentially affirm the universe, human community, with the person at the center, the person in possession of a series of moral claims to minimum health, education, nutrition, in order to protect human dignity.

    Third, we want to affirm that there is such a thing as an international common good, a common good of each nation and a common good of the human community as a whole. And the argument here is that the human person is a vulnerable entity. We must create a wider fabric of policies, laws, and programs that protect and support human dignity. And while we do that within each nation, and that is what we normally think of as the common good, this bill forces us to think about the international common good.
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    Fourth, the international common good is undergirded, or should be, by a conception of solidarity. Solidarity is not just a nice word; it is a fundamental moral assertion that we are responsible for the welfare of each other, across national boundaries, across regional differences, and across nations of very differing GNP, technological capability, and sophistication. This is the framework within which we approach Third World debt. It is about the human community as a whole. It is about the dignity of the person, the satisfaction of human rights. It is about solidarity and the achievement of the common good.

    Now, in that framework, there then arises the question of justice, justice meaning right relationships within a relevant human community. And justice here means not only communicative justice, which governs debts, that we ought to pay our debts; justice also means that the obligation to pay debts is at times to be overridden by more pressing human rights claims and more pressing human needs.

    Therefore, while we do not affirm that debts ought not to be paid, in principle, we do affirm that in the situation the international community faces, the human community faces, that obligation ought to be overridden consciously, purposefully, rationally, in order to meet basic human needs, protect basic human rights and ultimately protect the dignity of the person who is threatened by the failure to address that reform.

    Now, the overarching vision is a purely moral argument. There is also in our testimony a certain round range of experience of trying to deal with protecting human dignity and human rights. You will find the experience of Catholic Relief Services reflected from countries as diverse today as Ghana and Honduras.
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    We cite in the testimony the way in which failure to address debt relief hinders the work that we try to do in those two countries. It hinders it in Ghana because the government cannot collaborate with us in terms of feeding programs we have in that country; and it hinders us in Honduras in terms of the monumental problem the Honduran government faces because debt relief weighs heavily upon scarce resources, being that fundamental human services are reduced. And then we are back again to the violation of human rights and human dignity in the people we seek to serve through Catholic Relief Services.

    Now, within the framework of this bill, we have some policy thoughts that we would like to offer about the bill. Fundamentally, as you know, we are very supportive about H.R. 1095. We are supportive because it increases the recipients that would be available for debt relief, because it decreases what the debtor countries would have to pay as their share of the cost of this, and thirdly, it shortens the time of relief necessary to bring debt relief to countries.

    Moreover, the bill, we think, is powerfully effective because with debt relief it does four things. I think that the best way to summarize our view of the bill is to say how do we think about debt relief. You should link it, target it, protect it, and support it.

    First, debt relief needs to be linked to poverty reduction, as has been said in this committee several times this morning. Debt relief is a means to an end. The end is poverty reduction. The purpose of poverty reduction is the protection of human dignity and the fulfillment of human rights. So once again there is a fundamental kind of consensus I heard expressed here this morning that is powerfully important and very different from what I heard ten years ago before this same committee.
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    Debt relief is to be linked to debt reduction in the bill through the Human Development Fund. We find this very valuable assertion that governments are to use the money that they are granted through debt relief for very specific human purposes, again those purposes that are claimed by human rights.

    Linking debt relief to poverty reduction then moves to the second question, targeting debt relief. And this leads to the question of increasing the number of countries that would be eligible for debt relief.

    As you know, we are in support of increasing the countries as we find it in the bill; and indeed, we may have other candidates too that we think appropriately could be fitted under an expanded conception of debt relief.

    Third, protecting debt relief: We all know that there is a certain risk. It is called moral hazard in the jargon of the day. There is a certain risk in providing debt relief if there is no sense of what will be done with it. The bill and certainly our testimony coming before you argues that if you are going to protect debt relief, then one has to be concerned about the internal policies of the countries receiving debt relief.

    Now, the determination of how to protect it within countries is what normally comes under the phrase conditionality. Conditionality, we think, needs to be thought about more deeply and broadly than it has been so far. We are not opposed to the notion of conditionality. Certainly, healthy macro-economic policy is necessary to the long-term benefit of a country. But the question of by what principles conditionality is shaped, who is hurt perhaps by well-intentioned conditionality programs and how do you protect the most vulnerable member of a society when you are structuring conditionality.
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    And third, what kinds of voices are heard within the country in determining how conditionality is to be shaped. The involvement of civil society for us is essential, because in a sense we fit within civil society when we work in these countries through Catholic Relief Services.

    So there is a way in which protecting debt relief means watching how it is used within countries, but the determination of how it is used needs to be shaped by principles that are both firm, but flexible in their application.

    Moreover, we really feel that the determination of how macro-economic policy is being set within a country needs to be looked at not only through the eyes of one institution like the IMF, but ought to be looked at by a larger spectrum of institutions that could make judgments on the basis of both economic soundness and protection of human vulnerability in applying these programs.

    Finally, there is the question of supporting debt relief. There clearly is the need for much money for certain aspects of debt relief. Only yesterday, the treasurer of our Bishops Conference, along with sixteen other bishops, met with Mr. Schroeder, Chancellor Schroeder of Germany, and made a direct appeal, not only to him, but through him to the other countries meeting in the G–7 this week, that if we are serious about debt relief we have to be serious about the resources that it will take above and beyond what presently we are engaged with in the countries that are in the HIPC initiative.

    So supporting debt relief means being willing to pay for it in very specific terms, but to pay for it consciously and conscientiously looking at what is absolutely needed. Basically, that is what we come before you to say today.
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    The bill, we feel, is sound. We feel it identifies the right recipients. It has the right kind of rules. It has a vision of what the U.S. role in the world should be, and we are here to support the bill and, if anything, to push it ahead.

    Chairman LEACH. Thank you, Reverend Hehir.

    Mr. Booker.


    Mr. BOOKER. Thank you, Mr. Chairman. Thank you for extending an invitation for me to testify today on this subject of debt reduction for the world's poorest countries, with special reference to those in Africa, which is the region of the world which I work specifically on.

    I was surprised, perhaps even shocked, at the testimony this morning by Under Secretary Geithner in that he did not mention the word Africa once in his testimony. And I think that is a significant reflection of how the Treasury Department has failed to appreciate the importance of the geographic concentration of a majority of the world's poorest highly indebted countries in Africa.

    Mr. Chairman, let me apologize for the rather unpolished nature of my printed testimony. I just returned from overseas and had only yesterday afternoon to prepare the remarks I would make today, which is why they are so mercifully short. But I want to submit for the record a copy of this background paper, entitled ''Africa's Debt'', which I made available to all Members of the committee and staff. It is a publication by the Africa Policy Information Center whose board I am proud to sit on.
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    Chairman LEACH. Without objection that will be made part of the record. And the full statements of all the Members will be made—or all the witnesses will be made part of the record as well.

    Mr. BOOKER. Thank you very much. This background paper is one of the best short resources available on the African debt crisis, and I will use several of its arguments in my presentation.

    The first question is, how important is debt reduction to Africa. Well, it is extremely important and it is urgent for Africa. And Africa deserves a new commitment of resources from the United States of which debt relief is but one part.

    When we talk about changing American economic relations with Africa, there has been a great deal of concentration and focus and discussion on increasing trade with Africa. But as we all know, economic relations, particularly in terms of financing development in Africa, have several key components. One is aid, which has been declining and which was never significantly high in terms of levels of aid going to Africa.

    The second is promoting trade, but particularly opening up American markets to additional African exports.

    Another is promoting direct investment to Africa, a region of the world that has been unfortunately attracting very little attention from the funds available for direct investment in recent years.
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    And the fourth element, of course, is debt reduction.

    And Africa is the region in the greatest need of debt reduction. Africa's debt is so large in comparison to the continent's income that it cannot be repaid. But as long as it is not canceled, the constant pressure to pay it off will be unrelenting. Quote, ''Must we starve our children to pay our debts?'' asks former Tanzanian President Julius Nyerere. It not a rhetorical question. When debt payments take priority, along with economic reforms that are imposed by creditors, as opposed to developed by the country of the governments in question, when debt payments take this kind of priority, health and education budgets are squeezed and long-term investments necessary for development are lost.

    Africa's heavy indebtedness discourages investors and dissuades private creditors from putting new money into the region. It also discourages debtor governments from adopting reforms when their gains accrue mainly to foreign creditors.

    Second, can it work? Debt cancellation for the poorest highly indebted countries is crucial, not just to the individual countries, but to the continent's prospects for achieving sustainable development in the new millennium. Debt cancellation and reduction will work in Africa as it has elsewhere in the world as part of the broader effort to promote development and democracy.

    It is important to note that since the dawn of this decade the nations of Africa have been experiencing profound social, political and economic changes that offer improved prospects for economic development and growth. And while the continent's continuing problems should not be understated, including recent and disheartening setbacks in several states, it is nevertheless evident that we continue to witness the inception of Africa's second independence. The debt overhang most African countries face is a major impediment to their ability to take full advantage of the economic progress achieved in recent years and to invest more in their future.
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    America's own rhetorical championing of the positive changes in Africa, including President Clinton's historic trip last year, have simply not been matched by commensurate commitment of political and economic resources to Africa's efforts to meet their own development challenges. It is at the precise moment when changes in Africa generated by new African leadership and not just government, but also non-government civil society leadership, just when these changes have begun to take place and combined with the change in the international environment, that has created conditions conducive to tackling these enormous developmental challenges in Africa, it is precisely at this moment that we have been watching the U.S. and the West in general reducing their commitments to development assistance and to debt relief in Africa.

    The Clinton Administration's recent proposals for accelerating and expanding debt relief for the poorest debtor nations are, on the one hand, unprecedented and on the other hand inadequate. An international consensus is building in favor of massive and dramatic debt cancellation as an indispensable step for addressing Africa's broader problems. Without such action, prospects for economic growth and human development will be crippled. Yet international financial institutions and developed country governments are still trying to resist this conclusion.

    The decision whether to cancel debt and how much debt to cancel is as much political as it is economic. Generous debt cancellation and reduction measures were provided to Britain after World War I, and even to Germany and Japan; and in more recent years, Indonesia, Poland, Jordan, Egypt and many Latin American countries have all benefited from debt relief because of political will on the part of the creditor nations.

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    My third point is simply that the rich nations, which will begin the G–7 summit meeting in Cologne this Friday, should not only pursue a new consensus on the nature of the debt cancellation and debt reduction, but make the necessary commitments to finance a new plan as well. This is simply called ''Put your money where your mouth is.''

    This has been the problem of HIPC since it was initiated in 1996, at which time there was already discussion of selling gold from the IMF's reserves. There was also the establishment of the HIPC trust fund. Commitments by—bilateral commitments have been inadequate to that fund and, of course, no gold has been sold.

    So there has always been an absence of the necessary funding for adequate debt relief even under the existing program.

    The second thing is the argument that debt write-offs would foster financial irresponsibility by debtors, the so-called ''moral hazard'' argument. I think that argument is often made in bad faith and certainly with regard to many of the poor countries in Africa. Indeed, I would ask, what about the irresponsibility of the creditors, of the lenders? Moral hazard affects them as well.

    Africa's debt problem is, as Secretary of the Treasury Robert Rubin put in extremely diplomatic terms, ''the result of a lot of mistakes made by too many countries and too many lenders.'' Put more bluntly, the question is, why should the people of The Congo, formerly Zaire, be forced to pay back $14 billion in loans that international lenders gave to a former dictator, knowing full well that he was taking such loans as personal gain.

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    And on this point, I commend Congressman Campbell for his initiative in this regard.

    Agreeing on new debt relief proposals is crucial both here in the U.S. Congress and especially among the G–7 countries that will meet later this week. But agreeing on how to finance this new consensus is just as important. The key elements, as noted in your own legislation, will be making contributions to the trust fund and selling a portion of the IMF's gold reserves.

    Let me conclude by saying debt cancellation and debt reduction is part of a larger picture. How successful it is will depend upon the larger political security and economic environment in Africa, and U.S. efforts to promote conflict resolution, democratization and economic development can make a tremendous difference, but they need to be more ambitious than they currently are.

    Africa matters to the United States, and this is perhaps the most important point, because I credit this Administration with giving more attention to Africa—the President's trip, Secretary Rubin was the first Secretary of the Treasury ever to visit Africa. The visits have been impressive, the new initiatives at the rhetorical level have been extremely impressive; but the commitment of resources, beginning with a willingness to cancel outstanding debt, has yet to be forthcoming. The problem with U.S. policy toward the debt crisis in Africa is that it has been given the same low priority that overall Africa policy traditionally received until recently. The rhetoric must be matched with resources.

    Thank you.
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    Chairman LEACH. Thank you, Mr. Booker.

    Ms. Williams.


    Ms. WILLIAMS. Thank you, Mr. Chairman, for the opportunity to testify today at what I see as an extremely timely hearing.

    Chairman LEACH. If I could interrupt, if you could, please pull the microphone a little bit closer.

    Ms. WILLIAMS. Better?

    I represent Oxfam America. We are a private, non-profit humanitarian organization. As part of Oxfam International, we provide financial support to local groups engaged in self-help development in 120 countries.

    I would like to thank you, Mr. Chairman, for your kind words about the role that Oxfam and other NGOs of this country have played in bringing the debt issue into the debate in the Congress. But I would also like to note that we are not alone here, and many of the groups that are working on this issue in this country are doing so because we have been pushed by non-governmental organizations and citizen groups in debtor countries. This is also an extremely important issue for them, and they deserve a lot of credit, I think, for where we are today.
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    I am pleased to be able to speak in favor of your bill, the Debt Relief for Poverty Reduction Act. And in addition to thanking you, Mr. Chairman, for your leadership on this bill, I would also like to recognize the remarkable bipartisan coalition behind it. In particular, I would like to thank Mr. LaFalce, Mr. Bachus and Ms. Waters for their leadership, as well.

    At Oxfam—I think I speak for a lot of the groups in the Jubilee coalition—we are seriously concerned that the G–7 is about to seal an agreement on debt relief that will fail to deliver. The Administration and its G–7 partners seem to have embraced the rhetoric for debt relief for poverty reduction while not committing enough resources to solve the problem. We are hopeful that with your continued leadership, the Congress will be able to play a strong role in crafting a U.S. policy on debt relief that goes beyond what is currently on offer.

    I was asked to talk a little bit about what we see as the prospects for translating debt relief into a better future for poor children, and I think the case of Uganda is particularly instructive, so I would like to focus on that.

    As I am sure you know, Uganda is one of the poorest countries in the world, and until very recently, families in Uganda, like in most African countries, have faced stark choices about which of their children they would be able to send to grade school. Parents have had to shoulder a large share of the cost of education, including tuition, books, uniforms and even building maintenance. As a result, millions of children were forced to stay at home or phase their schooling over several years.
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    In 1997, Uganda was the first country to receive debt relief under the HIPC initiative; and at that time, the government made a public pledge and also a campaign promise to translate all the savings from debt relief into fighting poverty with an emphasis on getting all children into school.

    To implement the pledge, the government agreed—promised to set up a Poverty Eradication Action Fund and invited private groups like Oxfam, but also donor governments like the United States, to help oversee the funds. Currently, Uganda is receiving about $40 million a year in debt relief savings, all of which goes into the fund, along with the direct contributions from donor countries, and the results have been impressive. Enrollment rates rose from 52 percent to over 90 percent in grade school in just two years. And overage children have been brought in to be taught for the first time.

    Because corruption is a concern of Ugandans, as well as donor countries, 5 percent of the money dedicated to the poverty action funds is earmarked for local and national audits which are made public.

    While the current debt relief program, the HIPC initiative, has contributed to success in Uganda, the story there also points to the failure of the program. Even after debt relief, Uganda is still paying roughly 18 percent of its government revenue to cover its remaining debt.

    In neighboring Tanzania, another heavily indebted poor country, we have seen enrollment rates fall in recent years at the same time that debt payments consume four times the amount of the government budget than primary education. Oxfam has been working for many years in Tanzania, particularly in the area of helping in basic education. And one of my Oxfam colleagues was interviewing a head teacher in a school in a region of Tanzania for a report we did recently, and she told my colleague that her worst duty is to send children home when their tuition is late. This was a particular problem last year after the country experienced a severe drought; and she said for this year, about 250 have paid and 750 have not. So we have had to remind the parents by sending home their children during the morning. And the same thing, she said, is happening everywhere.
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    Well, Mr. Chairman, the same thing is happening everywhere. Other countries receiving debt relief under the current program will fare even worse than Uganda. Without a substantial commitment of new resources, debt relief will continue to be more of an accounting exercise, rather than part—excuse me, reducing that part of the debt that was not being served without making any dent in actual debt payments. And requirements for entry into the HIPC program have meant that only two countries have qualified for modest relief.

    I am pleased to say that the Debt Relief for Poverty Reduction Act is better than most. And Oxfam is among over 100 local—I think there are now 145 national and local organizations that have endorsed the bill, which promises faster, deeper debt relief to more countries, provided they are committed to following the example of Uganda.

    The bill is more generous than the current program; countries would not be forced to pay more than 10 percent of government revenue on debt service. But it is also more stringent; it requires governments and creditors to open up the process of deciding the terms of debt relief to public scrutiny so that citizens themselves can monitor their governments' commitments.

    In return for debt relief, countries must set up a human development fund modeled after Uganda's, and independent audits and regular reporting are required. Countries that are in the midst of conflict or considered violators of human rights wouldn't be eligible.

    If this proposal were adopted by all the creditors, the results would be truly dramatic. Oxfam estimates that sub-Saharan Africa could expect to realize some $2- to $3-billion in savings in a year. And if these resources were, instead, dedicated to basic education and health, it would a help avert the death of more than one million children; and it would also provide over 50 million children, all of the children in Africa that currently aren't going to school, with the education they need to break the cycle of poverty.
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    Unfortunately, the debt relief proposal expected to be announced at the G–7 on Saturday falls well short of what would be achieved through the Debt Relief for Poverty Reduction Act. In spite of some very large figures being thrown around, ranging from $50 billion to $100 billion, the reality is quite disappointing. At Oxfam, we estimate the countries would still, on average, be paying over a fifth of their government revenue on debt service even after the changes in the HIPC initiative are made. The heads of the wealthiest countries in the world are sending a message to the poorest that they simply cannot afford to do better.

    Mr. Chairman, Uganda has something to show for debt relief, and under your bill, more countries would qualify and they, too, would have something to show for it. But without a concerted effort by the Administration and with more leadership from the President, the G–7 agreement will join a long list of failed attempts to end the debt crisis.

    Right now, the Administration has a historic opportunity with strong support from Members of Congress, the religious community and private citizens to stop the senseless cycle of debt and poverty in far too many of the world's countries. We hope that they make use of it.

    Chairman LEACH. Thank you very much, Ms. Williams.

    Mr. Sachs.

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    Mr. SACHS. Mr. Chairman, thank you very much for the opportunity to be here, and let me join my fellow panelists in congratulating you and your colleagues on the leadership that you are providing on this issue. I don't think that there is a more important issue in international development than this. And I don't think there has been more leadership than what this committee and you personally have provided.

    It is absolutely vital that we get this right this time. It is been my honor and privilege to discuss this issue with you and colleagues over the course of more than a decade. Each time that we come, we bemoan the fact that it is clearly too little, what is on offer, it is clearly not going to work; and each time we have been told over the last ten years from a stream of Treasury officials that, ''Just wait, this time it is really going to work.'' And I am afraid that what we are going to find again if what is being brewed in the press about the Cologne Summit announcement that actually comes to pass is that we are going to have taken one more small and very disappointing step, much more disappointing this time because we all sense that there is a unique historical moment for a breakthrough, and to miss this moment would be a profound tragedy for all of us.

    I would like to submit my formal brief remarks for the record and just highlight a few of the practical points right now as I understand them.

    First, I think that we are still in a numbers game. Even this morning the Treasury was saying that it will be $70 billion of relief. There should be a truth-in-numbers rule for all discussion here. I asked, on the way out, some of the officials, was that $70 billion in present value? No, no, it was significantly less in present value. That is a headline number.
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    So we first have to be aware that it is easy to multiply numbers in this game, especially with concessional aid, because the numbers can be very large on paper, but the net present value of the reduction can be very, very much lower than what is announced. And it is tragic, actually, that given what we can accomplish, that we are still stuck in the headline game and not being very clear about what the real numbers are.

    I think it is fair to say that for a very large number of the countries that we are considering, no matter whose list it is, these countries can't afford to pay anything, pure and simple. And it does not take a Ph.D., and probably it takes not having one, to see the fact clearly. You know these are countries where life expectancy is maybe 45 years, or a where a substantial portion of children, one-third to one-half the children are undernourished, stunted, going to be burdened with a lifetime of cognitive and physical disabilities as a result of basic malnutrition, where the AIDS epidemic is threatening to be the greatest epidemic in the history of the world rivaling the 14th Century bubonic plague, if it doesn't get under control.

    And we are talking about countries where you have 30 or 40 percent of the adult population, sexually active-age population already HIV positive, we are talking about catastrophes. And then we are playing with numbers right now.

    So I think that the first point that I would stress is that we have gone down the wrong track. And the Treasury and the IMF and the World Bank have taken us down the wrong track when we talk about whether we are going to reduce the net present value-to-export ratio from 200 to 150, or whatever the targets are.

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    These countries, pure and simple—not every one, but many of them can't pay anything. And we wouldn't want them to pay. We want them to be able to address the most urgent, complex, profound human crises on this planet, not to be paying back these debts.

    So I almost shudder every time I hear the great breakthrough of the Treasury, that we are going to get it down to 150 percent of net exports. I think it is the wrong starting point. I would even suggest in the legislation, if I might, Mr. Chairman, that when the discussion is that for the benefit of a country with an unsustainable debt burden, I am sorry that ''the amount of debt reduction shall be sufficient to reduce'' and then give numerical targets, I would much prefer language something on the order that says that ''the amount of debt reduction for a country with an unsustainable debt burden should be sufficient to permit countries to meet essential needs and to undertake sufficient investments to ensure a reliable basis for sustained economic growth,'' and then go on to say, ''but in no case shall this debt be greater than the following numbers,'' because when we put the targets in terms of these absolutely artificial constructs, which even Secretary Geithner couldn't begin to explain, I can tell you, as a macro-economist, there is no basis for these numbers.

    One has to look at the totality of the social conditions, the economic conditions, the challenges confronting the country. And when I do it, I can't imagine that we would want 25 of these countries to pay anything on the debt. And in fact they don't have to pay. We give them more money.

    So we play the circular game. We know in our hearts and in our practice we have got to get more money to them, the situation is so horrendous. But the shell game where we give them some this way and then pull out this way is hugely inefficient.
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    The basic point that I am making is, all of these numerical targets, in my opinion, take us a bit down the wrong path. The right standards, it seems to me, should be standards about the most urgent social needs being met, tested against issues such as vaccine coverage or issues of extent of malnutrition or other ability even to provide a few dollars per person to address the AIDS epidemic rather than the artificial macro-economic constructs which I can tell you, as a macro-economist, simply cannot be justified, given the development challenges that we are facing.

    I think these are guidelines, but they become the maximum that we accomplish, not the minimum. And the real point is that both psychologically and economically for many of these countries, we want to wipe the debts, the slate clean—the psychological benefit of going that far, rather than getting into a bureaucratic exercise of 150 percent net present value-to-exports in terms of mobilizing societies, mobilizing support for reform; making us realize that we are doing something in our moral contribution, as well, is profoundly important, it seems to me.

    And I believe that we already, three years ago when the HIPC got caught in a bureaucratic nightmare, when they started with the 200 percent of net present value of exports as the target, it made no economic sense; it wasn't measured against needs or even capacity to pay, because exports are not capacity to pay, as was noted in this morning's session.

    Tax revenues are much closer to that, but even there, one must judge everything relative to the burdens facing the society. And when you have mass malnutrition or a rampant AIDS epidemic or an unimmunized population because you can't even provide the dollar per person to get the basic immunizations taken care of, we know that something is wrong with the artificial targets that we are setting.
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    So my first point is, we are very much at risk of doing it again right now. To listen to the Treasury, we are just there once again—the minimum step to satisfy the headlines and not really as far as we need to go.

    I will try to watch my time.

    Second point, the IMF absolutely should be taken out of the center of this process. The IMF is not a development institution, and it does not recognize the development challenges, nor should it, nor could it. I don't want to remake the IMF, as they said this morning, to reinvent it as an institution that gives childhood vaccines.

    The mistake we keep making, though, is that the IMF has to be the center of everything. And it is so much the center of this process, Mr. Chairman, I can't even describe to you the frustrations of being on the other side and watching the wall of impermeability surround the whole discussion, because one can't get any logic into the process, because the Treasury and the IMF have it all figured out. And they are going to solve these problems by civil service reform or tax increases or something else, and not address the real development challenges. So I think the process is deeply, deeply skewed right now.

    The third point that my testimony suggests is that the whole money game, in my opinion, is exaggerated. We have already discussed here how the U.S. claims are about $6.1 billion, but the appropriations that would be needed for 100 percent write-off are closer to $635 million.

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    Basically, for almost the entire stock, we can find the money in analogous ways. The IMF is sitting on $22 billion of unrealized capital gains on gold and several billion dollars of reserve accounts all over the balance sheets, that can be used to absorb the write-downs of about $7 billion of face value and somewhat less of present value. They say, ''No, no, we can't do anything until you give us dollar-for-dollar.'' But that is an old creditor game.

    The IMF, in my view, should just be asked to bear the burden within its own balance sheets. And similarly for the World Bank, which in my opinion, both on the IBRD side and on the IDA side, should simply absorb the write-offs within the balance sheets. We can then get on with the business about what kind of international assistance program we want.

    But the notion that the only way to write off debts is to keep the bank and the fund whole is stopping us from thinking clearly—I mean, stopping the Treasury at least from thinking clearly, I should say—because it all of a sudden looks very expensive. It isn't expensive if we just acknowledge that bad debts are bad debts and, therefore, should be written down substantially.

    My opinion, as I tried to describe in the annex to my testimony, is that with a very, very small amount of money virtually the entire debt stock could be written off, and that we should not be put in a position of making the World Bank and the IMF whole as we have gotten into the rhetoric of doing because Mr. Wolfensohn and others have claimed that is the only way it can be done. One just needs to look at the balance sheets to see how many reserves there really are. There are both capital and reserve accounts, and the ability to shrink IDA itself—that, I think, is the much more appropriate response.

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    Now, many people ask, if that is true—and I believe it to be at least factually true—is it wise? Don't we want to put more money in? And my answer would be, not in the way that we are doing it right now. The presumption that our aid should go through ESAF, IDA structural adjustment lending, I think is the beginning of the mistake in this process in terms of how we pay whatever bills we want to pay.

    If you, Mr. Chairman, came up with an added billion dollars from the U.S. Congress for these countries, I would strongly urge, strongly urge that you not put it in future ESAF lending, but rather help to raise the amount of resources available for the U.N., AIDS, or for the World Health Organization or for UNICEF to improve its vaccine coverage, or for CGIAR to improve agricultural research in the tropical regions of Africa to improve food productivity.

    I think we have almost reached the limit of what the macro-economic-style dials can do. That is what the ESAF's twenty years have brought us. There have been some modest improvements, but we can't keep pushing down the Treasury path because most of the answers don't lie down the path of where the U.S. Treasury or where the IMF would look. They lie in the direction of public health, in agricultural productivity, children's vaccines, environmental management, clean water and so forth. And the IMF is certainly not the right instrumentality for that.

    So the idea that we have to redo our aid by replenishing those very funds seems to me to be a misdirection of priorities for the future.

    One final step that I find very regrettable in the whole discussion is that, as usual, we are going to do something for them without engaging them in any of the discussion. Where is the international summit of President Clinton, President Mbeki, President Nobasanjo, President Museveni to talk about the real African renaissance, to say, ''We can go this far. Where are you going to go,'' to try to raise the stakes on both sides so that we have a dramatic international political process which helps to address the situation, rather than the most down-in-the-mouth limited bureaucratic process that drags along the way it is right now.
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    It seems to me that unless we engage the political leadership of the debtor side in this, we miss a tremendous, tremendous opportunity for a global and human breakthrough.

    The final point that I would suggest, Mr. Chairman, very, very strongly—and I think it was implicit in the discussion this morning, but I would urge you to make it as explicit as possible—neither the Treasury nor the IMF nor the World Bank has provided the public with the numbers that are needed to understand fully and clearly what the real options are right now.

    One needs, country by country, in face value and in net present value terms the amounts of debts and to whom they are owed; and when it is within the IMF and the World Bank, which programs—IDA, IBRD, ESAF, and so forth.

    I would also ask the Treasury not necessarily their preferences about how much gold to sell or their preferences about the World Bank's reserves, but what is possible, given the charters and the balance sheets and so forth. And I think what you would find, Mr. Chairman is that the range of possibilities for much more ambitious reduction is well within the charters and the financial guidelines of these institutions, if we choose to grasp it.

    Thank you.

    Chairman LEACH. Thank you very much for a very distinguished presentation coming from many different perspectives. Let me just say, because the word leadership has been thrown out earlier today in this panel, that I don't think I have ever introduced a bill that has been based more on the input of others than this particular bill, and I want to thank everybody on the panel and in the room for the leadership that they have provided.
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    I don't know of a single issue that is before as many different governments that is reflected more in the leadership of a series of faith-based and activist groups such as represented partly on the panel and by more independent academic perspectives such as Mr. Sachs.

    The word gold has been raised, and really I think what is at stake is whether we are going to have a policy that reflects a heart of gold or a policy that demands a pound of flesh. And these are theoretical precepts that are reflected in literature as well as various faces and reflect economic judgments, what Dr. Sachs has presented from the numerical perspective looking back macro-economically at what societies can do.

    I share some of Dr. Sachs—your concerns about the IMF, but there is an aspect of the IMF that I am not sure that I am in complete agreement with you on and, that is, one of the great strengths of the IMF is that it reflects burden sharing in terms of the raising of revenue to help others.

    Likewise, it is a uniquely positioned institution to expect burden sharing in the reduction of debt, and that when one has concepts such as Jubilee, or for that matter a desire to increase assistance in more direct ways, institutions that are international of this nature have charters that are established that instantaneously reflect burden sharing if there is leadership and that is where the translation of private leadership to public becomes so consequential.

    From the United States perspective, both the United States and the World Bank are a little less than 20 percent of the total burden, which means that over 80 percent is others. With respect to direct lending, it appears that we are in the neighborhood of less than—and perhaps substantially less than—10 percent. And one of the aspects of that is that I know of no area in which we should not be leading more. That is, American leadership can produce results and affect others mighty significantly.
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    And so Secretary Geithner was correct in his analysis that we want to move more than the United States. But what I think as groups have been testifying with some of the Congress and the panel this morning have been indicating is that we ought to be leading maximally, rather than modestly; and one of the tremendous issues is that ironically a large change may still be an inadequate change and so how do we deal with the situation in a more comprehensive way.

    Here you have on one side of the panel Dr. Sachs talking about the simple inability of some societies to deal with any debt and from the other side of the panel, the precept is presented that the totality of Jubilee is a perspective that brings a moral perspective that is coincident with an economic perspective, which is a fairly extraordinary phenomenon.

    And I am hopeful that we can proceed in a way that will bring everyone together, but I have some doubts that one achieves this objective by rejecting the IMF or the World Bank. I think the issue is to leave the IMF and the World Bank, and that is the only difference in what might be tone that I would suggest.

    Anyway, Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman. First my apologies to the first two members of the panel, but I had a long-scheduled speech off the Hill that I had to give and I got back as quickly as I could. I am sorry to have missed you. Most of you were present when I queried Treasury about the differences they might have with the bill that Chairman Leach and Mr. Bachus, Ms. Waters, and myself and others have introduced; and they articulated three principal reasons, Mr. Geithner did, that we would move along rather than multilaterally, that the extent to which a country can grow based on good macro-economic policy, and how we would define how deep we would go in creating reverse incentives for government. Would any of you wish to address the differing points that Mr. Geithner made earlier this morning?
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    Mr. Sachs, Father Hehir, either one.

    Mr. SACHS. Maybe I could start briefly. I think the question of the U.S. moving unilaterally is not such a consequential question in the end because we will get multilateral movement on this and because the direct claims that we can move on are very, very small. So I think it would be wise for us to move in any event unilaterally on the $630 million roughly of actually carried value of our bilateral claims.

    Irrespective of what the others do, but I am not consequentially worried about that. What I am worried about is the extent to which the U.S. is prepared to lead, to get movement in other areas, and particularly the multilateral institutions.

    On the second point, I have a much more fundamental disagreement; and I will be able to respond to the Chairman's observation as well.

    The notion of the current strategy is that our interlocutor in this process is the International Monetary Fund. I can't stress how true that is in practice, because while there are many organizations that float around the IMF, this puts the thumb up or the thumb down.

    Mr. LAFALCE. How could we address that problem legislatively, Mr. Sachs?

    Mr. SACHS. That is a good question. Let me say the policy—how we could address it. First we need to understand that the IMF cannot lead a development effort.
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    Mr. LAFALCE. I accept that premise. I share it.

    Mr. SACHS. Then I think what we need in terms of the debt reduction mechanism in practice as I would see it would be for the country to come forward with a plan after consultation with many different agencies and organizations that would be approved not by the IMF as the arbiter, but by the broad group of creditors, including the bilaterals, the IMF, the World Bank, all sitting as I see it as kind of a workout creditors committee.

    Mr. LAFALCE. What about using the World Bank as the central entity?

    Mr. SACHS. I have fewer misgivings, but still misgivings; but it would definitely be a big improvement. Right now, as you know, the World Bank will not move if the IMF says no. So this is practicably a problem, but groups that are not even at the table right now include the World Health Organization, UNAIDS, UNICEF, and the very core international groups that we know are the ones charged with the expertise to address the most urgent social problems that are the goals of this committee.

    Mr. LAFALCE. Should we create some type of consultive committee legislatively that could include, for example, the World Health Organization or entities of the United Nations working in consultation with the World Bank, with the World Bank perhaps chairing?

    Mr. SACHS. Definitely. And a kind of steering committee of the creditors to oversee the workout process would put the IMF in its 20 percent share not as the total channel through which everything gets done, and that would be vastly more appropriate. So that is the direction that I am trying to play with, a kind of steering committee.
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    On the third point, how to define how deep. This is really the critical point, because they are going to announce very limited goals on Saturday that are dressed up with big numbers, and I think we get to the crux of the issue there also. It is those two, who is going to lead and how deep. I could not agree less in that context with the Treasury position.

    Mr. LAFALCE. So the numbers they are using are at least $65 billion, let's say $70 billion, and your argument is that is the face value, but not the present value. By the present value, are you talking about the written-down value, the $630 million as opposed to the $6 billion, for example? If it were the United States bilateral?

    Mr. SACHS. What I am talking about is for 25, perhaps 30, of the countries on the list, the right approach in my view is 100 percent write-off.

    Mr. LAFALCE. I understand, but what we want to quantify, are we using the present value or face value and what would the present value be as opposed to the face value? What would the present value of the $70 billion face value be?

    Mr. SACHS. $35 million, probably.

    Mr. LAFALCE. I thought it would be less than that.

    Mr. SACHS. The gentleman claimed around $40. I would want to see the numbers one by one.

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    Mr. LAFALCE. Let me ask you, Mr. Sachs, I had called in the 1980's for a sale of a portion of the IMF gold in order to use it for debt relief. Is it necessary to sell the gold or might it be preferable, given economic conditions that exist today, to use the gold as collateral for some financial fund-raising purposes, and without giving up the gold itself, just using it as collateral? What are your thoughts on that?

    Mr. SACHS. I think probably some is going to have to be sold down the line, but revaluing the gold right now, recognizing some of the capital gains, even with balance sheet adjustments, would allow some writedowns before any gold capital gains are actually realized by sales. I should also stress there are many other line items in the IMF balance sheet.

    The reserve account in the general department of the fund, the reserve account in the ESOP trust fund, the subsidy account in the ESOP trust fund, which are all pockets where you can write down some of this money. There are ways to take the hit within the institution without doing any damage to the institution. They don't want that. They want you to pay dollar for dollar.

    Mr. LAFALCE. Is this articulated in any paper that you or anyone has written, that is, ways that this debt writedown elimination could be done internally by the multilateral institutions themselves?

    Mr. SACHS. In the appendices to my testimony today, I go through the numbers, and I would stress to you a general point that for every number there is some twist that the Treasury will very cleverly have to come up with, but this can be accomplished if there is the will to do it.
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    Mr. LAFALCE. My time has expired, Mr. Chairman, but I would like a second round later.

    Chairman LEACH. Thank you.

    Mr. Bereuter.

    Mr. BEREUTER. I will pass to my colleagues down the line since they have been here for the whole testimony.

    Chairman LEACH. Mr. Bachus.

    Mr. BACHUS. Mr. Chairman, I would like to acknowledge that Ms. Williams testified before our subcommittee in May, and in preparation for the hearing today I again read your testimony and it has been a great help to me in understanding this issue. It gives me tremendous insight. I would have to say that, as well as Jim McDonald's Bread for the World, their efforts have been really alerting me to this issue. Those two organizations put a lot of time and effort and a lot of heart in this matter. I would like to—and I know Jim was here earlier.

    I want to tell you how much I appreciate all your efforts.

    Professor Sachs, to have someone who is a Director of Studies at Harvard University and a position that you are in, to have you as an advocate for the Jubilee 2000 and to have your knowledge and insight, you probably realize where I get that figure, $1.19, that was your figure.
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    Mr. SACHS. I appreciate it.

    Mr. BACHUS. I had Jim McDonald's figure of $2.67 and I discussed with my wife mailing a letter to everyone in the Congress with $2.67 in it, and I figured that the cost would be about $1,500. And as we were pondering that, I read your article in the New York Times and realized that you may have saved me about $900. So I very much appreciate that.

    Your contribution to really—I had gone on notice I think——

    Chairman LEACH. Would the gentleman yield.

    I think Congressman Campbell saved you another rather stunning amount. He is arguing that it is only 12 cents.

    Mr. BACHUS. I will take that. That letter is fixing to go out.

    Chairman LEACH. But he is a lawyer, not an economist.

    Mr. BACHUS. I better stick with the $1.19.

    But you have been very enlightening. You have enlightened us all on the true costs of the fact that they are carrying these debts on the book and that they are not being repaid and looking behind the numbers. So I appreciate that very much.
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    Reverend Hehir, and let me say, we have several—we are called on the floor with the Transportation budget and this is something that I wouldn't have missed. I have your testimony, and I will tell you that one of the things that I think has motivated me and my faith in this matter more than anything else is an Apostolic letter from Pope John Paul II on the preparation for the Jubilee 2000, which I don't see how anyone with our religious faith can read that without becoming intensely motivated, and I will tell you that I even think besides Jubilee 2000 to be reminded of the principles.

    Fr. HEHIR. It is the common perception of the wider religious community. The Pope articulates it, but there are people who have invested from various religious traditions an enormous effort around this idea. It is one of those ideas that you can converge on, which has not always been the history of religions, unfortunately. It is good to cite the good moments.

    Mr. BACHUS. As a Southern Baptist, I had read works on prayer, but this is actually my second.

    Fr. HEHIR. We will try and let the Pope know for sure.

    Mr. BACHUS. And our prayers are with the Pope in his visit to Poland and for his health.

    Finally, Mr. Booker, I have been reading your testimony since I got back and I will read it more and consider. I did notice something in here which I thought was a very good point, but I don't remember now exactly what it is. I appreciate your attendance, too.
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    Mr. Sachs, let me ask you a question. IMF wouldn't even have to sell gold to finance this debt forgiveness. Is that right?

    Mr. SACHS. Well, I think depending on how much you want to play with the balance sheet one could acknowledge some of the capital gains and take some of the writedown prior to gold sales. Exactly what the flexibility is, I couldn't guarantee. What is true is that there is an undisclosed $22 billion of capital gains because the gold is held on the books at 35 SDRs, special drawing rates per ounce, or $47 per ounce, compared to the current price of about $260 per ounce. So one can recognize that—one can realize some of it. One can borrow against it.

    If the will is there, there is a large amount of capital that has not been acknowledged, and I think that the idea right now that one should sell just 10 percent and then use just the interest on the 10 percent is the most minimalist conceivable maneuver that one would want to do on this. And frankly it surprises me that the U.S. Treasury and the Administration would want to go down that road because that is the absolutely smallest conceivable step forward.

    I stress also again that other than the gold, there are many buffers in the IMF accounts. There are reserve loss accounts, in essence, throughout the balance sheet so these things can be recognized. We can just cancel part of this claim, not just against gold, either realized or sold, but also against special reserves at various points of the balance sheet. This has not been discussed up until now.

    Again from my point of view it is not only a huge missed opportunity, it is, frankly, a surprise from the point of view of the Administration. Why are we aiming for the most minimal amounts when we actually could go in and do a lot more, and the world mood is definitely to do a lot more. So it is a bit of a mystery to me.
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    Mr. BACHUS. I am lucky. I have been surprised by their lack of commitment in this regard. And it is not consistent with some of their other positions.

    I now realize what it was, Mr. Booker, and that is what we have discussed; but I think you say it so well, the debt overhang that most African countries face is a major impediment of their ability to take full advantage of the economic progress achieved in recent years and invest more in the future.

    We were actually holding whole regions of the world back from the fruits of our modern technology through this debt. So it is not only their standard of living, but their whole economic progress. The thing that I did not touch on earlier in my remarks—and Ms. Williams you made this point back in May and I have seen it made before—I don't understand why this escapes most Americans when we consider this, is that bringing the standard of living up in this country would be a tremendous benefit to our country, its national security, its health, its environmental well-being. And you could justify it on terms of tangible economic benefit inuring to us, if nothing else. I hope that we won't. I hope that is not how we will approach it. I hope we will approach it as one of those opportunities and moments in time where we can make all the world difference to someone, and that we will do something for someone who really is not in a position to do something for us. We do it purely and simply because we care for them and we love them and it is the right thing to do and I know that is what motivates you all. Thank you.

    Chairman LEACH. Mr. Sherman.

    Mr. SHERMAN. If you will forgive me, I would like to play the devil's advocate role. One concern that I have is this is basically foreign aid, and it is foreign aid to regimes rather than to relief organizations and I would like to put out a rival approach and, that is, instead of forgiving the debt that has been proposed to forgive, that we earmark debt and say you still have to pay it, but whatever payments the IMF receives will then be allocated as cash payments to those foreign aid projects, to those governments, to those NGOs that most need and most deserve the money.
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    In this way, the foreign aid would cost the same amount, but the recipients would be selected not based on which governments have run up the biggest debts, but rather which—including the debt burden that they bear, most deserve the aid.

    I would like one or two of you to comment. Does it make sense to allocate foreign aid to governments based upon how big a debt they have run up rather than to governments and NGOs based upon the other criteria that we usually use in allocating international foreign aid?

    Mr. BOOKER. I will take a shot at that. I certainly don't think that it makes sense to allocate aid to countries based on the size of debts the governments have run up. Part of the problem——

    Mr. SHERMAN. I think that should be one factor, because if you have two countries and one of them has suffered this or that natural disaster and the other has the disaster of having run up a bunch of debt that it cannot afford to pay anytime soon, the existence of that debt is a factor just as much as the presence of oil or the presence of gold would be an asset for a country. I am sorry for interrupting.

    Mr. BOOKER. In some cases the existence of the sizable debts are a man-made disaster. You have to bear in mind the historical context of particularly aid to Africa, which is where most of the debt is.

    Most of the aid during the Cold War was not intended to promote development in Africa. It was intended to buy regimes that would support the United States during the Cold War. Thus, we encouraged the IMF to spend billions of dollars on Mobutu Sese Seko in the former Zaire. The 45 million people now face a debt of $14 billion, and yet they don't have roads or schools or clinics. They have a tremendous need and they have a historical purchase, I would say, on the United States in particular because we helped create those conditions because it served our strategic interests at the time.
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    So it is a bit of a moral obligation as well, but it is also in our current self interests. These interests can be joined because we have an interest in promoting stability in the heart of Africa, in promoting development, advances in public health, and so forth. So I think the criteria has to do with the obligation to get rid of this debt of which we bear a tremendous responsibility for and to create a new era of cooperation and mutual self-interest.

    Mr. SHERMAN. If I can go on to a second question, getting aside from the desirability of forgiving the debt, this relatively absurd idea that you have to sell the gold to make the balance sheet look better as opposed to marking things to market. And I believe Mr. Sachs commented on this. Wouldn't we get a more accurate balance sheet from the IMF if they were to market all of their assets and liabilities?

    Mr. SACHS. It would be very frightening because a lot of this is not payable on their balance sheets.

    Mr. SHERMAN. So what we have is a situation where we can use an accounting device, either marking it to market or selling it, to realize $22 billion of unrealized gain while never telling the world about the unrealized loss?

    Mr. SACHS. Of course I am being facetious. I think that is exactly what we should do, mark-to-market most of this.

    Mr. SHERMAN. If we were to mark to market, we would have a $22 billion increase in net worth on the gold. You said there are the other assets. The loans often have reserves attached to them. What kind of decrease in the net worth of the IMF would we have if we marked its other assets to market? .
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    Mr. SACHS. For the 42 countries that I use on my list, which is the original HIPC countries plus Malawi, the total amount that those countries owe to the IMF is $7.8 billion in face value, of which $5 billion is ESOP lending and $2.8 billion is stand-by and other IMF facilities.

    In other words, one could write off the whole thing quite comfortably just within the capital gains of the——

    Mr. SHERMAN. Are there other assets on the balance sheet that are overstated in their value?

    Mr. SACHS. Loans to other countries that one might want to take a similar view, which I have not done systematically for the purposes here. If I can return to the earlier question——

    Mr. SHERMAN. Before you do that, I would hope that our committee would write a letter to the IMF asking to give a balance sheet reflecting the fair-market value of their assets.

    Mr. SACHS. What they will tell you is they are a privileged creditor, so they have never lost a penny on their claims. It is a policy choice for them.

    Mr. SHERMAN. At least they could tell us about their unrealized gains.
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    Mr. SACHS. Yes.

    Mr. SHERMAN. Maybe you could help us identify their unrealized losses.

    Mr. SACHS. That they could do and that I could do as well.

    Could I return briefly to your first question?

    Mr. SHERMAN. Only with the permission of the Chairman.

    Chairman LEACH. Go ahead.

    Mr. SACHS. I think one should see the debt reduction not simply as aid, but as reflecting the unpayability of the debt. If the debt were completely payable under normal conditions but you wanted to do a favor, it would be one thing. But the vast proportion of the debt that we are talking about either cannot be paid at all or can be paid literally out of the hands of starving or malnourished children, so that is the standard that we are talking about.

    We are talking about societies where one-third to one-half of the children are deeply malnourished, stunted, and bearing horrendous disease burdens. It is in that sense that I don't think it is right to view it just as aid. The unpayability is crucial and costly for the U.S. Government to relieve this debt because we have already written-down 90 percent in the OMB books on this.
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    The cost of canceling $6 billion of U.S. claims is estimated to be $635 million because we have already taken the step of saying 90 percent is not coming back. It is always cheap to forgive loans that won't be repaid, and the reason for recognizing reality is the same reason we have bankruptcy in general. The inefficiency of keeping unpayable debt on the books is that you can never get better.

    So if we want these societies to have a chance to get better, which we all do, it is not enough to not have them pay. The burden also has to be canceled so that there can be a fresh start and that I think is a huge part of the story here.

    I would say 80 percent is almost—surely for maybe 30 to 35 of the countries. 80 percent flat out would have to be canceled. Probably for some of them you might want 20 percent to be repaid in local currency to fund social programs, for example. It depends on the context. But for many, many of them, we simply wouldn't want them to even try and they can't.

    Mr. SHERMAN. Thank you.

    Chairman LEACH. Mr. Campbell.

    Mr. CAMPBELL. Thank you, Mr. Chairman.

    I have three questions which I would like to state at the beginning and anticipate perhaps that you would divide them.

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    The first one that will make sense most for Mr. Booker. You heard the earlier panel, the discussion of the alternatives. The Chairman's bill, my colleague Congresswoman Waters' bill, and many others which have a condition that the repayment be directed to some other purpose which we believe is desirable; and my good friend, Mr. Sherman had a similar point right now.

    And I raise the question of practicality. That is to say as I understand it, the Chairman's bill or Congresswoman Waters' bill would require the pay-back on the existing schedule of debt in local money to then be directed toward education or AIDS in the other case, evidently to be supervised by somebody, maybe it is us or maybe it is the IMF, to be sure that it is being used for that purpose.

    You heard the Treasury Secretary's designee say it might be used for guns. I would like your comment on the practicality of it. I am skeptical. We would be creating a monitoring system as to how Mali spends tax revenue derived from people in Timbuktu so that we Americans make sure that it doesn't go to guns but instead goes to schools.

    Dr. Sachs or anybody, I would like you to take a stake and put it through the heart, if at all possible, and then pound it a few extra times, of the theory that if we forgive a loan it damages the creditworthiness of the debtor. Let us kill this one so that no representative of the Treasury ever again dares to make that bizarre argument.

    And if I haven't signaled my intention enough, let me say that to me the moral hazard argument is totally misplaced. Two identical debtors come before a bank, one has a rich uncle. The rich uncle dies, drops money in and the first debt is gone, but they are equally the same in everything else. The question of whether they are creditworthy is their ability to go forward, not whether the one happened to have a rich uncle that died.
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    The third and last strange, hard-to-understand argument is that we should not go ahead in debt forgiveness lest Belgium benefit. I chose Belgium because they are a creditor to The Congo. We should not go ahead, because if we don't go ahead altogether, heaven forbid, because then The Congo might pay off its loan from Belgium. This is an argument that abstracts entirely from the question of why do the people of Zaire, The Congo now, owe this money? I think Mr. Booker addressed that well.

    But again, whoever might wish to, but particularly I address Father Hehir on that. And, Ms. Williams, I didn't have a question that fit you because I have three questions and four people.

    Mr. Booker.

    Mr. BOOKER. In terms of comparing the bills and the notion of channeling savings, whether it is called the local human development Fund or debt for development swaps or debt for HIV education, and so forth, I understand the concern and the motivation for why that is part of this legislation as well as other proposals; but I agree actually with your point on an earlier issue, which is some of these countries should not have to pay back this debt at all, and so it compounds the penalty that is being imposed upon them to say, ''We will forgive you this debt so long as we can dictate how the savings are spent.''

    Mr. CAMPBELL. With our experts in our SUVs monitoring it.

    Mr. BOOKER. And these are our new experts replacing the ones there previously telling you how to spend the previous money we loaned to you which was intended to achieve political purposes. So there is that problem, but bear in mind that does not apply to all countries.
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    There are certain countries that have credible governments, that are prepared to negotiate these kinds of arrangements because they think that it is important and they think that it is a valuable way for themselves to move forward in promoting development like Uganda's educational fund, or Zambia is now proposing a similar fund with regard to spending savings on HIV.

    Mr. CAMPBELL. And you feel that their monitoring that would be practical in those two instances?

    Mr. BOOKER. Absolutely. And I think the burden should be with the government.

    Mr. CAMPBELL. Let me ask Ms. Williams because Oxfam has experience in this, too.

    Ms. WILLIAMS. I want to, Mr. Campbell, call your attention to my written testimony. We have been a part of the experiment that is going on now in Uganda where the government set up a poverty action fund and it is not just the creditors that are involved in monitoring the use of the fund. Local organizations are also involved, and I think it is important for me to share with you the fact that many of the local organizations that we work with see debt relief as an opportunity for the creditors and the debtor governments and civil society in the country to come together to turn a debt liability into an opportunity for development.

    These organizations themselves are asking the creditors to work with them to demand accountability on the part of the government. So I think it is important that—no matter how you shape the relief, that the public is involved in setting the terms of debt relief and monitor the local use of the resources.
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    Mr. CAMPBELL. I am pushing only because the red light is on and my good friend from Texas is waiting.

    Father Hehir?

    Fr. HEHIR. Yes. Two points, Mr. Congressman. One, to reaffirm what Ms. Williams just said, at least through the Church we hear again and again that the debt is a terrible burden. It can also be turned into a certain moment of opportunity because people don't want resources misused again as they have been in the past. So the emphasis is less on outside control over surveillance and much more trying to strengthen civil society and groups within the country.

    Mr. CAMPBELL. Are you saying that the domestic political situation might benefit from an outside constraint?

    Fr. HEHIR. An outside constraint which is worked out collaboratively with civil society inside the society. There is certain pressure from outside, but there is this sense that there is a democratization possibility in the midst of this huge problem and that is a concern.

    The Belgian question, as I listened to Mr. Geithner this morning, there is a unidimensional view of U.S. leadership, that is, unless we leverage, we don't lead. Leverage is part of leadership in international affairs, but example is also part. You lead by taking a step that, in fact, puts a burden on others to do something about the step, and I think the emphasis on leverage is so great today that we bind ourselves into a straight jacket.
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    The final point that I would make is that the enormous significance of what this committee is doing in a bipartisan way, in my view, is the following. In foreign affairs there are two kinds of choices that a country faces: choices of necessity and choices where there is freedom of choice. In other words, you have got to defend your boundaries if you are attacked.

    There is another range of questions which I call issues of choice rather than necessity. We will not do them unless there is a willingness because of the intrinsic human value of what is at stake to do them. What this committee is asking the international arena and the American foreign policy to do is to concentrate on what I would call an issue of choice rather than necessity.

    It is not a choice morally we ought to do it, but politically it is one of those things where we won't do it unless there is a certain vision that says we ought to do it even though nobody can force us to do it. I think the enormous significance of these hearings is to highlight this issue of choice and push it ahead.

    Mr. CAMPBELL. Thank you, Mr. Chairman. I might ask your indulgence to allow Mr. Sachs to answer the question.

    Mr. SACHS. I think that your observation is both theoretically and empirically absolutely justified. If a country in bad faith repudiates its loans, then it loses access.

    If a country as part of a consensual process and in good faith receives debt reduction, both theoretically and strongly empirically, it gains tremendously in creditworthiness because it has less debt. I was involved very deeply in this argument and in this practice nine years ago when Poland got a substantial reduction of its debt as part of a multilateral agreement.
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    Poland went back to the capital markets with vastly improved creditworthiness when some people were surprised because they said, ''Never do that, this will ruin you.'' The creditors said it has less debt, it is safe to lend to, so this is completely misplaced, and I don't quite take it at the face value of the argument. I think—I hope it is more excuse than real analysis, because there is a long, long history of consensual arrangements which improve creditworthiness, and this is true within our own bankruptcy procedures as it is within sovereign debt workouts; but I can give you chapter and verse of a number of examples.

    One small point also, it should not be thought in my opinion if we relieve the billion dollars of debt burden of country X, therefore there is a billion dollars to be invested internally or redirected, most of this cannot be paid.

    For some, none can be paid. For some, the reduction should probably be 80 percent. And for the remaining 20, you might want to turn it into a local effort. But the first step is not simply to say pay it into a domestic fund. The first step is going to have to be to acknowledge that 80 or 90 or 100 percent is simply unpayable without doing profound fiscal destabilization or simply impossibility.

    Mr. CAMPBELL. Thank you. Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. I think that at least for a brief instant the committee has seen a short marriage between the University of Chicago and Harvard University's Economics Departments.
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    Let me raise just a couple of questions. I think it is fair to differentiate between accumulated debt of nations that was done for various foreign policy reasons that have subsequently failed. The Congo was suggested and others have been suggested. Our colleague from California mentioned this.

    But I think you have to differentiate between that and failed economic policies. And so I think if we are able to move this bill forward, which I hope we are, that is something that we have to take into consideration. Mr. Sachs, I think I hear you saying that there is not a uniform process for all HIPC countries. Some countries should be treated differently than other countries. Some countries should get total relief, and some should get partial relief.

    I do want to take issue with the moral hazard question, but before that, it would seem that there does need to be—we should treat this like bankruptcy. Ironically, we are proposing to treat bankruptcy differently in this country than what some of the Members have talked about how we should treat it for HIPC countries, but that is another issue.

    I think that where the loan has been made in good faith on the creditor's part, albeit perhaps with the failed theory, and the creditor is willing to forgive that debt, that the creditor does have some rights in return for that. We have been through that with the debt for rain forest swaps and things like that; and I don't think that is all that bad, and I think we should be concerned that even though you argue that some countries cannot pay this debt anyway and there is no money that we are freeing up in this process, I think if we are willing to forgive, I think we should be willing to make some demands that the reason that we are forgiving this debt is that we are hoping, to the extent you can, that you will spend your money better.
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    I also think that there is a concern of moral hazard going forward to some extent, and that is if we do not carefully look at this question in the future, this could have an impact on all foreign loan, foreign aid programs; that ultimately both the creditor and the borrower may say, if this doesn't work out, we know that we don't have to pay it back. You may argue that historically that has been the case anyway and this is just a mirage that we are looking at, but I think that is something that we have to be concerned about.

    In your testimony, you argue that—you raise a question about the bill's use—actually you are talking more about the G–7, the idea of the debt-to-export ratio as a mechanism to grade on what a sustainable debt level should be. The bill looks at that issue as well. You say that is not a very sound approach.

    What approach would you propose that we use if we were drafting a bill that would try and set a criteria for levels of debt relief?

    Mr. SACHS. Thank you for the several questions. I think first to keep vividly in mind the countries that we are talking about. Again we are talking about countries with an average per capita income of $350 per year and a life expectancy of about 50 years; massive disease burden and for most of them an AIDS epidemic absolutely out of control.

    Given those economic realities and the institutional realities for many of the countries where I work and where we could go down the list, 100 percent relief is only the starting point of those countries having a chance to get a grip on extraordinarily serious, one could say unique, social challenges in the globe right now.
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    There are other countries on the original HIPC list that are growing, that are growing out of their debt and where you wouldn't want—and they would not want 100 percent relief necessarily or need it. So I do think that there is room for judgment here. Where the current program has gone seriously wrong is to actually make uniform the end target, not that so many countries ever got there, only two have gotten all of the way through, but they said we will aim for 200 percent net present value to exports.

    For 25 countries, if we look down the list and went through the human indicators, the real challenges on health, the lack of vaccine coverage, the most minimal basic needs not being met and the budget constraints on that, and the cost, you would say let's start fresh. This country doesn't have a chance without getting down to zero.

    I believe that the right of starting point I said is language something different from these numerical targets which to me do not have macro-economic or developmental significance.

    I thought that language might be that the relief should be sufficient to permit countries to meet essential needs and to undertake sufficient investments to ensure a reliable basis for sustained economic growth. Targets and guidelines would come out of that, but what that kind of general language would do, would allow some of the countries clearly to be zeroed out so that you would look at a Mali or Chad or Malawi and say let's get down to zero, because these are countries that because of the following environmental conditions, health conditions, the following basic economic conditions, cannot meet the essential human needs or reliably make even the most minimal public investments with paying anything on the current debt, much less receiving the flow of other kinds of assistance that they will receive. I wish I could be more precise.
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    I believe in my experience on this list—and it is considerable for more than half of the countries, I think zero is the right point, the right ending point. For some—in other words, 100 percent relief. For others I think it is considerably less than that, but only for a small number.

    Mr. BENTSEN. I guess what you are saying then, for countries that have—I think this is a hard question, because for countries which have struggled to try and make payments versus those who just absolutely can't, would you differentiate between those countries or not? On the one hand you want to say, ''If you are making it, we would like to see you continue to make it. On the other hand, you ought to be rewarded in some respects for that versus countries which just got in the hole and never could get out anyway.''

    Mr. SACHS. I would not make a distinction because, given the desperation that is involved here, I think that the general issue of helping to find a way out of the current morass is vastly the main priority.

    My experience whether in Bolivia or Poland or other countries that got very deep relief, if it is done in the right way, bold enough to be real and engaging a political leadership of responsibility on the other side, it truly allows a historic change.

    And so I believe both sides, both the creditors and the debtors, have to reach far beyond what they think that they are reaching for, rather than the current situation, which is, we pretend to reform and we pretend to aid you so we get the minimal deals. We have to reach for the maximal deals because we are in a quite desperate situation in most of these countries.
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    I think the cause of not teaching lessons right now or the teaching of lessons of what did you do in the past, and so forth, actually pales with the question of what are you going to do now to save a desperate situation, to get your children vaccinated, to get children in school, to have full stomachs, to get a burden of hookworm infestation or hyperendemic malaria under control or to break an AIDS epidemic threatening to rival the bubonic plague of the 14th Century?

    That is the reality that we are dealing with in a number of the countries on this list.

    Mr. BENTSEN. You state that you would remove the IMF from the post-bankruptcy period, and maybe shift it to the World Bank. You are open on that. I would like to expand upon that. And second of all, is there a concern—is it something that the IFIs or somebody should be looking at that if you go through a debt relief period, some sort of moratorium of future debt, so you don't go back to where the U.S. does this and Belgium says we will make a development loan—and I don't want to sound paternalistic—but the government decides that is not a bad deal even though it may not be in the best consideration, should there be some coordinated effort among the IFIs in looking at that?

    Mr. SACHS. First, your analogy to bankruptcy is wholly appropriate and this is the right way think about it, whether it is Chapter 9 or 11 or 13. There are good analogies at every stage to the bankruptcy and the composition of creditors bringing them all under one tent and solving the problem, I think, is one of the main points because we don't have that right now.
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    I would like to see the IMF in there as one of the creditors, not as our interlocutor. That is the main distinction that I am making. It is our interlocutor right now to the conditions that a country should follow, to the claim of whether relief is or is not justified.

    Nobody else has a look. UNICEF doesn't get in there. The World Health Organization does not get in there, even the World Bank does not get in there if the IMF puts its thumb down. And the Treasury likes it that way to some extent because it is the Treasury's institution, but it is not a development institution so it makes fundamental misjudgments of what is a realistic approach for these countries.

    It was miscast in Africa and I would like to see ESAF ended, frankly, because the idea that the IMF should be a long-term development institution, period, is a misuse of that. It was a misuse for convenience of that institution. But if we really canceled the debts, then the first kind of loan that should not be repeated are ESAF loans, it seems to me. There is no case for them.

    Let's get the real development institutions and the grant agencies in, but not the IMF pretending to be a development institution. So I would like a composition of creditors all around the table. I would like the IMF to put in its word, and I would like to see the WHO say that is all very well and good, but you haven't left a penny in there for a vaccine, which is what the dynamic would be in a more articulated structure; and I think the legislation can push that and recognize that structural feature of the current system.

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    What Mr. Geithner said, Secretary Geithner was absolutely clear. They are going to try to reinvent the IMF again. And he announced it, we recognize we need a new framework. Some of us have been telling them that for ten years, and I am glad that they acknowledge it, but it is wrong to fix the IMF in this context. The IMF is a monetary institution, not a development institution.

    So, let's say, ''No, don't fix it.'' Get it out of this particular role. And let's work on development. And find the mechanism to do that. Several come to mind. I don't know which is preferred. The World Bank is a slightly preferable alternative.

    There are other ways to engage UNICEF, World Health Organization, so forth with targets and to push the debtor light in a bankruptcy to come up with the restructuring plan. This is the first thing I would do. Because I think the big mistake right now is the idea that you land the IMF. You lock the finance minister in the room and two weeks later you have 119 conditions that nobody else in the country has any idea about that are never going to be implemented and that are on the wrong target because they are all about finances and they are not about the issues that we have been discussing all day here.

    Ms. WILLIAMS. I just wanted to follow up on your question about the appropriateness of the debt sustainability targets that are in the bill in H.R. 1095. There are two ways of looking at debt sustainability in the bill.

    One is the debt-to-export ratio, but there is another even more important definition and that is the amount of government revenue that is being spent on debt service. In the legislation it calls for countries before they enter into the HIPC program to draft a plan of action or a human development plan, so that the resources that are freed through debt relief are part of a larger poverty-reduction plan. And then based on the financing gaps in that plan, that is when the decision comes in how much debt relief to provide.
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    So there is a provision for the amount of debt-service payment to be capped at 10 percent. So I think you can get to some of the issues that Professor Sachs is talking about if countries do have significant needs. Of course, a lot of these countries do, and are looking at serious gaps in immunization and education.

    And they can make the case if they have the capacity to deal with those problems. And their debts should be forgiven, brought down to a level perhaps below the 10 percent. So there is a provision for that in the bill.

    Mr. BENTSEN. I am going to get in trouble, but is it—would debt to GDP in these cases where you have very low per capita income be a more favorable ratio to look at, or is this really apples and oranges?

    In developed countries you tend to look at debt to GDP and in private sector accounting we tend to look to debt-to-capital. Here you don't really have any capital. You have some form of GDP, a very low level. And that is just a question I have had since I started looking at this bill from the very beginning. I am not criticizing. I just don't know what is appropriate.

    Mr. SACHS. I think a key point is that the debt we are talking about is owed by government. And so a natural denominator is the debt burden either flow or stock relative to the government revenues, taking into account, however, that the governments now with the revenues they have can't even meet the most minimal needs in many of these countries and therefore have to have their revenues already topped up from the outside.
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    So the debt-to-export standard in my view makes the least sense of all. Because it is not the exporters that owe the debt. It is the government that owes the debt. A mere debt-to-government revenue standard, you can see it introduces as many questions as their adequate revenue effort quote unquote is the government meeting its needs.

    I like in practice the idea of capping the debt servicing to no more than 10 percent of GDP—of government revenues, but I actually worry even there. For most of these countries I think the right standard is forgiveness. I worry about any lesser level becoming the target rather than the cap.

    If you could ensure that the legislation made it a cap rather than a target, I would feel a lot more comfortable. It seems to me again that the right language might be that the debt relief is sufficient to meet the basic human needs and meet conditions for growth, but that in no case should the debt service exceed 10 percent of government revenue.

    That kind of mix is possible and might be useful. Just putting in the numbers seems to me to miss the point where after the relief so that the resources are freed sufficiently so that governments can perform their most basic functions which they can't perform right now.

    Ms. WILLIAMS. I would just add I think that is—the way you are describing it is sort of a reformulation of the intent of the legislation. I don't think that is inconsistent with the legislation as I read it.

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    Mr. BOOKER. Can I add on that point that is one thing that is very unlikely to come out of the G–7 meeting in Cologne. This was the British proposal to cap it at 10 percent of government revenues, and from all we understand that is one of the things that will definitely be rejected in Cologne.

    Mr. SACHS. And our Treasury rejected it.

    Fr. HEHIR. The point that I take away from much of what Jeff has said is that in this determination of conditionality, if you use it that way or in this determination of how the resources are used, the one thematic idea is that the consultation that is now engaged in has to be both broader and deeper, broader in the sense of the international institutions that are regarded as relevant actors in determining what an adequate response to the debt problem is; and deeper inside the country in terms of these various groups who have known the mistakes that have been made inside the country before and themselves are the most vigorous proponents of not having that happen again.

    But there is a curious kind of way that if you don't get any outside leverage inside some of the countries we are concerned about, you won't be able to free up these internal groups. So it is a very interesting mix of outside leverage and internal participation that is at stake.

    But it also involves a huge structural change if the broader consultation misplaces the IMF, as Jeff has said. And it does seem to be finally—and Jeff is the economist at the table and others have backgrounds that can answer this better than I, but it does seem to be part of the problem that we are dealing with the IMF and the bank is that if you look at the last twenty years, both of these institutions have taken on added functions to meet crises.
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    And the question about whether they are appropriate functions and whether they are the best institutions is precisely part of the discussion which isn't beating up on the bank or the fund, I don't think, but asking how do you match the appropriate institution with sensitivity to internal problems in the country and to the resolution of this debt problem.

    Mr. BENTSEN. I guess the question—I will finish up here because I am way over my time—is whether the IMF should be the world bankruptcy judge which, in effect, it has filled that role now. And that is a question.

    And with respect to determining debt ratios, it is a complicated business, because when you consider it, the United States would not be able to meet any of those debt ratios if those were some sort of norm, if I recall the numbers correctly, although the United States' situation, of course, is completely different and can sustain a much higher debt load albeit correctly or incorrectly. Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you very much.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman. When I was questioning Mr. Geithner, I asked for the difficulties Treasury had with the bill that Chairman Leach and I and others have introduced. But actually there are difficulties that I have with the bill too and that I think that some of you might have.

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    They go in a different direction than Treasury's. And I look forward to working with you to not necessarily bring the bill closer to Treasury's perspective, but to make the bill a more perfect bill, as I hate to use the words ''more perfect.'' Beauty is in the eyes of the beholder, but that is something that is more attractive to our vision.

    Let me say that I think the only reason we have been able to come so far is because of the unusual convergence of so many religious organizations and the fortuitous circumstance of the Year 2000. There is just an unusual convergence.

    But when I think of religious groups, I think of a multiplicity of organizations. A number of the groups that are supporting debt relief could be viewed as more liberal, not necessarily, but they could be, or at least on this specific issue. To what extent has there been any outreach in an attempt to include other religious organizations that might be viewed as more conservative? For example the Christian Coalition, Pat Robertson's organization, Jerry Falwell's Moral Majority, and so forth. Can anybody comment on that? I mean, they have score cards which they have used against me. And I get a zero Christian rating, you know, from them and 100 percent from Bread for the World or other organizations. And I don't think—well, we just have a different perspective. But would anybody care to comment on that?

    Fr. HEHIR. I don't want to report on institutional discussions because I am not in a position to be able to do so. I think first of all a lot of times the conservative groups are regarded simply as evangelical. And I guess one of the points to be made is that there are evangelical groups, that is to say Christian tradition, that see themselves primarily in terms of interpretation of the Bible and not a larger set of religious themes such as some of the other religious communities have.
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    A number of those evangelical groups are very concerned about this issue. And there are some of them here in Washington that are very concerned about the debt problem. Sojourners, for example, is an evangelical group. It is hardly the Christian Coalition in any sense of the term, but it is evangelical in nature. And I do think that this theme of the Jubilee offers opportunities for people who start from very different places to come around a common theme.

    I can't give you a report on exactly what the outreach capability has been except to say this: if you look at the range of organizations, we would have a lot of disagreements among ourselves on other issues and not so much of a disagreement on this issue.

    So I do think there is a kind of moment of convergence around this theme that people leave their differences on other issues at the doorstep and come forward. Now, on your specific question, I obviously don't know.

    Ms. COLLINS. Well, I am national coordinator for Jubilee 2000 U.S.A.

    Chairman LEACH. Excuse me. Could you give us your name, ma'am.

    Ms. COLLINS. Carol Collins.

    Chairman LEACH. And you are National Coordinator for the Jubilee 2000.
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    Ms. COLLINS. Yes. My name is Carol Collins I am National Coordinator for Jubilee 2000 U.S.A. And, yes, we have done some with those groups, not as much as we would like. We have been too busy and we have a very small staff. But actually we have a ground swell of people calling into our offices from all sorts of denominations, not just those that are on our steering committee.

    Chairman LEACH. Can I just——

    Ms. COLLINS. We have also done outreach to Muslim and Jewish groups as well.

    Chairman LEACH. Are there Muslim groups part of your——

    Ms. COLLINS. The Muslim Public Affairs Council has endorsed our campaign.

    Mr. LAFALCE. I simply applaud what you've done and to the extent that there are any other religious organizations that have not yet come on board, I look forward to your best faith efforts to get as many of them on board as humanly possible. It would be helpful regardless of denomination, regardless of political philosophy or orientation.

    Dr. Sachs, you mentioned the efforts that were made in Poland, and I remember discussing that issue with you at the United States Embassy in Poland the summer of 1989, or January of 1990. We also had a great discussion at that time, you were advising not only Poland, but Russia.
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    I am going to pose to you and anybody else who wants to answer some large questions. First of all, it seems to me that the debate we are having today mirrors the debate that has taken place over—in different levels of intensity the past 20 to 30 years that has been called the North-South dialogue. And we are much closer now in our perspective at least within the membership of the Banking Committee that has attending today's hearing the dialogue that is been espoused by the South. Can you give us a bit of a historical perspective on that dialogue?

    Second, what went wrong—oh, that is too large of a question, what went wrong in Russia. That is too large. But what in God's name do we do today? I mean, Russia is a basket case, economically, not as bad as some of the highly indebted poor countries to be sure; but it has such a unique role in the world that we have to handle it adroitly.

    Are we doing the right thing in having additional financing simply so they can service their debt? Another large question, too, involving Russia is so much of Russia's indebtedness, I think for example, is to German banks and so much of that debt of German banks to Russia is guaranteed en toto by the German government.

    What opportunities do we have—I think it was Father Hehir who mentioned a group that had visited within the past week or two with Chancellor Schroeder in Germany—for greater involvement of Germany in the debt relief efforts, not simply bilaterally or multilaterally, but because of their unique position as guarantor en toto of private sector debt to sovereigns such as Russia?

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    Mr. SACHS. I will resist the 57-minute Harvard lecture in response to two very big questions and give you one minute on each one.

    On the North-South dialogue, let me start at the end. We are closer to consensus between North and South, if you will. I actually like to see it as temperate zone versus tropics—or not versus, but most of it is not quite North-South, exactly, than ever before in terms of the basic kind of economic policy, what to do.

    So that from the point of view of actually being able to get somewhere going forward, there really has been a lot of meeting of the minds about a lot of the core macro-economic issues which were not true twenty years ago. What there remains are two huge problems it seems to me, two enormous ones.

    One is the one we have been talking about today, which is the finances don't allow us to move forward. The second is that macro-economics is not enough, I shudder to say, to accomplish the goals of broad-based global development.

    We have profound crises of health, agriculture, productivity, environmental degradation and the like which remain largely unaddressed right now and offer a very complicated real agenda for the future, which is basically unmet at the present.

    I will give you one example. The World Health Organization, under wonderful new leadership of Dr. Gro Brundtland, appealed to the United States and others this year, ''Please, just increase our budget by 2 percent, enough to cover the increase of inflation.'' And the U.S. said, ''No, we keep the core budget of the WHO frozen in nominal terms again this year as we have for the past decade.''
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    So that the real spending on global public health has actually declined substantially in the core WHO budget. The same is true in international agricultural research where we desperately need breakthroughs in agricultural productivity.

    The long and the short of it is that there is a basic will right now on both sides to get beyond many of the deep impediments of the Cold War period or apartheid or vast ideological divides. We could do it.

    The debt burden or the debt overhang and actually the conceptual framework I think are the two greatest challenges going forward. We actually need a new way to think about these problems that stops putting them so relentlessly into the macro-economic verbiage. Some of that was useful ten years ago, but it is not the main point now. That is all I will say on the first one. I hope that is helpful.

    On Russia, every lesson we learn from how we helped make Poland work, an early stabilization fund, cancellation of debt, support for the reformers, for one reason or another we went exactly in the opposite direction with Russia and missed a historic opportunity in the early 1990's.

    Some people said it was too big; some people said let it fail; some people said, well, they don't need the help. All the good things we did for Poland which was hugely important, hugely tactically important, as well as strategically important, we did not do in Russia.

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    In the end, the government became highly corrupted and the reform agenda basically died away several years ago, in fact. Russia is now bankrupt. The good assets that the state used to own were given away to the cronies. Tens of billions of dollars of assets were probably distributed through phony privatizations in 1996 and 1997.

    Mr. LAFALCE. I just have to interrupt you for a second because when I was Chairman of the Small Business Subcommittee, I had many hearings in that capacity on the issue of privatization saying it is not just privatizing, it is how you privatize. And we should not be concerned exclusively with the efficiencies of privatization, but with equity of privatization.

    And you really, really couldn't get anybody to listen to that either within the Administrations or within any of the international finance institutions. It was just——

    Mr. SACHS. I resigned as advisor six years ago because it was already clear to me that this was seriously on the wrong track. When in 1995 the Shares for Loans deal came out, I went to the U.S. Treasury, the IMF, the World Bank, the OECD, everybody, to say you can't imagine this is about the biggest grab that we have seen in recent history. No one wanted to touch it, of course. And you saw it also, Congressman. So we have arrived at a terribly demoralizing situation right now.

    I do not believe that we have really any effective course of action right now except a holding pattern until there is a new Duma and a new president. And if there is, and if it is a workable counterpart, then we are going to have to have a whole fresh look, if we are lucky to get there, a fresh look at all of this.
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    In the end I can tell you, like it or not, the Germans are going to end up eating a lot of losses on this. That is just the reality of where we have arrived to.

    Chairman LEACH. Thank you.

    Let me just thank you all. This has been an extraordinarily helpful hearing. And I hope the Administration—may I ask is there anyone from the Administration here at the moment? Well, it will be up to us to pass on some of these views.

    And I hope it is not too late to change their initial plans. But certainly from U.S. policy position, Congress will play a larger role than otherwise. I take your testimony to great heart. And I want to thank each of you for hearing different perspectives and for your time and your good judgment. Thank you all. The hearing is adjourned.

    [Whereupon, at 3:25 p.m., the hearing was adjourned.]