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INTERNATIONAL FINANCIAL ARCHITECTURE
THURSDAY, MARCH 23, 2000,
U.S. House of Representatives,
Committee on Banking and Financial Services,
The Committee met, pursuant to call, at 9:30 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [Chairman of the Committee], presiding.
Present: Chairman Leach; Representatives Roukema, Bereuter, Lazio, Bachus, Castle, Campbell, Lucas, Metcalf, Barr, Kelly, Weldon, Cook, Ryan, Ose, Sweeney, Biggert, Toomey, LaFalce, Frank, Waters, Sanders, C. Maloney of New York, Bentsen, Sherman, Sandlin, Inslee, Jones, and Capuano.
Chairman LEACH. The hearing will come to order.
On behalf of the Committee, I would like extend a warm welcome to Secretary Summers, as well as our second panel representing members and staff of the International Financial Institutions Advisory Commission.
Unfortunately, the Chairman of the Commission, Allan H. Meltzer, could not be with us because of a scheduling conflict, but I am confident the views of the majority will be well presented, along with those who dissented on the report. And we're fortunate, of course, to have one of the panelists, Mr. Campbell, as a Member of our own Committee.
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The chief purpose of this hearing is to examine ongoing efforts to improve the ''architecture'' of the international financial system. In the IMF quota increase provisions contained in the Omnibus Appropriations Act for Fiscal Year 1999, the authorizing language of which stemmed from this Committee, Congress laid the groundwork for active and ongoing oversight of the IMF and the emerging issue of international financial reform. The Act called for specific IMF reforms in a number of areas and included a requirement for an annual report and testimony by the Secretary of the Treasury on progress made in reforming the institution; on efforts to strengthen the international financial system; and on the compliance of countries that have received IMF conditioned assistance.
The Omnibus Appropriations Act provided for the establishment of the International Financial Institutions Advisory Commission to consider the roles of several international financial institutions, including the International Monetary Fund and the World Bank, and report its findings to Congress and the Executive Branch. That report was received on March 8, 2000. It was statutorily stipulated that the Executive Branch would have ninety days in which to respond.
As we all recall, just eighteen months ago the world was jolted by the worst international financial crisis in decades. Certain high-flying economies of East Asia were grounded by plunging exchange rates and stricken by over-extended enterprises, the financial contagion spread to Russia and Latin America, and the resulting confidence crisis was reflected in the demise and rescue of the world's largest hedge fund, Long-Term Capital Management.
With the global outlook at the dawn of this century increasingly stabilized in Asia, it would appear to be a particularly propitious time for the United States to review our policies toward the international financial institutions.
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By historical background, representatives of some forty-four countries met in Bretton Woods, New Hampshire, in 1944, as World War II was drawing to a close to review the causes of the collapse of the international economic system, which had helped lead both to the Great Depression and the Second World War. The three Bretton Woods institutions that came into beingthe IMF, the World Bank, and the General Agreement on Tariffs and Trade, which has now become the World Trade Organizationwere designed to help rebuild Europe, to address the causes of the Depression and, most significantly, to mitigate the economic causes and consequences of war itself.
Despite errors made, any reading of history would indicate that the IMF and its sister institutions have generally advanced U.S. interests in maintaining a stable international political and financial system that promotes global economic growth in open markets. Indeed, in the last two decades alone, world GDP has quadrupled and international trade has quintupled. While it would be a mistake to argue that the Bretton Woods institutions were principally responsible for this stunning increase in world trade, it is credible to suggest that they have generally played a constructive, stabilizing role in the evolving global economy.
Within the American economic community, there are skeptics about certain IMF policies, but there is an impressive degree of consensus among conservatives and liberals on many of the core elements that should come to characterize the international financial system for the 21st century. Among these are the following precepts: that appropriately liberalized financial markets offer compelling benefits to the world economy; that protectionism is economically and socially dangerous; that globalization and capital mobility are here to stay; that domestic and international financial issues are increasingly intertwined; that when financial crises erupt, the IMF can play a constructive role in helping contain systemic risks; and that the World Bank and the other multilateral development institutions have an important role to play in the effort to spread economic opportunity and raise standards of living in developing countries around the world.
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Likewise, common ground appears to have been established on the principle that the international financial institutions should focus their energies on the fundamentals, i.e., various core competencies. In the case of the Fund, this means dispensing macro-economic advice, encouraging the development of international standards for minimally acceptable financial practices and crisis managementrather than quasi-development lending in underdeveloped economies.
In the case of the World Bank and the other Multilateral Development Banks, concentration on the fundamentals means focusing effective assistance aimed at promoting sustainable growth and poverty reduction.
To date, the Administration has advocated a gradualist approach. Others have made proposals that are more sweeping. In this context, I find some of the conclusions of the split commission report credible, while others appear to go too far.
For example, the recommendations to transfer the World Bank's Latin America and Asia programs to the regional development banks, and to end the Bank's role in private sector development, strikes me as radical and contrary to the national interest.
But I would highlight three areas where the Meltzer Commission is in lockstep with this Committee: the notion that protectionism in finance is profoundly counterproductive to the development of a robust domestic economy and banking system with a sound credit culture; that the World Bank is uniquely well-placed to play a leadership role in addressing a variety of transnational problems and is particularly well-positioned to lead at this junction in history in the battle against the scourge of AIDS; and that debt relief for heavily indebted poor countries is an economic and moral imperative that should proceed in a forthright and timely manner, which I believe is so critical that it should proceed without reference to other contentious issues.
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I have quite a bit more I would like to add to this opening statement, but let me just ask unanimous consent to revise and extend it and to turn at this point to Mr. LaFalce.
Mr. LAFALCE. Thank you very much, Mr. Chairman.
First let me say how much I share your sentiments. Recent months have brought increased attention to the need to help reform the IMF, the World Bank, and the Regional Multilateral Development Banks. Late last year Secretary Summers recommended some very constructive reforms of the IMF which merit our attention. And more recently the International Financial Institutions Advisory Commission issued their series of recommendations. I think it's wise that we use this opportunity to examine the proposals more closely today.
Our Committee has already taken substantial action, both in the IMF quota legislation and in last year's debt relief effort, that call for reform of the operations of the International Financial Institutions. I believe we have made some very concrete and important improvements in the way these institutions operate. Of course, that job is not finished. I would support further reforms. In all probability broader reforms than the Secretary has suggested; different reforms in many cases than what the Commission has recommended. And I know that reform of the International Financial Institutions will surely be a priority of this Committee as it should be.
Let me emphasize a very fundamental point on which Chairman Leach and I agree. Last year our Committee took a very major, a very progressive step by passing historic debt relief legislation. And Congress has already appropriated $123 million for HIPC debt relief, a very significant beginning to the debt relief effort. This year we very much need to complete the job by providing all of the necessary funding.
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Now, some proponents of the Commission's report are insisting that funding of the HIPC Trust Fund and otherwise funding debt relief should be tied to the implementation of the reforms that the majority recommends.
I fundamentally, unequivocally disagree with that. Funding the debt relief initiative must be an immediate and an independent priority for this Congress. Our Committee reached a strong bipartisan consensus on this issue last session, and our recommendations were largely reflected in the Omnibus Appropriations Bill, now the law of the land.
We must finish what we started by providing all the funding required this Congress, without any tying to the majority of the Commission's recommendations.
If Congress were to withhold or delay further funding for debt relief pending further IFI reform, as some would have us do, we would fail to meet our common goal of relieving the devastating poverty that people in the poorest countries struggle with every day and that would be unconscionable.
The Commission whose recommendations I find disappointing in some other key regards has agreed that debt relief is an important priority and the way to truly make it a priority is to move immediately to get it funded.
Mr. Secretary I know that you as a representative of this Administration which has made such a commitment to international debt relief are doing everything in your power to see that the debt relief initiative is fully and quickly funded. The ball is in our court.
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I hesitate to make tennis references with you, Mr. Secretary. Gene Sperling, while he's on crutches, OK?
Mr. Chairman, I thank you very much.
Chairman LEACH. Thank you.
Mrs. ROUKEMA. Thank you, Mr. Chairman, and I ask consent to have my full remarks included.
Chairman LEACH. Without objection. And let me also say without objection the statements of any and all Members will be put in the record.
Mrs. ROUKEMA. All right. And thank you, Mr. Chairman, for your opening remarks and the way you presented an overview of these issues concerning the structure of the architecture of an international financial system, particularly in this evolving global economy, and I want to stress that.
The IMF we have known has been a controversial entity and has evoked some strong feelings in both directions. Some Members of Congress have very grave reservations about the IMF and would like to see it abolished. Other Members, like myself, believe in the institution, but that it should be scaled back both in its missions and activities or at least have more accountabilityup front accountability and probably some structural changes. As I understand, this last approach is the approach that Secretary Summers has recently voiced and we'll be asking more questions about that today.
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We did have a significant debate about the IMF when we provided the additional billions in funds in 1998. As has already been mentioned by you, Mr. Chairman, the Asian and the Russian financial crises had just occurred. At that time it was suggested that the IMF might not have adequate resources if we did not provide the funds. So Congress did the right thing and voted the increase. But the critics of the IMF raised very valid concerns about the transparency and the accountability at that time. I certainly shared those concerns and supported the adoption of the provisions that we are addressing here today with our oversight hearings here. I'm looking forward to our review.
Let me say up front that the IMF should be maintained. Certainly the recent experience of Asia, Russia, Brazil, Mexico, Korea and other countries show the need for an institution like the IMF. In addition, we are speaking from our position as a leader in a global economy. It is for these reasons that I believe we should not be eliminating the IMF.
However, I must stress that we are not done with the IMF transparency and accountability questions. I regret to have to say this, but also the Treasury's accountability. I am disturbed by reports that in 1998 the IMF staff knew and apparently communicated facts to the IMF board that the Ukraine Central Bank had violated IMF loan terms. The Ukraine apparently double-counted reserves, encumbered reserves, and intervened in the Ukrainian T-bill market. All, if done, would have been violations of the IMF loan program. I think that we'll have to ask these questions and get a response from the Secretary. How did the Treasury and the United States executive director to IMF miss these notifications and miss this situation? Were they not informed? Or something worse than not being informed? What has been done in your recommendations today and in your operations since this was discovered to fix these oversight problems.
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In addition, it is still not clear whether there was a diversion of IMF monies to private parties, and there are assertions about the possibility of money laundering activities. I would hope that that can be addresses and dismissed with credibility.
I want to support and vote for additional IMF funding, but only if we can expect a full and open accounting here and specific recommendations for tightening of the responsibilities here and I'm looking forward with great anticipation to this hearing and to hearing Secretary Summers.
Chairman LEACH. Thank you. Does anyone else seek recognition?
Mr. FRANK. Thank you, Mr. Chairman. I'll yield to the
Mr. LAFALCE. Mr. Chairman, in connection with the remarks of Mrs. Roukema, I wonder if I could make an insertion into the record. This is a report on the condition of the National Bank of Ukraine and the problems with the Credit Suisse transaction. I don't necessarily subscribe to the report, it is a recognition of the fact that the Ukrainian Parliament has examined the situation and forwarded its findings to the General Public Prosecution Office.
Chairman LEACH. All right. If there is no objection that report will be made a part of the record.
Page 10 PREV PAGE TOP OF DOC Chairman LEACH. Let me stress to Members of the Committee, we will be hearing on the Ukraine issue specifically as the hearing goes forward.
Mr. FRANK. Thank you, Mr. Chairman.
This is a difficult task deciding what to say, because as I confront this subject and the array of people whom I respect, there are so many disagreements I have with so many people that I do not know which ones to pursue.
The purpose of this hearing, I think, is to talk very specifically about some of the recommendations of the Commission. So I will withhold my disagreement with some of the Commission's recommendations until the time that we get into the questioning. But I do want to address here a disagreement that I have with a lot of others and an agreement that I have. And I would like to call people's attention to the very thoughtful dissent filed by Mr. Levinson, a Commissioner, who in the interest of disclosure I say, I strongly supported his appointment.
And it is a fundamental issue that has to be addressed, and I'm going to deviate a little bit, but we have people here from the financial profession and elsewhere, and part of the problem that we have in trying to muster the support we ought to have for American participation in the globalization process in general in alleviating poverty in particular is the sense among a lot of Americans that the burdens of doing that have been unfairly distributed.
And what Mr. Levinson's reportwhat his dissent does is point to a way to break out of the deadlock that we now face. The deadlock is that the old consensus that supported globalization, which was essentially, in American political terms, the center to write consensus, which said the answer to this is to free capital of all constraints, help it along the way, and that's how we will alleviate poverty. It is broken down, because a number of Americans feel that that creates benefits for the country as a whole, but distributes the burdens unequally. These are people who are concerned about less skilled workers, people who have been concerned about the manufacturing sector, particularly the non-technologically sophisticated manufacturing sector, people who have been concerned about the environment.
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And I want to say, we have had a recent example of why people feel this way, and I know it is a little bit off, but the broader context is important. I have been struckfor some time I have been critical of Mr. Greenspan's interest rate increases although I recognize that Mr. Greenspan has been on the Federal Reserve Board, the best of the people, I think, in terms of being willing to accommodate growth. But I have been critical of the Fed. I have often felt very alone. I now find, as I read the financial pages and other respectable journals, that there are people who are agreeing that the Fed may be going too far. It was one thing for the Federal Reserve to be raising interest rates when its goal was to increase unemployment; and in the short-term, they felt that was necessary. Not because that was an end in itself, but because it would slow down inflation.
So when the Fed was worried that unemployment was getting too low, that was respectable and there was a great chorus of support. Now, however, they are threatening stock prices. And while I have never thought that the porcine metaphor was a fair one, because I don't accuse people of false motives when they are trying to raise money, I do think that the financial community and the financial press, their response to the Federal Reserve's concern about interest rates really does have toI have to invoke a porcine metaphor: They have become Miss Piggy. ''Moi'' they shout. I mean, it is one thing to raise interest rates because unemployment is getting too low, but stock prices? How dare they worry about stock prices?
And I am now delighted to have allies in being critical of the Fed's decision to raise interest rates in the absence of any inflation, because it is now starting to hit other people.
Page 12 PREV PAGE TOP OF DOC Now, I hope to pursue that in other fora, but I do want to say that's the context in which Mr. Levinson's dissent is so important. Think what it is like, you know, Mr. Greenspan himself has said, and he said it with regard to trade and it is also true with regard to the IMF, debt relief, intervention in the crisis, we couldn't get the votes in 1995 to help with Mexico, the Chairman wanted to do that, many of us wanted to do that. The votes weren't there. We need to create a new consensusand, by the way, the Commission report itself says that in some areas. The Commission report says, America is not putting enough of its tax revenues to this purpose. And I welcome the Commission saying that. I was just reminded by staff that the Commission does recognize that.
Why does such a wealthy Nation begrudge a pittance of our great wealth to this important task? And it's partly because it is seen within the country as being something where the benefits are distributed broadly and the burden is distributed unequally. And the people who get the least out of it are asked to pay the most for it, and that is why the stock market situation is so relevant. If in fact, we are going to have a situation where growth is slowed down and unemployment increases and wage growth is retarded because of people making too much money in the stock market then you are going to see an increase in the resistance. So I will get more into specifics later, but I do urge people to read Mr. Levinson's dissent, not simply for what I thinkcogency in its own terms, but because it points the way to the creation of a new consensus.
Last point. Twice in the last few years this very Committee has taken the lead in the Congress in being responsible about globalization. Mr. Chairman, you and the Ranking Member have forged a very important bipartisan coalition and we have, I am glad to say, given a lead to others in the Appropriations Committee. Once we did it with an IMF replenishment with regard to the crisis in 1998, last year we did it with regard to debt relief.
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In both cases this Committee took the lead in formulating a responsible approach to aspects of the global problem. We were able to do it because this Committee under the leadership of the Chairman and the Ranking Member working together deviated from the old pattern and showed some concern for the social issues, for the rights of workers, for the environment. And we know that in many cases what we were saying wasn't going to absolutely be accomplished. Much of what we did was inspirational. But at least people understood that we were tryingthat we had put it on the agenda. And so I urge people recognizing the successes we have had in this Committee with both debt relief in 1999 and IMF crisis in 1998 to look at Mr. Levinson's dissent, because he points the way to doing more of that more successfully.
Chairman LEACH. Mr. Campbell.
Mr. CAMPBELL. Thank you, Mr. Chairman. I appreciate the chance to speak a few words on the Commission's work at this point and then in questions I will develop them.
But hearing my colleagues, particularly the Ranking Democrat Member, Mr. LaFalce, I wanted to draw attention to what it seems to me is not properly understood regarding the HIPC question, the writing off of debt to the heavily indebted poor countries. And, Mr. LaFalce, I will ask for your attention on this particularly.
The prepared testimony of Secretary Summers, and he will explain it of course in his own words, but his prepared testimony says, ''we do not believe'' and I take it that's the Administration''we do not believe that the Report's recommendation to 'write-off' all HIPC debt would be either desirable or feasible.'' And he gives two reasons, and I am sure he will develop them on his own time. But it is important to recognize that the criticism here is from the Administration against the Commission insofar as the Commission went toward writing off HIPC debt. And the conditions that the Commission recommended for writing off HIPC debt said, ''provided there was some understandable and credible plan toward economic structuring in the countries as to which debt was to be written off.'' It was a very generic sort of conditionality. But if I didn't draw attention to this, it might be misperceived what the overwhelming consensus of the Commission is, and what this Committee's consensus which is toward the writing off of HIPC debt, and to the best of my perception it is the Administration whose view is against writing off HIPC debt as I read the Secretary's statement, ''we do not believe that the Report's recommendation to 'write-off' all HIPC debt would be either desirable or feasible.'' Again, page 17.
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Second, and last, as to the Levinson dissent it was a pleasure to serve with Professor Levinson. He will speak on his own behalf and we will have that testimony. But I do note that the Administration once again is more on the Commission majority side than it is on the dissent side. As to the insertion of worker protection and environmental standards into the international financial institutions, I think the Administration is to be applauded for trying to continue the WTO process and what happened in Seattle was regrettable. I think there could have been progress in Seattle had those meetings not been shut down. But the array of opinion on this actually to my perception puts the Administration more on the Commission side against a structural insertion at this moment into the IFIAs of environment and labor concerns not precluding their possibility in the future.
Mr. Chairman, thank you for allowing me to make an opening statement.
Chairman LEACH. Thank you, Mr. Campbell.
Yes, Mr. Sanders.
Mr. SANDERS. Thank you, Mr. Chairman.
And thank you very much, Mr. Summers, for coming to discuss what is certainly one of the most important issues we will be dealing with all year.
Mr. Chairman, I think the good news is that Congress has come a very long way in the last few years in forcing some changes on the IMF. Many of us, for a number of years, and I would perhaps site some of the more conservative members of this Commission and Congress and some of the more progressive Members of Congress who have said, the status quo is not good enough. In terms of the lack of accountability from the IMF to the taxpayers of this country and in terms of what the IMF has been doing to the poorest people in the world. And some of the objections that some of us have raised for the last several years are now falling into the mainstream and I think we are making some good progress.
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Mr. Chairman, the bottom line is that the IMF is losing support in the United States Congress. Last November this Committee voted overwhelmingly to stop the IMF from imposing austerity conditions on debt relief for the poorest countries. Last year, IMF funding authorizations had to be sneaked, let's remember thishad to be sneaked into an omnibus spending bill at the end of the legislative session, because it might not otherwise have passed on its own merits, and now a congressionally-appointed commission has recommended that the IMF should be significantly scaled back.
The IMF's mission creep has made it the most powerful financial institution in the world with decisionmaking authority over 50 national governments around the world. And that's why it has been so terribly important that this Committee and the Congress begin to address the enormous power of the IMF over billions of people throughout the world. The IMF's debt reduction program for the world's most heavily indebted poor countries has also been, up to this point, a dismal failure resulting in more debt and deeper poverty for the poorest of the world's poor. In many of these countries where AIDS, hunger, and literacy and unemployment are rampant it is now common for governments to spend far more on debt service than on urgent human needs. And I congratulate the United States Congress for finally recognizing this reality and demanding a change in terms of what's happening with the debts of the poorest countries.
The IMF's misguided policies in recent decades are largely responsible for the lack of per capita economic growth in Latin America, declining per capital income in Africa and skyrocketing trade deficits in the United States.
The IMF as an institution is in desperate need of some structural adjustment of its own. It's time that we gave them some medicine and said that if they do not shape up, the American taxpayer is not going to continue to provide them with the funds they request.
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Some of the reforms that I think we should be instituting are: number one, the IMF must become more open and accountable. As I understand it, today, Mr. Chairman, the IMF is going to approve a new director. Where was the open discussion regarding that director? Where was he asked to answer questions before the world's press as to where he wants to take that enormously powerful institution? We were told that the United States objected to the first gentleman who was proposed. We don't even know why. We were told that he didn't have the stature, perhaps, to come to Congress in order to get money out of us. That's not a good reason to reject that guy. We want to know where this new person is going. When Mr. Summers became Secretary of the Treasury, he was grilled by the Senate, right? And that's the process. ''Where do you stand? Where are you going to take the Treasury Department?'' We believe in that process. And it is incredible to me that today, after all the discussion about accountability, the new director is going to be appointed with very little knowledge of where he intends to take that institution.
Further, the IMF should reverse its mission creep of the past three decades and focus on its original mission of helping countries with short-term balance of payment problems and monitoring capital markets. Further, to discourage the reckless speculation that leads the financial and economic crisis, the IMF should make lenders pick up the tab for their losses and financial crises. It is not the function of the American taxpayer to bail out the largest financial institutions in the world who make poor investments in third-world countries. The IMF should stop dispensing one-size fits all austerity programs which only make financial crises worse and lead to long-term economic stagnation.
As I have been around the world talking to Third World leaders, but they keep telling us, ''They only give us one cookie-cutter prescription. Our country is different than other countries. Why do they always prescribe the same set of remedies?''
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The IMF further should stop pretending to be a development bank. Its misguided attempts have resulted in rising debt and deepening poverty for the poorest countries in the world.
The IMFand Mr. Campbell just made this pointthe IMF should cancel, not just reduce the debt it has created among a most heavily indebted poor countries. Its current debt reduction program, even under its new name, keeps poor countries hopelessly in debt and the IMF forever in charge.
So, in conclusion, Mr. Chairman, I think we are making some progress. I think we have got a long way to go and we cannot lose focus on this issue which affects not only the American people, but the lives of literally billions of people throughout the world.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Sanders.
Does anyone else seek recognition?
Mrs. KELLY. Mr. Chairman.
Chairman LEACH. Let me turn firstyes, the gentlelady from New York.
Page 18 PREV PAGE TOP OF DOC Mrs. KELLY. Thank you, Mr. Chairman. I'm going to ask that under the existing unanimous consent agreement that my statement be in total put in the record. But there are just two points I would like to bring up.
I find merit in the ideas of removing debt relief initiative from the IMF and moving it to the World Bank so that the IMF may focus solely on emergency liquidity problems when the private markets dry up in a crisis. And throughout all of the Committee's work I am going to continue my efforts to work to ensure transparency, a greater transparency in these institutions. And I thank you, Mr. Chairman, for letting me speak.
Chairman LEACH. Thank you. Yes, the gentlelady from New York.
Mrs. MALONEY. Thank you, Mr. Chairman.
It is a pleasure to see you again, Mr. Secretary, and thank you for coming on this important issue and your leadership on financial modernization.
With Secretary Summers' combination of experience on the front lines fighting economic contagion in Asia and other countries and his academic background, there is no more qualified person that the U.S. could have at this point as its representative as the world considers reform to international financial institutions.
Mr. Chairman and Ranking Member LaFalce, this Committee did really a wonderful thing last year when we voted in a bipartisan way for debt relief for the world's poorest countries. At that time, Mr. Chairman, Mr. Leach, you said, and I quote: ''Relieving the debt burdens of the world's poorest countries is one of the foremost economic, humanitarian, and moral challenges of our time.'' Your words of last November must guide Congress this year.
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I look forward to the debate over reform of the international financial institutions. I am very concerned by statements that opponents of IFIs may use HIPC legislation as a vehicle to attach their agenda. Additional debt relief for desperately poor countries must not be delayed by congressional efforts to coerce reforms of the IMF and the World Bank.
I applaud and join with my colleague on the other side of the aisle, Mr. Campbell, when he noted that the IFI advisory commission unanimously voted in favor of debt relief. Separately, the debate over the future of international financial institutions is highly appropriate. In some areas there is broad agreement, undoubtedly private capital is the preferred way to address international financial problems. When situations require the assistance of IFIs, I agree with my colleague from New York, Mrs. Kelly, that their operations should proceed in a transparent and accountable way.
The arrival of the IFI Commission's report does not mark the beginning of the effort to significantly reform these entities. The Administration is already leading the world effort to modernize the IFI. Treasury is already working to refocus the IMF to lending on shorter maturities. Secretary Summers has already stated that the World Bank should focus on lending to projects that would otherwise go unfunded by the private sector.
Today I expect Secretary Summers will report on the progress we've made in these areas and the Administration's plans to continue to lead IMF reform. I welcome the report of the IFI Commission and I welcome this debate and I look forward to today's testimony.
Thank you, Mr. Chairman.
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Chairman LEACH. Thank you, Mrs. Maloney.
Yes, the gentleman.
Mr. SWEENEY. Mr. Chairman, thank you. I won't belabor the point, and I want to welcome the Secretary and look forward to his testimony. We've already eaten up too much of your time.
Let me just make a comment and I'll submit to the record my formal statement.
But I concur in some respects with my colleague, Mr. Frank, on resistance here in America as it relates to globalization, because there are many who feel that the burden is unfairly distributed and I agree that we need to develop and create a new consensus in that regard, because it does have an effect on a lot of the reforms that we talk about in terms of the international financial architecture, especially on those issues like debt relief.
That burden, in the sense that it is being unfairly distributed, affects a lot of my constituents who really question why we in America would want to dedicate more resources than we already do. So before we judge the notion that some in America aren't willing to move forward with globalization, I think we need to look at the reforms that need to be realized here including, and I'll echo Ms. Kelly's comments, those reforms relating to transparency and accountability. Because in the end, it is their lives, their money that we're affecting.
Page 21 PREV PAGE TOP OF DOC So I thank you, Mr. Chairman, for conducting this hearing and I'll yield back my time.
Chairman LEACH. Thank you. Let me turn over here.
Yes, Ms. Waters.
Ms. WATERS. Mr. Chairman and Members, I commend the Meltzer Commission for recommending that the IMF completely write off the debts owed by heavily indebted poor countries that implement economic reform. Debt relief is desperately needed by many poor countries. The governments of these countries are being forced to make drastic cuts in basic services such as health and education in order to make payments on their debts. The Niger and Zambia 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. Debt relief will give poor countries a fresh start and improve their ability to serve the people.
I am deeply concerned that the current IMF debt relief plans do not go far enough to relieve the debts of impoverished countries. They enhance heavily indebted poor countries. The initiative of the IMF is intended to provide sufficient debt relief to reduce poor countries' debts to theoretically sustainable levels. However, the initiative would nevertheless require poor countries to make significant debt service payments.
H.R. 1095, which was passed by this Committee last fall, includes two amendments which I also urge the President to support improvements in the HIPC initiative. One amendment would require that the amount of debt relief provided to a country be sufficient to ensure that the value of the country's outstanding debts does not exceed the value of the country's annual exports.
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The other amendment would ensure that poor countries would not have to spend more than 10 percent of their annual revenues on debt service payments. Unfortunately, neither of these provisions were provided in H.R. 3194, the Fiscal Year 2000 Appropriations Bill which provided authorization of debt relief.
The Meltzer Commission is to be congratulated for recognizing the value of complete cancellation of the debts of heavily indebted poor countries.
Let me just close by saying this, Mr. Chairman. We have an opportunity with reform to get this thing right. I think we've heard over and over again, not just from me, but from many Members of Congress that we are unhappy with the way they have put these poor countriesIMF has put these poor countries in a position where number one, they can't get out of debt; number two, they're starving the children in order to repay the debt.
Now I'm trying to understand the recommendation for grants. Grants are fine, and I certainly would support grants, but what I don't know is, how the determination will be made to give the grants to these poor countries who will be responsible for those decisions and those evaluations and when will we leave poor countries out that desperately need assistance, because somehow they don't meet the criteria for the grants.
Everything that I've attempted to do with these poor countries speaks to technical assistance. We just talked about it with AIDS and I talk about it all the time. I have learned over the years that many of these countries do not have the systems by which to receive and implement funding in ways that you will get the best bang for your buck. So we have great leverage with IMF and the World Bank and I am hoping that our country, our representatives will exercise great influence in helping to get this thing right. I mean, again, total cancellation of debt. Second, if we move to a grant system, we've got to make sure that the criteria makes good sense, and we've got to make sure that we have technical assistance so we don't end up with the poorest and the most needy of these countries not being eligible for grants simply because they don't have the systems to implement them.
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So I'm hopeful that we will have a lot more transparency on this whole operation so that we can have the kind of input that's necessary to do the best job we can do with these tremendous resources that we have. And I don't expect the United States to go along, I don't expect them to be silent, I don't expect them not to exercise their power, and I expect you to get input from us about how to get this done.
Thank you very much.
Chairman LEACH. Thank you.
First let me recognize John LaFalce for a unanimous consent request.
Mr. LAFALCE. Mr. Chairman, a group of NGOs from Bread for the World to alphabetically World Vision, has sent an outstanding letter to Members of the Senate Foreign Relations Committee in connection with their authorization legislation for multilateral debt relief of poor countries, and I ask unanimous consent to insert that letter ito the record.
Chairman LEACH. Without objection, so ordered. And before turning to the gentleman from Wisconsin, would you like to request unanimous consent to put that sterling statement you gave on the House floor last night in the record as well?
Mr. RYAN. Thank you. Yes. I would like unanimous consent.
Chairman LEACH. Without objection, so ordered.
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The gentleman is recognized.
Mr. RYAN. Thank you, Mr. Chairman. I'll be brief since I know we have a vote and I would like to get to the Secretary's comments.
It's nice to see you again, Secretary Summers.
The report and its recommendations focus around three main issues: incentives, interest rates and information. I find it disturbing that the IMF or the World Bank has had continuous difficulty with these factors. These are the foundations of basic macro-economics. In many ways the IMF has done more harm than good in both the developing countries and in former Soviet Union countries like Russia and the Ukraine. But I find it very refreshing and intelligent that the Commission is recommending that countries avoid pegged or adjustable rate systems. I firmly believe that a reliable currency and stable money are the best ways to achieve long-term economic growth.
Failing to implement currency boards or dollarization in countries in weak or corrupt central banks or with unstable financial institutions is one of the IMF's greatest flaws. The theory behind pegged rates is outdated and has been proven wrong over and over again. Further, by following the path of currency boards or dollarization, the IMF would effectively kill two birds with one stone. By encouraging these systems, the IMF would not only be encouraging sound economic policies, but intrinsically also the institutional reform that is greatly needed in the countries that the IMF seeks to help.
Page 25 PREV PAGE TOP OF DOC Additionally I support the Commission's recommendation to eliminate the ESAF, now the poverty reduction and growth facility. The conditionalities attached to the long-term development and lending loans are counterproductive, they're invasive and flat out harmful to the citizens of impoverished countries.
I have had the opportunity to meet with several very thoughtful constituents in my own district who feel very strongly about this as well. I appreciate the time that they have expended on working to eliminate the ESAF and the conditional lending policies of the IMF.
Mr. Chairman, legislation has been introduced in the House by Joint Economic Committee Chairman, Jim Saxton, which addresses the concerns of the Advisory Commission and the recommendations for reform. If we want to give more than lip service to IMF reform, I think that this Committee should look into this bill or others like it. We want these countries to succeed economically. After decades of poverty and central planning, their citizens deserve a better standard of living. However, the sustained long-term planning needed for such prosperity cannot take place until the IMF gets on the right track.
I thank you, Mr. Chairman.
Mr. Secretary, it's nice to have you here and I look forward to your testimony.
Chairman LEACH. The Chairman would just like to make a comment. We have a vote on the floor, we also want to get to the Secretary, so I would like to close opening statements before the vote on the floor and begin with the Secretary immediately thereafter. That makes just several minutes for the two, if that's all right, Mr. Sherman?
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Mrs. JONES. I need a minute, that's all.
Mr. SHERMAN. Mr. Secretary, thanks for coming here. I think some speakers have been inclined to blame the IMF for the difficulties that impoverished countries are facing. I think we should remember the IMF provides concessionary loans which is a lot more helpful than a poke in the eye with a sharp stick, but just because the IMF has tried to be helpful, and I think in most cases has been, does not mean that it cannot do better. The chief mechanism for doing better is to provide more sunshine into the process. Inevitably, what this will do is, it will take IMF decisionmaking and national decisionmaking about the IMF out of the hands of a few experts and into the hands of, to some extent, the Congress and the public at large. But I think that that's a necessary process as these institutions' importance becomes more apparent, and I think that the country and the Congress would be well served if we spent more time getting more information about the IMF and the World Bank and debating it on the floor, and maybe shortening some of our debates about abortion and the NEA and the other things that clog both the Congress and the pages of our newspapers. Thank you.
Chairman LEACH. Thank you.
Mrs. JONES. Thank you. Mr. Chairman, I would just like to congratulate you and the Ranking Member for bringing these issues before our Committee.
It's always good to see you, Mr. Secretary. I think that it is very important that we debate all these issues. I would like to associate my commentsor myself with the comments of many of my colleagues who said that underdeveloped countries and truly underdeveloped, underserved, and heavily indebted countries need our support and help so that as we talk about the global marketplace and we talk about financial modernization they have an opportunity to be at the table and participate and be a part and parcel of it. I would just like to thank you for being here and I look forward to your comments.
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Thank you very much, Mr. Chairman.
Chairman LEACH. I thank you very much and I appreciate the brevity of both yourself and Mr. Sherman.
At this point the hearing will be in recess pending the vote and then we will proceed directly to Secretary Summers' statements.
The hearing is in recess.
Chairman LEACH. The hearing will return to order.
Secretary Summers, please proceed as you see fit. Your are extraordinarily welcome back before the Committee.
STATEMENT OF HON. LAWRENCE H. SUMMERS,
SECRETARY OF THE TREASURY
Mr. SUMMERS. Chairman Leach, Ranking Member LaFalce, Members of the Committee, I am pleased to once again have the opportunity to appear before the Banking Committee to discuss the crucial issues relating to ongoing reform of the international financial institutions in the context of the rapidly changing global economy. It's a particular pleasure to appear before this Committee because of the contributions that it has made to consideration of these issues over the last several years.
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In my testimony today I will address three issues. There's a much longer statement that has been submitted for the record.
First, the case for strong United States support of the international financial institutionsIFIs.
Second, our reform agenda for both the IMF and the Multilateral Development Banks.
And, third, some initial reflections on recommendations of the recent report of the International Financial Institutions Advisory Commission.
Let me turn first to the case for strong support for the international financial institutions. It is a case that rests on the core case for the United States supporting increased prosperity in the developing world and increased global integration. It has three pillars.
First, the desire to advance our core values and humanitarian goals in a world where 1.3 billion people live on less than $2.00 a day.
Countries that are helped to succeed economically are much more likely to become democratic, their people more likely to avoid debilitating disease, more likely to have the opportunity to learn to read and to work with human dignity.
Page 29 PREV PAGE TOP OF DOC Second, the institutions promote U.S. economic and commercial interests. Already, the developing world accounts for 40 percent of U.S. exports and this percentage is increasing. The international financial institutions have supported policy changes, such as reduced tariffs in Mexico, and opening up the Indian economy that enormously benefit U.S. producers.
And, of course, the events of the financial crisis in 1997 and 1998 remind us, as Chairman Greenspan has so often, that the United States cannot be an oasis of prosperity in a troubled global economy.
Third, programs of the international financial institutions promote our national security. From the experience of Germany in the 1930's to Bosnia and Africa in more recent times, history teaches us the conflicts into which we will be drawn are most likely in situations of economic distress when populations turn in their frustration to nationalist leaders because of a lack of a sense of economic opportunity.
In their annual lending of more than $40 billion the international financial institutions support all three of these core American interests. They do so at a cost to American taxpayers that represents one-tenth of 1 percent of our Federal budget.
I think it bears emphasis that despite our working together with Congress, U.S. financial support for international financial institutions is today 40 percent lower than it was in the 1990's. And, yet, each dollar that we contribute to the international financial institutions levers some $45 dollars in new lending.
Page 30 PREV PAGE TOP OF DOC Let me turn now to our reform agenda for the IMF and the Multilateral Development Banks. As we have said many times, to say that these institutions are indispensable is not to say that we are satisfied with them as they now are. The world has changed dramatically since the IFIs were founded and we must work to reform them to function effectively in this new world. That has been a focus of our cooperation with this Committee and other Members of Congress and a focus of our ongoing efforts.
Those efforts have made progress, but there is a long way to go in completing what I believe will be and should be the most far-reaching set of changes in these institutions in several decades.
So far, working with Congress we have made progress with respect to the IMF. Enormous amounts of information about the Fund's operations are now publicly available on its website. When it negotiates programs, it pays much greater attention now to trade liberalization, labor rights, and other issues of critical U.S. concern. And the IMF has strengthened its focus on corruption, moving in a number of cases to suspend lending until investigations of corruption are complete.
At the World Bank, working with Members of this Committee we have worked to raise the percentage of projects designed to further environmental matters and to put governance in combatting corruption at center stage. And disclosure of the Bank's key planning documents for lending is now routine as are consultations with local people who will be affected by Bank projects.
In statements in London last December and at the Council on Foreign Relations this week, we have outlined a program of reforms for both the IMF and the World Bank. Central to our approach is the idea that today there is a global private capital market and that the central objective of the international financial institutions has to be supporting and complementing private capital flows, not supplanting private capital flows. And it is essential for the institutions to function as effectively as possible in support of human development.
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This approach will require reviews of pricing and other aspects of IMF financial arrangements. We believe that the most important issues for reform at the IMF are an emphasis on transparency and accountability, and in particular on shifting the focus from governments providing the information to the IMF to their providing it to markets. Greater attention must be paid to the kind of vulnerabilities and national balance sheets and financial issues that played such an important role in causing the crisis in Asia.
There needs to be a new emphasis on a more strategic and limited financing roles, with lending to emerging market economies more centered on emergencies, conditionality more focused on conditions for financial stability, the IMF's financial role in the poorest countries more narrowly macro-economic, and greater emphasis on catalyzing market-based solutions to crises. It is important to have market confidence and to support economic reform, but the private sector must also play its part in resolving crises.
I might add, Mr. Chairman, that one of the crucial issues that we will face working together in formulating American policy with respect to the international financial institutions is the issue of managing and achieving the right balance between our common objectives of reducing intrusions on sovereignty, increasing the focus of conditionality, and appropriately constraining the role of the IMF on the one hand, and on the other hand, using the IMF as a tool to pursue the wide range of important interests that we have identified from bankruptcy laws to military spending, from labor rights to credit allocations and trade liberalization policies. How we manage this balance in the pursuit of American interests needs to be a crucial area of dialogue in the time ahead.
Page 32 PREV PAGE TOP OF DOC With respect to the World Bank, the agenda we have advanced calls for the multilateral development banks to focus on three core missions and to be more parsimonious with respect to their activities outside these areas.
First, providing and coordinating development assistance in the poorest countries with a human, development-centered approach focused on lasting growth and poverty reduction.
Second, focusing their role in the emerging market economies on places where they are able to do things that the private sector cannot, such as financing crucial social investments and responding to emergencies. They should not be alternative sources for projects that can and are financed by the private markets.
Third, and I think ultimately most important over the longer term, the banks should have an increased role in supporting the development of global public goods: issues such as vaccination programs; research on vaccines; agricultural research; and environmental protection with respect to global issues.
Let me just say, as important as any mission for the World Bank in the years ahead will be support for strong economic programs in the countries benefiting from the HIPC debt relief efforts.
We believe that this approach focused on complementing the private markets and delineating roles clearly offers the best prospect for these institutions to serve our interests and promote our values, and to do so in a way that respects the need for flexibility with respect to the contingencies that may arise in the future.
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We have not yet completed a full review of the report of the International Financial Institutions Commission, but are in a position to offer some observations. The recent report shares a number of key goals with our approach: the importance of helping the poorest countries; the importance of debt relief; the importance of global public goods; and the need for a clearer delineation of the roles of the World Bank and the IMF.
However, we believe that, taken literally and in full, the recommendations contained in the report would straight-jacket these international financial institutions to the point where they would no longer be able to advance America's core values and interests around the world.
Taken together, these recommendations would essentially eliminate these institutions' capacity to provide support for countries as diverse as Mexico, Hungary, and Thailand. They would put at risk American wages, American savings, and American security.
More specifically, we are concerned that the Commission's recommendations for the IMF, if implemented, could limit lending to a narrow set of relatively prosperous economies, thereby preventing the international community from responding to crises such as those in Asia if the recommendations or the report were taken at face value, few, if any of the countries that have suffered financial crises in recent years, Mexico, Brazil, or Korea, would have qualified for emergency IMF support.
A second and quite different concern with the recommendations of the report is that on those occasions when IMF financing would be possible, consistent with the terms of the report based on prequalification, the absence of conditionality with respect to other issuesfrom private sector involvement to fiscal reforms, to social safety nets, to anti-corruptionthe absence of conditionality covering such issues would jeopardize the effectiveness of programs and indeed put taxpayers' money at risk.
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With respect to the recommendations bearing on the multilateral development banks, our concerns are in two primary areas. First, the exclusion of the banks' lending to countries at investment grade or with income above $4,000 per capita would make it impossible to advance U.S. interests in a diverse range of countries. We would lose a crucial tool for supporting poverty reduction, for supporting the kinds of structural reforms that we want to promote, and we would do so with very little offsetting benefits, because the banks' operations in these countries largely pay for themselves.
Second, the idea of replacing loans with grant-based assistance, not channeled through governments, seems to us to run in the face of direct experience. Funds are more effectively leveraged when they're in the form of loans, both because a larger volume of resources can be brought to bear, and because of the accountability that comes with the obligation to prepay.
Mr. Chairman, let me conclude by highlighting common ground within the International Financial Institutions Advisory Committee: unanimous support for debt relief.
At this point, our ability to advance U.S. interests in the international financial institutions and in the poorest countries will depend crucially on meeting our obligations to these institutions and for debt relief. There has also been broad national and international support for the President's efforts to promote the provision of vaccines, research on vaccines, and cost effective treatments for HIV/AIDS and other diseases that hurt the poorest countries worst of all. These two initiatives need urgently to move forward. We look forward to full and continuing dialogue with Members of this Committee and other Members of the Congress on the range of issues affecting international financial institutions. But it would be tragic if anything were allowed to delay steps in terms of debt relief, in terms of promotion for support for vaccines that offer the potential to save literally hundreds of thousands of lives in the poorest countries in the world.
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I look forward to working with Members of this Committee, both on debt relief and global public goods issues and on the crucial task of supporting the institutions in the form that will best support U.S. interests in the years ahead.
Chairman LEACH. Well, thank you, Mr. Secretary for your thoughtful statement. We have before us a report with a critique of the international financial institutions and some proposals for change, some of which I consider constructive, some less so. We also have a minority report that puts a little different perspective.
I would just like to raise one particular issue. It appears as we look at successes and failures in general, and when you deal with international institutions and lending to countries in very difficult circumstances, you can't always expect successes, that there have been a few successes, but that the great failure in the last decade, to the degree there's been a failure, has been in the newly emerging economies of the former Soviet Union. Part of this appears to be related, unfortunately, to corruption. Does the Treasury have a perspective on this issue and does that perspective include proposals for reform of IMF and World Bank lending?
Mr. SUMMERS. Let me say, Mr. Chairman, that I think it is always important that we remember, as I've often said before this Committee in the past, that countries shape their own destinies. Ultimate outcomes in countries are determined very heavily by the policies that their governments and their people pursue. There have been important successes in the transition economies, notably in Poland, and, even in those cases where we have to be much less than fully satisfied with the results, it's important to remember that there have been real changes with respect to what many people feared in the early 1990'swidespread hunger, hyperinflation, remilitarization, a return to communism.
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I think you're right, and we had a chance to discuss this when this Committee held hearings on Russia and the Ukraine in September. I think you are entirely correct, Mr. Chairman, in placing enormous emphasis on the issue of corruption and integrity and the use of funds. We have put in place for that reason, both with respect to Russia and to Ukraine and are working to put in place as part of the common practice of the institutions, a set of measures to assure that funds are used in the right way. Those measures include requirements that satisfactory progress be made with respect to monitoring and evaluating and holding individuals accountable with respect to past financial mispractice. Those measures include ongoing external audits of central banks involved in the receipt of IMF funds. Those measures involve new procedures such as those that are in place with respect to Russia that assure that there is no technical possibility for the diversion of IMF support, because it's provided in the form of illiquid SDRs that can be used only to pay the IMF back. Those measures include a much greater transparency with respect to operations of the World Bank as it works with individual ministries on priorities such as the social safety net. Those measures include clear policy statements, which have been implemented in a number of cases, pointing up the unwillingness to lend if a satisfactorily resistance to corruption policy environment doesn't exist.
Mr. Chairman, I would urge that, as we look at the record in central Europe and in the former Soviet Union, that we recognize that if the glass is not full, it is also not empty. I think there was a temptation at the beginning of this experiment and this experience to suppose that these countries, despite the vast malformations during the communist period, could quickly converge to a more traditional European economic experience. That has not happened, but I think that is more a reflection on the difficulty of the problem than it is on aid efforts. We certainly have learned a lot about the importance of corruption and the rule of law.
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Chairman LEACH. I appreciate that and I just want to end with one observation that's a Catch-22 that the Committee finds very difficult. The fund hasthe IMF, that is, has taken on a policy of contracting for certain audits, which is, of course, appropriate. On the other hand, it's not sharing the information. We've requested Price Waterhouse to come before this Committee to present its findings. That company has indicated, because of confidentiality agreements, it is precluded from so doing. Well, that is a very difficult circumstance. The reason you have audits is to have transparency. But transparency to insiders is not transparency to publics that are sharing the burden of these institutions. And I would urge, in the strongest possible way, that the United States prod the IMF to make available appropriate information to legislative bodies in the principal donor countries that are shouldering the responsibility for providing these resources.
Mr. SUMMERS. We will certainly do that and I appreciate that. I very much share your view that it is important that there be accountability and that there be the provision of information and we will work to achieve that objective in a workable fashion that's consistent with everybody's contractual obligations.
Chairman LEACH. Thank you.
Mr. LAFALCE. Mr. Chairman, I have to defer my question. I just received a phone call that I have to testify on a project at the Federal Court House in Buffalo within the next four minutes. I'll return and ask my questions at that time.
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Chairman LEACH. Thank you.
Mr. FRANK. Thank you, Mr. Chairman.
Mr. Secretary, I noticed when my colleague from CaliforniaMr. Campbell, who isn't here nowhe suggested that he found the Commission report to be more committed to debt relief for the highly indebted poor countries than the Administration. So I wanted to address that. That had not been my experience, and this may give us a chance to clarify it. If, in fact, we are to have a competition as to who among usthe Commission, the Administration, the Members of Congressare most committed to the HIPC, then I think that will be a good result. So, let me ask you, one of the problems I see is I received a copy of a newspaper article from the Dallas Morning News in which the Majority leader of the House, and the Chairman of the Senate Banking Committee are quoted as saying that debt relief should be conditioned on implementation of the other reports of the Commission regarding the IMF. That is, they say that that would give them leverage.
As with you and debt relief, however, Republicans may have the whiphand, I'm quoting the Dallas Morning News, Mr. Landers is the author, ''Republicans may have the whiphand in the IMF debate. To reach a goal nearly everyone accepts eliminating the debt burdens of the poorest of the poor. The Clinton Administration may have to whittle down the duties of a pillar of the international order, in other words, linkage.''
Page 39 PREV PAGE TOP OF DOC Now, as I read the Commission report, I didn't see that, I didn't see that it was there and I must say it would be rather odd as I would understand the structure of the argument it would be, one, we must give debt relief to the poor countries; two, we must prevent the IMF from victimizing the poor countries and to show how much we love the poor countries, we will not give them debt relief until the IMF stops victimizing them. That would seem to me very odd.
I do notice in the letter that Mr. LaFalce read into the record from that coalition of groups, they are aware of this danger and very specifically address it, unless someone thinks this is some kind of straw man. And I quote: ''We, however, are steadfast in our support for debt relief and do not want to see IMF reform stall this initiative. Additional conditions or requirements of debt relief in order to restructure the IMF hurts both proposals.'' So we do know that while this Committee was very supportive of full debt relief last year, elsewhere in the appropriations process it was slowed down and conditioned. Work has to be done. I would be interested in your response to the suggestion that the Majority leader and the Senate Banking Committee Chairman want to make it conditional. And maybe if you come out strongly against conditionality, the Commission will trump you and they'll come out even stronger against conditionality, and we go on to debt relief and the Commission will get a second chance. So here's your chance to set a mark for them to shoot at in opposing conditioning IMF debt relief on the rest of the report, Mr. Secretary.
Mr. SUMMERS. Congressman Frank, I certainly share the concern that you expressed. It seems to me that debt relief is financially right and morally urgent. It seems to me that anything that delays this step which is favored by a wide cross-section within our country would be very unfortunate.
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By all means, let us debate and discuss the questions relating to the role of the international financial institutions, but it seems to me that it would be very, very unfortunate and very, very costly if debt relief, which we believe should be funded in part in the supplemental appropriations bill that is now being considered by the Congress, were to be held hostage to debates about the questions having to do with the role of the institutions in lower and medium income countries that are not even the countries that are involved in receiving debt relief.
Mr. FRANK. So to clarify, because again, I was not here, Mr. Campbell referred to some passage in your statement about debt relief; am I correct that that did not refer to the current HIPC proposal, is thathe quoted you somewhere as saying that you were a little skeptical of complete debt relief. He said it was on page 17.
Mr. SUMMERS. Congressman Frank, I believe that there's a compelling case for Congress to act with respect to the current HIPC proposals to provide the necessary funds, to provide the necessary authorizations so that the regional development banks can forgive debt, and to provide the necessary authorization so that the remainder of the IMF gold resources can be mobilized at the earliest possible date. If there is not congressional action, I believe there is a serious risk that the momentum of debt relief will be sacrificed.
Mr. FRANK. Well, thank you, and I'll just close, Mr. Chairman, and say, I hope the Commission will be reinforcing that and perhaps the Commission can persuade the Senate Banking Committee Chairman and the House Majority Leader. The House Majority Leader seems, in many respects, enamored of the Commission and maybe they can expand the area of agreement between them and him so we can get debt relief.
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Chairman LEACH. Mrs. Roukema.
Mrs. ROUKEMA. Thank you, Mr. Chairman.
Mr. Secretary, I do apologize for not being here for your full testimony. I was unavoidably detained. But I did ask the question in my opening statement and I would like to get back to that. I do not want to rehash the past, but Ukraine-IMF loan term violations have been reported by the staff. If our information is correct, the IMF staff recognized problems and reported to the IMF board. It is very disturbing that if true, all these actions were a violation of the terms and conditions of the loan program. I would like you to apply thatthose questionsto the present situation, particularly in terms of what I heard you say about the ongoing central audits and the new procedures would prevent such a thing as happened in Russia. Can you be a little more specific about that, and perhaps relate it to the present situation?; or another part of my question is integral to it, or another part of the question is the issue of transparency, everybody keeps using the terminology, but unless you defined it very clearly in your statement, how does this so-called ''transparency'' translate into real policies and implementation by Treasury and IMF?
Mr. SUMMERS. Congresswoman Roukema, there are three key areas here. The first is with respect to the reporting of reserves and encumbrances on reserves. We saw in a number of countries, Ukraine was one, Korea was another, that reserves were in some way encumbered or invested in non-liquid forms and that encumbrance was not fully disclosed. So in working with the international community, we have agreed on new standards for the reporting of reserves that will much more clearly distinguish between reserves which are in a real sense available and reserves which are in some sense encumbered.
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Second, we are putting in place procedures that will require as a component of IMF programs satisfactory accounting by central banks and satisfactory reliance on external audits. This is a subject of ongoing discussion at the IMF, but our position is clear: those who wish to receive this support need to accept external auditing as a condition for the receipt of this support.
Third, in the cases that have raised particular concernand we've touched today on Ukraine and Russiawe are pursuing approaches that reflect those concerns in insisting on clarifying what happened in the past as a condition for future assistance, in requiring that there be procedures for subsequent disbursements that will put in place rigid controls that allow no possibility of diversion, such as making the disbursement in the form of SDRs that can be used only to repay the IMF.
So the basic approach is requiring transparency in the definition of reserves to a much greater extent than there has been before; requiring external auditing as a common practice; and requiring specific additional restrictions, both with respect to review of the past and with respect to preemptive prevention of future problems in those countries where there have been serious problems.
Mrs. ROUKEMA. But you're saying that this should be left totally up to the discretion of the Treasury as to how these so-called reforms are implemented, or do you have with some specificity a way that we should be putting the requirement in the law? Well, I'm asking the wrong person. But it seems to me
Page 43 PREV PAGE TOP OF DOC Mr. SUMMERS. Congresswoman
Mrs. ROUKEMA. Yes, go ahead.
Mr. SUMMERS. Just as a matter of
Mrs. ROUKEMA. In other words, because you've already had this discretion in the past, how can we make it more precise as to the standards of operation here and so that we don't have these questions again, did the board know or did they not, did the staff make the recommendations, and if so, why were they not followed?
Mr. SUMMERS. There are now policies coming into placeannounced policies of the international financial institutions and announced policies of the Treasurywith respect to these issues along the lines that I outlined.
Mrs. ROUKEMA. I will be following through with this question, of course, with the next panel with those people that have studied this issue and see. I think we have a good idea of what their recommendations may be. I think there has to be a more precise definition of certain terms in the law. I don't know if we can come to that agreement today or not.
Chairman LEACH. Mr. Sanders.
Page 44 PREV PAGE TOP OF DOC Mr. SANDERS. Thank you, Mr. Chairman.
Mr. Summers, let me pick up on the question Mrs. Roukema asked and the word ''transparency'' means different things to different folks.
As I understand it, Horst KoehlerI think is the way his name is pronouncedis going to be appointed head of the IMF, and despite all of the talk about transparency, I'm not aware that there has been an open process where the different member countries of the IMF have been able to ask this gentleman about his views. And as I indicated earlier, when you get appointed to be a Secretary of the Treasury, you have to go before the Senate, the TV cameras are there, people have a right to know what are your views, how are you going to take the Department of Treasury. How can we be talking about transparency when just today the same old process takes place behind closed doors with the appointment of the most importantthe guy who is replacing Mr. Camdesseus?
Second question is in terms of transparency, it is not only, I think, making those people who want to lend or invest money in countries understand economic conditions and the financial conditions of those countries, but it is opening up knowledge for the poor people of those countries themselves and for all of us.
We learned, Mr. Bachus, and I were involved in a hearing last year with our IMF representative. And at that hearing we learned that despitewe had never known this before, for years, Members of Congress had asked our representative to the IMF to use her voice and vote. Well, it turns out, you know what, she told us there are virtually no votes at all. No votes at all at the IMF. She indicated that there were very, very few votes. Now, what I want to know is when we talk about transparency is C-SPAN going to be in these discussions or are they going to continue to be done very quietly, huge agreements made which have profound impacts on hundreds of millions of people throughout the world; are we going to see that debate? Or, in fact, are they going to continue to be done in secrecy without any votes? We don't know how anyone votes because there are no votes.
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So in terms of transparency, number one, your view on the appointment of Mr. Koehler and that process; number two, are we going to see the TV cameras in the IMF in open discussion, open debate? Question number one, please respond.
Mr. SUMMERS. Congressman Sanders, the selection of heads of international organizations is a process with quite extensive consultations among the countries that are involved. There has not been historically any analog to a Senate confirmation for the Secretary General of the U.N., or the President of the World Bank, or the Managing Director of the IMF, or the head of the WTO, or the head of the World Health Organization. I think it would be fair to say that the consultation process within governments does give the governments who are involved in making the choice some sense of the strengths and weaknesses of the candidate. I would also say, without being in a position here to prescribe specific procedures, that I think there is a common desire felt quite widely internationally to improve the processes by which the heads of international organizations are selected and to make sure, given the growing importance of these institutions, that we get the best and most qualified people.
Mr. SANDERS. Excuse me, Mr. Summers, if I can interrupt you. I mean, basically what you have told us, this is the way it has always been and that's the way it is. We are talking about reform. That's the whole purpose of this meeting; are you going to change it? I don't see that there's anything wrong for the people of the world, the people in the poor countries who are going to be affected, the taxpayers of this country, what does this person stand for. Get the TV cameras there. It shouldn't only be doneI understand that it's done by, you know, people through the various countries and leaders of those countries. Open up the process. That's what transparency means.
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I would hope thatdo you agree with that?
Mr. SUMMERS. I think if you look at the kind of approach that the IMF and World Bank have taken, to describing their activities, indicating their policies, participating in public debatewhich frankly is a response to pressure from this Committee and many, many othersthere have been important changes over the last several years. Just what procedure the countries of the world will be comfortable with, with respect to the choice of heads of international institutions, going forward is not something I'm in a position to prejudge.
Mr. SANDERS. Well, excuse me, if I may, there's not a lot of time, Mr. Summers.
In fact, you are in a position. We have veto power over the IMF. We have enormous clout, we contribute an enormous sum of money. But getting back to the issue again of transparency, are we going to know who votes for what? Are we going to see transcripts of the debates? Are television cameras going to be allowed in as some of the most important economic issues facing the world are debated or do we continue with the same old secrecy?
Mr. SUMMERS. We provide full reports to the United States Congress on the positions that are taken by the United States Executive Director with respect to all crucial issues at the IMF.
Mr. SANDERS. But there are no votes.
Page 47 PREV PAGE TOP OF DOC Mr. SUMMERS. With respect to the positions that are taken, with respect to the interventions that are made, the statements that are made in the course of the debate. We have also worked to achieve a situation which is unprecedented, where essentially all of the IMF programs are made available on the internet at the time at which they are agreed. I do not foresee in the near future, however, that there would be any kind of consensus internationally for IMF board meetings to be open to the public.
Indeed, given what is discussed at those meetings, which in many cases is extraordinarily market-sensitive, I believe that an effort to open IMF board meetings to the public would run into the same kinds of problems that an effort to open up meetings of the Federal Open Market Committee at the Federal Reserve to the public would run into. In the case of the Federal Reserve, there have been changes over time that have led to reduced lag time for greater information being provided about the deliberations. Certainly a program of that kind is underway with respect to the IMF.
Mr. SANDERS. If I could interrupt. Last question.
Chairman LEACH. Excuse me, we have a number of people and our new clock goes to how much time it's gone over and you've run about 50 percent over.
Mr. SANDERS. OK. Thank you.
Chairman LEACH. But if you would like to submit a question in writing, that would be appreciated.
Page 48 PREV PAGE TOP OF DOC Mr. Bereuter.
Mr. BEREUTER. Thank you, Mr. Chairman.
Secretary Summers, thank you very much for your oral and written testimony. There are points where I would like to pursue some questions, but I'm going tofar from the usual fashion, since I wasn't here because of mark up for opening statement, I might perhaps mostly or totally devote my time to a statement. I want to thank the Chairman for conducting these hearings on international financial architecture and particularly the work of the recent Commission and its report. I have particular interest in the work of the Commission since I am the author of the language which found its way into the 1999 Omnibus Act with the special help of the Chairman.
Before proceeding with a couple of comments on the Commission report, I would like to offer a few candid remarks on the IMF and the Executive Branch. A great many in Congress have lost confidence in the IMF, I'm among them.
Regrettably, I believe that the IMF and its defenders in the Treasury Department, past and presentand I take you at your word, you're looking seriously at reforms, Secretary Summers, so I exempt you from this statement of minehave been unwilling to admit to some of its flaws, its errors and especially its recent misjudgment. I think the first step in the process of reform is to face up to recent failures of the IMF and to what I believe has at times been a very serious misuse of its resources. That's something that this Administration and the IMF has been unwilling to do. I would say it goes for the previous Administration perhaps too.
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The fact is, there were counterproductive IMF policies employed in the early stages of the Asian financial crisis in both Thailand and Korea. They were treated like fiscal basket cases, neither were, particularly in the early stages until they were pushed to that status, or they reached that of their own effort. I also think that they were massively wrong-headed loans to Russia, which might better be labeled ''Yeltsin loans,'' which I think will be shown over time to be part of one of the biggest blunders of the late 20th Century. At the same time, I think Congresswe need to be candid that if we didn't have the IMF or an institution like it, we would have to create one. We also need to recognize in reality the U.S. Treasury has a very large role in dictating important IMF policy; Mr. Sanders was talking about that.
We may also have a European in charge again of the IMF, as we always have. But in fact, the U.S. Treasury Department, under the U.S. administrations has often, maybe usually, in effect, called the shots on crucial policy matters. There has been a demonstrated resistance to reform in the Executive Branch, at least in the past, by Secretary Summers, by the IMF, and apparently a great number of the member states as well. I think that's very unfortunate.
I think perhaps the most significant recommendation to report with regard to the IMF is a proposal that the IMF withdraw from questionable long-term loans and focus instead on the extension of short-term credit, more like an emergency effort of a fire station. I believe that this focus on IMF short-term loans is a significant step in the right direction. The Commission suggests that they be given in three specific ways and under three kinds of conditions; short maturity, pay a penalty rate above the borrower's recent market rate, and should specify the IMF has given priority in payments overall to the creditors secured and unsecured.
Page 50 PREV PAGE TOP OF DOC I appreciate the independent judgment of those dissenting members who made a statement on the Commission Report with respect to IMF prequalification criteria, particularly the statement signed by Messrs. Bergsten, Huber, Levinson, and the Honorable Estoban Torres, contend that limiting the IMF to a set of prequalifying criteria would preclude certain countries which are central to global financial stability from receiving assistance. They may be right. If so, that's an extraordinarily serious problem and accordingly I think we need to have the Committee focus on that warning. I would like to explore how these prequalification criteria in practice would affect specific countries such as those in Southeast Asia. Certain exigent factors such as global financial stability should be considered by the IMF on a case-by-case basis.
Of course, the IMF does not operate in a political vacuum. In light of the past Asian financial crisis, it is vital and obvious that the IMF consider political and economic repercussions of its recommended actions on the global economy.
Lastly, Congress, I think, and Mr. Chairman, my colleagues should study comprehensive recommendations to the Commission and I want to recommend, and will ask unanimous consent now, that the Executive Summary of this Task Force report in 1999, by the Council on Foreign Relations on this very subject, be a part of our record, along with various editorials from national newspapers in this country and a couple from the Financial Times, I think they would be important.
And I'll submit questions, Mr. Chairman. Thank you very much.
Chairman LEACH. Without objection, those statements will be placed within the record.
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Mrs. MALONEY. Thank you, Mr. Chairman.
Mr. Secretary, you represented our country in many of the Asian crisis meetings. Can you talk about the specific dangers that the spreading Asian contagion presented to the United States? And if the recommendations of the International Financial Institutions Advisory Commission had been enacted in 1998, what would the impact have been on your ability to fight the Asian crisis?
Mr. SUMMERS. Congresswoman Maloney, I believe that, if the Asian crisis had not been contained, it would have put American wages at risk from reduced exports and a surge of imports into our country from countries experiencing massive devaluations, it would have put American savings at risk because of what it would have meant for the broad pattern of financial markets, and it would have put American security at risk given our stake in a prospering Asia.
I believe that if the Commission's recommendations had been in placeand I want to be fair, there is considerable ambiguity in those recommendations; so it is possible that I have misinterpreted those recommendationsthere would have been two different risks that we would have run. One risk is that a number of the countries would not have prequalified, and, therefore, it would have been more difficult or impossible to have extended them credit to respond to the emergency and to provide the confidence that was so important to the return to economic health that has taken place in Korea or in Thailand.
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A second riskwhich in some ways may be the more serious riskis that the prequalification approach of the Commission would have precluded the imposition of ex-post conditions in the context of those programs which, therefore, would have made the policy changes that led to increased confidence impossible. I'm inclined to agree with Congressman Bereuter that it would have been desirable if the shift to fiscal expansion had taken place more rapidly in those countries, and if the situation had been more fully understood, and there had not been the initial fiscal contraction. So I think that is an important issue.
But I think in a variety of respects, the ex-post conditions that were imposed in forcing structural change and trade liberalization in Korea, in requiring private sector involvement as a condition for subsequent tranchees, in bringing about reform of the banking sector, in addressing issues relating to corruption and directed lendingI believe those measures were all important to the restoration of confidence. If a judgment had simply been made that the countries had prequalified, it's possibleas I think the Commission would arguethat these countries would have simply been provided the financial resources based on their prequalification. I believe those structural changes would not have been brought about therefore, and without those structural changes having been brought about, you would have seen large amounts of taxpayers' money flow into these countries that would have simply been wasted and would have left them with a large burden of debt. So the two concerns with the prequalification approach, which I believe would have rendered it ineffective in responding to the Asian financial crisis, are both how you handle those who do not prequalify, and howin the event there is prequalificationyou assure that a satisfactory reform program is in place ex-post.
Mrs. MALONEY. The United States is currently trying to lead the world in providing IFI reform. What would the signal be to our partners in the IFIs if the U.S. adopted the International Financial Institutions Advisory Commission's recommendations?
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Mr. SUMMERS. I think the consequences would be catastrophic for our ability to cooperate internationally in a situation where the United States has already reduced substantially its contributions to the Multilateral Development Banks by 40 percent over the last six years. For the United States to take the position that the World Bank should cease its lending to both Latin America and Asia would, I think, be seen internationally as the United States repudiating an institution which had been its creation. I think it would lead to radical changes in terms of cooperation between the United States and other countries with respect to these international financial institutions.
Let me emphasize that these institutions do need to be changed in very substantial ways. I tried in my statements in London and at the Council on Foreign Relations on Monday, to lay out what we regard as the appropriate directions of change to reflect the realities of a new world. Certainly with respect to their cultures and approaches they do need to be much more transparent and accountable. I think we will succeed in these matters much more, however, if we work cooperatively with other major shareholders rather than if we seek to impose proposals by fiat. It's our intention to work closely with other shareholders to try to bring about the necessary and large changes and I think that we have made progress in doing so.
You know, Congressman Bereuter, I think, rightly, emphasized from the perspective of managing financial crisis, three areas as being particularly important: shorter term lending; a penalty rate; and the assurance of priority for payments to the IMF. Those are the three pillars of the so-called SRF facility, which the IMF adopted some time ago at our instigation, as a mechanism for enabling it to respond in a strong and vigorous way to emergencies. I think we have to be very careful, however, with respect to taking any steps that would so limit flexibility as to straight-jacket us whenever the next crisis comes, because we can't right now know what form that crisis will take.
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Mrs. MALONEY. My time is up and I, with the Chairman's permission, will submit some further questions for the record. Thank you.
Chairman LEACH. Thank you.
Mr. BACHUS. Thank you, Mr. Secretary.
Mr. Secretary, I'm looking at your recommendations and I'm also attempting to look over the Commission's recommendations. I think you all both agree, and see if I'm right, that the IMF needs to focus more on emergency lending; is that a consensus there?
Mr. SUMMERS. I'm not certain it needs to do more emergency lending, but its focus needs to be more on emergency lending.
Mr. BACHUS. Right. OK. So the focus on emergency lending. Other than emergency lending, should they eliminate most long-term development lending?
Mr. SUMMERS. I think it's important, Congressman Bachus, to distinguish between non-concessional and concessional lending. In the case of non-concessional lending, I don't think that longer-term development lending is appropriate. There may be cases where the provision of funds over a slightly longer horizon is desirable, as with countries that are graduating from concessional lending or cases where a desirable financial profile would involve more medium-term financing, but in general, the focus should be on shorter-term response to financial emergency in order to return to a more normal situation.
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That, by the way, goes not just to the question of longer-term lending, it also goes to something that I think requires increased attention: the question of repeat use of IMF resources when the IMF is involved on a protracted basis. We have called for a full review of the IMF's facilities, and in particular their pricing practices, directed at that objective.
With respect to the countries eligible for concessional loans, we, the United States, have not made a contribution in a number of years to the IMF's concessional lending facility, the ESAF poverty reduction and growth facility. But we do believe that there is a case for continuing IMF involvement in the poorest countries, both to assure a macro-economic framework that prevents capital flight and to assure the debt relief proceeds are used properly. We believe that some financing makes that macro-economic framework more meaningful and real.
Mr. BACHUS. And I think that's maybe the disagreement is that I think both of you are saying it's appropriate that we focus on emergency lending and lend only to those countries after looking at their balance sheet and seeing whether or not they'll be able to repay it. You both agree that that's an appropriate thing for the IMF to do? I think where the disagreement is, is lending longer term to countries that may not be able to pay back in a short term; is that accurate?
Mr. SUMMERS. I think there are a variety of disagreements in the non-concessional cases, for example, the points I made about prequalification in answer to Congresswoman Maloney's question.
Mr. BACHUS. I understand that, but the disagreements are on those countries which may not be able to have the financial resources to pay back in a short term? I mean, that's where the disagreements come in?
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Mr. SUMMERS. Well, I think there are a number of issues in respect to the non-concessional countries.
Mr. BACHUS. But by non-concessional we're talking
Mr. SUMMERS. We believe that it is useful that the IMF's existing Trust fund for concessional lendingvery low interest rate lending to the poorest countries in the worldbe maintained, although the United States has not, and is not, making contributions to it.
Mr. BACHUS. Right.
Mr. SUMMERS. That trust fund, which is funded by other countries, should be maintained in order to enable the IMF to be involved, not in the broad range of development policies of these countries, but only in the macro-economic issues that are important to assure that aid does not give rise simply to capital flight. We believe that that's a core competence of the IMF.
Mr. BACHUS. Right. I understand.
Mr. SUMMERS. For it to be effectively carried out, it needs to be associated with a financing option.
Mr. BACHUS. But let me say this. What I think you're saying is you both agree if you have a silent country whether they're prequalified or whether they're not, that short-term emergency lending is appropriate. I think the disagreement again, whether it's in lending to countries whose solvency or stability or ability to pay back is in question.
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Mr. SUMMERS. Well
Mr. BACHUS. The poorer countries
Mr. SUMMERS. I don't think the IMF should ever make loans that it does not expect to have repaid.
Mr. BACHUS. Well, OK, I think
Mr. SUMMERS. There is a case for concessional lending in certain cases where that concessional lending will be repaid associated with a narrowly defined macro-economic role in countries that can't expect to have substantial involvement with the private capital market.
Mr. BACHUS. All right. I think you just said something that I sort of believe is part of the essence of this and that'sI think the debate is on countries which don't have the ability to repay, particularly in the short term. Now, if you say they may have the ability to repay in ten years or five years or twenty years, and these are poor countries with all sorts of problems, and if you loan them money and that interest just runs, can they ever pay it back? Why would you everyou know, why wouldn't you address that through grants through the World Bank? And let me maybe rephrase that
Mr. SUMMERS. Let me say, the long-term lending that I've indicated we believe is constructive in the poorest countries is concessional lending.
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Mr. BACHUS. Very low interest rate?
Mr. SUMMERS. Very low interest rates that do not compound in a major way, with a significant grace period. We believe that approach is frankly essential if we are not to condemn these countries to a permanent second-tier status, but are instead to support their rejoining the global economy.
Mr. BACHUS. And isn't there sort ofI mean, I see some agreement. You know, the Commission is saying, don't loan to the poor countries because they may not have the ability to repay. And you're saying, loan to the poor countries, but do it at such a low interest rate that they may be able to repay at some future date. I think there's an agreement on both parts that you can't loan to poor countries at a market interest rate. If you do so, you're going to basically have to give them what is either ais almost a very low interest rate, I mean, if at all. Because we found that loaning them money at any higher interest rate, there is very little way to get repaid.
Mr. SUMMERS. Let me say where I think there is an important point of agreement. And that is that we need to work through the debt reduction exercise and work through the HIPC program and do it in a way that: A, assures the human development objectives are met; and that B, does not involve new hard lending, new high interest rate lending of a kind that would simply set the stage for further debt reduction in the future. Crucial to successful debt reduction is agreement on a policy framework that does not involve taking on new debt that would have to be reduced at some point in the future. That certainly is something that we deeply believe and I would suspect that's something that members of the Commission would agree to.
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Mr. BACHUS. Do you think maybe that is part of their motivation for saying, we don't think the IMF ought to be making long-term debts for the poorer countries is recognition like you recognized that this in fact is notit's just burdened them down with debt?
Mr. SUMMERS. I would rather not try to speak to their motivations, but from reading their report, I think it goes more to issues of institutional delineation.
Mr. BACHUS. Let me ask one more question.
Chairman LEACH. This will be your final question.
Mr. BACHUS. My final question.
Chairman LEACH. Fair enough. Fair enough.
Mr. LAFALCE. Will this be Mr. Summers' final answer?
Mr. BACHUS. When it comes to the poorer countries, when it comes to the poorer countries, their problems are more systemic whether it's a political situation, a social situation, the lack of development, those are the problems. Why can't those needs, why can't those problems be addressed by the World Bank exclusively and be done in a better way? And I say that I think they've failed to do that. I think maybe one of the reasons the IMF has begun to do this is part of the report said that 70 percent of the regular loans by the World Bank are to eleven countries which have adequate access to the private capital markets. So you basically have the World Bank making 70 percent of their regular loans to eleven countries which could go to private sources. So why can't we take it out of the IMF as far ashave debt relief and then take lending to poor countries that can't repay out of the IMF, put that in the World Bank and get the World Bank to commit more of their resources to countries which may not have adequate access to the private capital markets?
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Mr. SUMMERS. I would make two points with respect to the very important set of issues that you raised, Congressman Bachus. First, with respect to the poorest countries, there are broad systemic difficulties as you suggest. But crucial to any economic success in any country is that it have a stable currency. If it doesn't have stable money, it's going to have capital flight. That is the IMF's expertise. It is not an area of competence for the World Bank whose concern is with longer-term development, not with the requisites of a stable currency. So, conditions addressing a stable money supply so that assistance doesn't flow right out to Swiss bank accounts do have to be an element in any program. It is necessary: it is, as you stress, very, very far from sufficient, but it is necessary in the poorest countries. Hence, a role for the IMF.
Second, there are a variety of issues.
Mr. BACHUS. But could it be a non-lending role?
Mr. SUMMERS. It could possibly be. That is a suggestion that is sometimes made. Experience with the institutions, I think, suggests that non-lending roles tend to be non-real roles. If the conditionality is to be meaningful, it has to be associated with the availability of finance. Indeed, from the point of view of the countries, the resources that the ESAF makes available represent a contribution to their budget and to funding education, to funding health care, and to meeting social objectives.
Chairman LEACH. The time of the gentleman has expired. Before turning to John, let me, in ten seconds, note that in response to some of the concerns the World Bank has put out a statement noting that its true that eleven countries get 70 percent of the resource of the IBRD, but it's also true that 80 percent of the people with incomes under $2.00 a day of those countries that qualify for IBRD assistance live in those eleven countries. And so there are kind of two statistical ways of looking at it.
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Mr. LAFALCE. I thank the Chairman for bringing that extremely important point out.
Mr. Secretary, I get comments from people on the left and the right and the pro-debt relief, anti-debt relief, and so forth, and even some of the people who are for debt relief say, ''Well, you really didn't accomplish anything in the last Congress. I mean, come on, you really have to do something in this Congress, because what you did was insignificant, and you certainly haven't put your money where your mouth is.'' And that is flat wrong. And yet there are other people who say, ''Hey, you took care of the problem last year, you know, slow down; you know, don't be pushy. Put it in perspective.''
I think what we did was historic, and yet I think what we did was the beginning of what we must do. What is your analysis of what we did and what we must do?
Mr. SUMMERS. I think you got it exactly right in your comments. To paraphrase Churchill, we're certainly not at the end. I don't actually think we're at the beginning of the end, but perhaps with Congress' actions last year to provide initial funding and to recognize the importance of the problem, we're at the end of the beginning with respect to the historically important issue of creating a sound financial framework for relieving the debt and achieving educational and health care and social development in the world's poorest countries. But the momentum we have built up will be lost if we do not act this year.
Page 62 PREV PAGE TOP OF DOC Mr. LAFALCE. Let me flesh that out a bit more. Can you juxtapose what we did financially with respect to debt relief? How significant it was? What we need to do; and how significant that is? Can you also make a little more explicit what we did to help bring about reforms that's truly significant legislatively that was part of the Omnibus Appropriations Bill and yet what we still need to do?
Mr. SUMMERS. To take your second question first, Mr. LaFalce, the mode of the international financial institutions addressing the poorest countries is changing fundamentally with the Poverty Reduction and Growth Facility and with the agreement on Poverty Reduction Strategy Papers toward an approach that's defining objectives not in terms of macro-economic abstractions, but in terms of concrete measurable indicators of human progress, like infant mortality, and like literacy, and is harnessing the other measures, the financial and macro-economic measures toward that objective. So we have seen a real change in approachI think an overdue change in approach to a more development-centered approach. That is something that is underway and it is something that we're going to have to work with going forward.
Frankly there are going to be tradeoffsas we've had a number of opportunities to discuss with our friends in the NGO communitybetween on the one hand, the desire to move rapidly with debt relief, and on the other hand, the desire to fully implement and carry through the kinds of participatory processes that we prescribed last year. That's a tradeoff that we are going to have to manage.
With respect to what we can do, we've seen progress in a number of countries. However, our ability to provide full debt relief for Bolivia, for example, which is a country that has made real progressa country that is a positive success, if you like, of economic development as part of an anti-drug strategywill depend both on more adequate funding and upon authorization for contributions to the HIPC Trust Fund, since a substantial part of Bolivia's debt is to the regional development bank in our region, the InterAmerican Development Bank. So we need both more finance and further authorization if nations like Bolivia and Mozambique are to benefit fully from debt relief.
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Mr. LAFALCE. Let me just ask one last question and then we're going to have to go for a vote. Switching gears from debt relief, globalization is one of the most important phenomenons that has taken place, that is taking place, that will take place; it is a reality. Oftentimes globalization has take place, however, without, in my judgment, adequate consideration of the human face that can be attached to globalization.
Now, some people view Seattle as a renunciation of everything that the United Stateswell, as a renunciation of globalization. I don't think it was that at all. Some people view it as a renunciation of the tactics of either organized labor or anarchists. I don't think it was that at all.
My judgment is that it was the fact that the other countries of the world were simply not ready to deal with the human face that the United States Administration said should be a part of the globalization trend. It should be on the agenda. Coupled with globalization in an attempt to put a human face is a big debate looming right now over permanent NTR status for China.
It is my understanding that the Administration believe this to be one of the most important initiatives that we can take and must take, not only for economic and trade purpose, but for geopolitical purposes and for furthering the forces of openness within the largest country on the face of this earth.
I want you to address, in your judgment, the importance of permanent NTR to the United States, to China and to the world. And then, I want you to deal with the question of how we can best go about bringing the human face to globalization within the world context, and then within the context of China in particularwithin 60 seconds or less.
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Mr. SUMMERS. Congressman LaFalce, I believe there's a compelling case for the United States to support PNTR. It starts from the recognition that this is about us, not about them. It is about the pursuit of our interests rather than the question of whether China should be rewarded in the abstract. That case rests on three primary arguments.
First, there are enormous commercial benefits to our country from this agreement which, if we do not accede to PNTR, will simply go to our major international competitors. Those benefits include reductions of more than 50 percent in tariffs on major manufactured products; the opportunity to do business in China in new innovative ways; substantial reductions on tariffs and quotas on agricultural products.
Second, there will be changes in China that will result from PNTR. China, like any country, has divided politics. A vote for PNTR reinforces those who believe in the internet, those who believe in markets, those who believe in freedom. A vote against PNTR weakens those same forces at real detriment to our interests in a more open and a more democratic China.
Third, a security case rests on the overwhelming lesson of global history going back to Assyria and Sparta that major changes in the balance of economic power frequently lead to armed conflict, particularly when those countries that are gaining in economic strength are not allowed to become part of a rule-based global system.
These three considerations, the security case, dynamics in China and our commercial interests, make a strong case for China to be in the WTO. This case needs to be associated with initiatives that further our values: our values in terms of labor rights; our values in terms of the rule of law, which we further in a variety of ways, including through the international financial institutions, assuming they are able to continue to engage with major developing countries. We do it through out technical assistance programs. We do it through our commercial diplomacy. We do it in various other multilateral dialogues. We need to do so as vigorously as possible.
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Chairman LEACH. Mr. Secretary, at this point I apologize to both you and Mr. LaFalce, but we have a vote on the floor and so the hearing will be in recess pending the vote.
Chairman LEACH. The hearing will come back to order.
Our next speaker is a member of the Commission and a distinguished colleague and friend. Mr. Campbell.
STATEMENT OF HON. TOM CAMPBELL, A MEMBER OF CONGRESS FROM THE STATE OF CALIFORNIA
Mr. CAMPBELL. Thank you, Mr. Chairman. And you are my distinguished colleague, and God knows, friend.
Secretary Summers, thank you for your patience. I know it was hard because we had the break and all, and I deeply appreciate it because I was the next one in line. And a less patient man might have said he had to go. So I take it as a personal favor that you didn't.
My focus is on HIPC, so I'm going to give you my rebuttal to your written testimony and then allow you to tell me your point of view and perhaps there will be a meeting of the minds. I read you to say that we do not believe the report's recommendation to write off all HIPC debt would be either desirable or feasible. I'm going to pause there, because the word ''desirable'' is quite different from the word ''feasible''. I think it's highly desirable. I do think you might want to say that it's desirable, but sobeit, we'll see.
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Now, you give two reasons for that. The first is you say, because the money is not there. We can talk a good game, but the money is not there. And that, to me, is just picking up a little bit of recent debate history in the Presidential campaigns. We ought to debate what should be done, and if somebody says, ''Well, the will is not there,'' that's quite different from saying it should be done. So as to the desirable work, you point out that it will cost more, $14 billion to $43, if it's worth doing, then let's put it forward, it would still be desirable.
But, the heart of your argument appears to be that if there's no increase in overall concessional resources then this would mean less money for the other purposes of IMF in the concessional area. And here are the points that I would offer in respectful potential disagreement; first, are those debts owed by the HIPC countries to the IFIsare they real anyway? Are they being carried at any reasonable actuarial number based on likelihood of collecting? I have my doubt, point one.
Point two, you remember this, I know, because you were involved and indeed you testified on it. The gold reserves question, and at what level they are carried on the books of IMF becomes a factor in deciding whether we would have to go to the participant countries and hit them for a contribution. If instead we could, without selling an ounce of gold, write up the reserves, we could haveto tell you the trutha paper increase in assets to offset a paper decrease in obligations, assuming they weren't collectible, assuming my first point.
So, my first point is that they're probably not collectible anyway, hence, I doubt that the number is as high as you say, and number two, could we not effectuate that through a write-up of the reserves?
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Third and last, in response is now outside the realm of economics for a moment, but it will come back to it. Not every country is the same in this category, some incurred the debt under a previous tyrannical regime, the benefit of which lending did not in any real sense go to the people. For an example, Mobutu is an example in The Congo. And in international law the general rule is, if you build an asset with the lending that stays in the country, then the country, whatever the form of government, is obliged to pay the debt service on the loans to construct the asset, like a railroad.
But where the money went to a tyrant who took it out of the country, the lending didn't reflect the democratic will of the people. I just don't think it's fair or right for a fisherman in The Congo River to have to set aside two fish out of a catch to pay interest on a debt to a loan that was made to Mobutu to choose an extreme example. So that sounds non-economic, and maybe it is, but I think it comes back in the sense that it says that where there is an asset that remains capable of producing the revenue, then the debt remains. But where the funds that were advanced supposedly for monetary purposes were in fact dissipated. And you can make that a case-by-case basis, then it's fair to write it off.
Those are my points on HIPCs, if we have time at the end, I have another question, but this is most important and I give you the rest of my time. Thank you.
Mr. SUMMERS. Thank you. In the remaining 34 seconds?
Mr. CAMPBELL. Oh, I'm sorry, I wish it was more.
Page 68 PREV PAGE TOP OF DOC Mr. SUMMERS. Let me make these points if I could. First, I agree with your last observation that it's important to have a country-by-country approach to writing off debt in situations where there's no capacity to repay, but, where there is a capacity to repay, not writing off the debt. That's one of the reasons why the Commission's recommendation that there be 100 percent write-off in all HIPC cases seems to me to not be a warranted recommendation. It seems to me appropriate to make those judgments on a case-by-case basis, which is what the current framework provides.
Second, it seems to me that it is essential that we not just look at the IMF, where, in principle, if there were will, there would be the possibility of mobilizing gold resources, but we should also look to the regional development banks, where the allotments to the HIPC Trust Fund are required and where there are not internal resources that could be put to use in addressing the debt relief question. To make those commitments for debt reduction would be potentially to eviscerate the capacity of the regional development banks for new concessional lending, which, it seems to me, would be very dangerous in light of the continuing social needs in these countries.
Third, it seems to me that it's importantand this is something you touched on in your statementthat we be prepared to support countries on a transition path back to participation in the normal system. Then, an approach of writing off all debts would not be an approach that many of these countries would favor, precisely because it would reduce their capacity to make a transition back into the global system.
And, finally, with respect to your first observation, because of the traditional preferred creditor status of the institutions, the overwhelming majority over the last years of these debts have been repaid in full with respect to the preferred creditors, the IMF, the World Bank, and the other Multilateral Development Banks, and that's why those institutions are rated AAA, and that's why the debts are carried in full. So I don't think there any actuarial reductions which would be appropriate in these cases. So I guess if we're going to find a meeting of the minds, and I certainly hope we can, it seems to me it should be on the idea that it's important that we move as rapidly as possible on debt relief without holding hostage other issues and that we do so in a way that allows us to respond sensitively to differing country circumstances, and that we do so in a way that achieves the social objectives by not putting concessional lending at risk. I think that would be an approach that would enable some finding of common ground, though it's certainly not precisely the approach that's contained in the Commission report.
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Mr. CAMPBELL. There's one point you didn't respond to. I'm going to ask the Chairman for unanimous consent for an additional minute to pose it?
Chairman LEACH. Without objection.
Mr. CAMPBELL. Thank you, Mr. Chairman.
The point was, in making this country-by-country analysis, which I understand, do you take cognizance of the problem I described in the last part of my question to you, or not? Namely, whatever the ability of the country is to pay it back, putting that to one side, do you take cognizance of the fact that the loan may have not gone to anything real that stayed in the country, but really left the country? The moral question about do the people owe it, does the fisherman in The Congo River owe it? Do you find a way to take that into account or not?
Mr. SUMMERS. You know, I think there are many factors to go into these things, and certainly the capacity of the country to paywhich, after all, is greatly reduced if the money is all gone off to somebody's Swiss bank accountis something that has to enter into the equation. I think we have to be carefulvery careful if we want to have a capital market in which there's going to be future lendingabout the way we would establish a principle that allows new governments to renounce the old government, the death of old governments that they find unattractive. I think that would be a principle that would have to be very narrowly drawn if one were not to interfere with new lending in the future. I suspect, given your background, Congressman Campbell, that certainly you know vastly more about the international law in this area than I. My impression is that in order to support new lending we must be very careful about allowing the renunciation of national obligations because of change in national governments.
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Mr. CAMPBELL. I'll close then with the Chairman's indulgence, thank you. The possible area to follow, if you really care about this line of thought, is when there is a legitimate revolution, a legitimate total repudiation of government which happens in some occasions and where there is no continuing real asset.
Mr. SUMMERS. No continuing real asset, yes, that's something that has to be looked at. But certainly, I think we can move to the idea that you have to make case-by-case judgments about appropriate debt reduction and that 100 percent write-off as an absolute in all HIPC countries isn't prudent. I think that would be a very important point to attain common ground.
Mr. CAMPBELL. Thank you very much.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
Have you had your questions asked, Ms. Waters?
Ms. WATERS. If I may, Mr. Chairman, I came in when Congressman Campbell was raising the question about
Chairman LEACH. Excuse me, I want to just for regular order purposes, have you asked your questions? I forget.
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Ms. WATERS. No.
Chairman LEACH. OK. Then I would like to recognize you.
Ms. WATERS. Thank you.
Chairman LEACH. And you are recognized.
Ms. WATERS. Thank you very much.
I came in when there was some discussion about debt forgiveness and debt cancellation and I would like to pursue that a little further.
Chairman LEACH. Absolutely. Absolutely.
Ms. WATERS. It has been said and stated over and over again, and many of us, on both sides of the aisle feel very strongly about poor countries that are forced to repay phantom debt or debt and they literally are starving their people trying to do that. You just talked about renouncing debt must be carefully crafted, those kinds of possibilities. How do you factor into that the knowledge of corrupt money, identifiable money, placed in American banks such as we see with the Abacha boys and the money that was stolen under the dictatorship of their father, that's in CitiBank?
Mr. SUMMERS. I don't think it would be appropriate for me to comment on specific cases, Congresswoman Waters, but it's in response to that problem that we have proposed legislation which has been endorsed by the Chairman and Ranking Member and many other Members of this Committee to increase the strength of the U.S. legal framework with respect to money laundering including, in particular, by making foreign corruption a predicate offense and by enabling us to have a more differentiated set of sanctions that can be pursued with respect to countries that facilitate money laundering. I think it's something that has to be an increased priority for us as we deal with the consequences of globalization. Certainly, with respect to debt reduction, as the colloquy I had with Congressman Campbell suggests, we've got to maintain a case-by-case awareness of a country's capacity to pay, which will be related to the ways in which their governments have used money in the past and which will obviously be reduced when the money has been stolen, rather than translated into investments that have the capacity to generate repayment capacity.
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Ms. WATERS. I appreciate that, and one of the reasons this is so much on my mind is I'm focused on Nigeria, as you know, and we have not determined that we can do full debt cancellation there. And still, I think, we're talking about restructuring and some other kinds of things that may be helpful. Nigeria, and as my grandmother would say, ''mark my words, as I sit here today,'' Nigeria is going to fall apart again with us watching. President Olusegun Obasanjo will not be able to maintain this democracy that he's attempting to create under the circumstances. Debt relief is extremely important. In Nigeria the people are saying, ''We can't eat democracy.'' And one of the greatest things that could happen for Nigeria at this point is for us not only to announce our role, whatever it is in debt relief, but to do everything that we can to leverage in the Paris Club for complete debt relief and go after the money that was stolen that's in the banks by the Abachas. I just don't know why we can't do that. And I'm appreciative for, you know, whatever has been fashioned that will help us to get at this big question of money laundering sometime in the future. But this stands out as a case that we ought to be focused on now. We ought to be working with IMF, World Bank, well, no, actually Paris Club. And the United States, I think, could pull this off. So, let me ask you to respond to that.
Mr. SUMMERS. Certainly all of us share the concern with corruption and the desire, to the extent that it's feasible, to locate any ill-gotten gains. Certainly we recognize the enormous stake that the United States has in democratic transition in Nigeria and are working very hard to assure that Nigeria's debt repayment obligations this year and in succeeding years are consistent with a successful economic development strategy for Nigeria. That certainly means recognizing that Nigeria is not able this year, or has any likelihood next year, to pay back all of the debt that is coming due. We are therefore seeking to achieve appropriate debt relief arrangements within the Paris Club.
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Mr. FRANK. Will the gentlelady yield?
Ms. WATERS. I yield.
Mr. FRANK. I just want to underline, Mr. Secretary, I know we've been able to work together. The Democratic Members of this Committee, in particular, have been very important, and I just want to stress the importance of what my colleague has just said. Substantial relief in Nigeria really is going to be, I think, a sine qua non for our continued good working relationship. We kind of took on faith last year that we would get some. It's very, very important and I can't think of anything that the Administration could do that would be more helpful to the overall agenda here than to work that out along the lines she's been suggesting.
Mr. CAMPBELL. Would the gentlelady yield?
Ms. WATERS. Yes, sir.
Mr. CAMPBELL. And I would say that's a strong bipartisan element to that same message.
Ms. WATERS. Thank you very much.
Chairman LEACH. Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman.
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Mr. Secretary, a couple of points I would like to make. First of all, previously, about an hour ago, maybe, in discussion on HIPC, you made a comment thatI think this is rightthat you believe that nationsthat we should be careful of the hazard of nations that go through the HIPC process of getting back into the lending world, the hard loan window, and the capital markets. And I would just tell you that Mr. Campbell and I, when we considered the HIPC legislation, proposed an amendment that would have excluded those countries from non-concessional lending and from the public markets for a period of time in return for being part of the HIPC process. In some it might have seemed hard-hearted, I think our feeling was exactly that, the hazard that existed in getting somebody out of debt and then putting them right back in debt again. And at the time I think your staff was opposed to that idea, they may still be opposed to it, but I would ask you all to look at that, and I appreciate your comments about that. Maybe you all either didn't fully explain it at the time or changed your tune on that.
With respect to the purpose of this hearing, let me say a couple of things. First of all, I think both you and your predecessor, Mr. Rubin, have done a very good job in addressing world financial crises that have occurred both in the case of Mexico and in the Asian crisis and maybe to a lesser extent Brazil, and perhaps to a lesser extent Russia. But in many respects it's worked, in some cases it hasn't worked that well.
But I think the problem has been that while you all have been successful, you've been flying by the seat of your pants. You've used the tools that are available to you, and you've used them well, but there hasn't been an overall strategy. And I know that both you and your predecessor have said that you believe that the next great test for the United States and for Treasury secretaries and others is a restructuring of the world financial institutions like the Fund and the Bank. And obviously, we have the Commission's Report that goes in one direction, we have your recommendations that you're proposing, which the Fund is taking up. We have a new head of the Fund coming in, but I guess he's not even there yet, who will be faced with this. And we also have a world that has changed dramatically since the Bretton Woods.
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I don't think Bretton Woods expected the rise and fall of the Soviet Union. I don't think it expected the modern economic and financial structure that we have, and I don't think it expected even the HIPC situation that we have. And at the same time, I think the greatest foreign policy crisis facing the United States is the expanding divide between the haves and the have nots.
And last week, or two weeks ago, this Committee adopted the Chairman's bill to create a trust for addressing the worldwide AIDS crisis, particularly in Sub-Saharan Africa, which I think is an enormous foreign policy problem for the United States, or could become an enormous foreign policy problem for the United States.
And so my question to you is, building on the proposals that you have talked about in your testimony, do you think it is time thatand probably under the leadership of the United Statesthat it's time to convene a new Bretton Woods to talk about both proposals from the Commission, which I agree, from what I've read, probably go a little too far. I understand you don't want a situation to tie down the tools that the Fund and the Bank and the other Multilateral Development Banks have available to them, but to maybe look at where our focus should be. There are times when I think maybe the Fund should be the Bank and the Bank should be the Fund, based upon what their purposes are.
But is it time perhaps that the industrialized nations of the world reconvene a Bretton Woods and look at the financial architecture of the world and lay out some new ground rules, or is it too premature to do something like that?
Page 76 PREV PAGE TOP OF DOC Mr. SUMMERS. I think you have, Congressman Bentsen, a different situation than you had in 1946. In 1946, you had no international financial institutions and the problem was to create institutions. Today, we have institutions and the challenge is to modify them to meet our needs. We have established important new global fora such as the G-20 that bring together the finance ministers and central bank governors of the twenty major economies, both industrial and emerging markets. We have meetings every six months that bring together the major officials of the world's major countries to discuss and debate the future of these international financial institutions.
So I think what's appropriate is to try to forge consensus. We've tried to lay out what I think are a quite far-reaching set of recommendations as to how we believe these institutions should be reformed. I think we have an adequate schedule of meetings and fora for debate about the future of the institutions and the real challenge is not to establish a new forum or a new meeting, the real challenge is to establish the right kind of consensus on how these institutions can best achieve our objectives in the future. The set of recommendations that I've provided in the speech in London, and in the speech on development and the World Bank, at the Council on Foreign Relations earlier this week, provide one blueprint which we are ready and prepared to discuss with others as to how best to modify the institutions. But I think it's really the task of ongoing discussion that's most important, rather than scheduling some particular meeting of people who meet with each other quite regularly now.
Mr. BENTSEN. Well, I think I wouldand I know my time is up, but I would just add this, that I understand that you're having these meetings and recommendations are being made, but I don't thinkI'm not sure that anybody outside those organizations believes that anything is really being changed structurally. I think you're sincere and I think you're very serious about doing this. But I think the world as a whole looks at this and says the Fund and the Bank are just muddling through this process and they're going to give lip service to these ideas and those ideas, but at the end of the day, it's not really going to be that different. You can rename ESAP, you can try and say you're going to involve NGOs, and I'm not necessarily talking about radical overhaul of the operations. But I think, if nothing else, I think that both the United States and the participants within the Fund and the Bank need to speak with a clearer voice about what they see as their roles and what reforms they impose.
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As you know, I think a lot of what had to be done in Mexico, in Asia, were the right decisions at the time. I think the critics had a lot to criticize, but had very little to offer as an alternative to arrest the situation at hand. But some of the criticism we ought to look at in going forward. And so I would just encourage you, because I know you are thoughtful on this. To try and perhaps have the Fund and the Bank to be a little more open and a little more forceful in explaining what changes they are making and whether or not they're really going to follow it.
And I don't need a response to that, but that's just sort of my observation.
I thank the Chairman.
Chairman LEACH. Thank you, Mr. Bentsen.
Let me just in conclusion, I do want to stress several things. One, there's a report that has been issued by a Commission that was precipitated by an act of Congress. The report resulted in the divided conclusion. There is a second, very significant private sector report done by the Council on Foreign Relations under the co-chairmanship of two former Republican Cabinet Members, Carla Hills and Peter G. Peterson. It was a bipartisan report that received unanimous endorsement on both sides. My own personal view is that the second report appears to be more balanced. Do you share that conclusion, Mr. Secretary?
Mr. SUMMERS. I'm not sure I want to make comparisons. I suspect there's more in the Council on Foreign Relations Report with which I could agree and I think that it's a stronger reaffirmation for the need for the international financial institutions to have a strong and continuing role in the developing world, which is certainly something that we could support. Frankly, there are a number of points, however, in the Council on Foreign Relations Report that we would also regard as not representing the best policy and there are important changes that we would favor particularly in relation to the multilateral development banks that are not addressed in the Council on Foreign Relations Report.
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Chairman LEACH. Fair enough.
One of our problems in timing is, A, that you've been here a very lengthy period, and we're very respectful. Also, one of the next panelists is delivering the Summers lecture this evening and has a serious time constraint, but I would, just so that it's
Mr. FRANK. Is the serious time constraint getting to the lecture or the length of the lecture; which is it?
Chairman LEACH. It could be both.
But, just so it's understood that there can be differences in judgment between myself and you, because there aren't an enormous number. One of the recommendations of the Council on Foreign Relations Report, and I would like to read it, it is recommendation Number 4, which readsand this is the Executive Summary: ''Just say no to pegged exchange rates. Further, the IMF and the group of seven should advise emerging economies against adopting pegged exchange rates and should not provide funds to support unsustainable pegs.''
Frankly, one of the mistakes I believe the IMF made, at the urging of this Treasury, was to support the peg rate in Brazil. I know that you have suggested that this may have deferred further international crisis, but it seems to me, and the evidence is pretty well in, that a bet was made, and that bet was lost, in supporting the Brazilian currency. In retrospect: A, do you think that a mistake was made?; B, do you agree or disagree with the recommendation of the Council on Foreign Relations Report in this area?
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Mr. SUMMERS. Let me take your questions in the opposite order you asked them, if I could, Mr. Chairman. We have stated on a number of occasions, including in my London speech and in the presentations to the IMF Board of Governors, and in other places, that we believe the middle ground exchange rate regimes are increasingly dangerous and, in general, they should be advised against and should not be supported.
It is, I think, difficult to come to absolute rules. There are questions of moving out of hyperinflation, there are questions of countries that are of systemic importance that have to be addressed. And so whether an absolute rule or not is appropriate, I think an absolute rule might well be unwise. But the direction that is reflected in that recommendation is absolutely U.S. policy and we have stated it on a variety of occasions.
With respect to the Brazilian case in November, Mr. Chairman, it's something where I think we will never know the answer. The judgments that the international community made with our support were framed by a sense that this was as fragile a moment in global financial markets as any that had taken place in the previous fifty years. In that context, it was judged best to make an attempt to maintain stability. The judgment was made in full awareness of the general risks associated with pegged exchange rate regimes, but also with an awareness of the exigencies of that moment.
In the event, time was bought. There was a subsequent supported adjustment of the exchange rate, and the crisis was averted. Would it have been possible to have forced an adjustment at that moment when the crisis was at a much greater fever pitch and to have maintained the same degree of stability? Quite possibly. At the time, it was a risk that we felt was a risk not worth takinga risk that should not have been taken. In general, should there be support for pegged exchange rates facing speculative attack, as the tone of your question suggested? In our judgment, absolutely not.
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Chairman LEACH. Fair enough. The only reason I raise it is that this Committee frequently deals with the question of too-big-to-fail for financial institutions. And my own view is that no currency is too-big-to-fail. And as a matter of fact, our currency is at a flexible rate. Why should we think any others, which by definition are of lesser significance to us and to the global economy, should be fixed? This is not something that I've ever particularly understood, although one can view at least one Asian circumstance where one hesitates to move away from it. But I'm not so sure that there should be a great international effort to protect it.
Let me just end with Mr. Bachus who wants to make a comment.
Mr. BACHUS. Thank you.
Secretary Summers, first of all, when we look at debt relief, the entire issue, I'm not sure that you've received due credit. I do not think that the debt relief that passed the Congress last year would have occurred had you not become involved effectively and committed really your heart and soul to debt relief. And you're very much to be commended for that.
Mr. SUMMERS. I would certainly say the same about you, Congressman. I think your efforts made an enormous difference on that issue.
Mr. BACHUS. Thank you. When we talk of debt relief, when we talk about the World Bank, when we talk about the IMF, a question from the American people is, why are we involved? Why is this in our national interest? Why is this a concern for us? Why are we even having a hearing on reforming or restructuring the global financial institutions?
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Mr. Chairman, to answer that question I would like to introduce the speech that Secretary Summers delivered March the 20th, to the Council of Foreign Relations. Secretary Summers, it's a fine speech, it's inspiring. I think it's well considered. There are, you know, differences in solutions, but certainly when the American people ask us or when the American people, if people want to know why this is our concern, why it's in our national interest to participate in these institutions.
I think your speech, as well as anything I've ever read, answers that question and I would like to quote just two or three sentences from that speech, but certainly I would think your speech hasn't been published or publicized as much as it should and it ought to be required reading for anyone that's interested in the international financial institutions.
You say, ''The United States has more to fear from states that are too weak than states that are too strong. In such a world, the promotion of successful development serves America's core interest, more global prosperity promotes peace. More global prosperity promotes human freedom. More global prosperity produces better trading partners. More global prosperity helps us to meet the profound challenges of protecting the global environment.''
Chairman LEACH. Without objection that statement will be placed in the record.
Mr. BACHUS. Thank you. And I'm going to introduce the entire speech into the record if I could.
Page 82 PREV PAGE TOP OF DOC Chairman LEACH. Yes.
Mr. BACHUS. And I want to also
Chairman LEACH. Oh, continue.
Mr. BACHUS. [reading.] ''In this new global economy, the power of open markets and market-based incentives are larger and clearer than ever before. And the failings of a more centralized means of coordinating economic activity have become that much more apparent. The promotion of open markets in the institutions and policies that are needed for markets to function well or notskipped part of it, but globally the message has been repeated again and again. The successful national economic development depends above all on the promotion of open markets and the institutions and policies that are needed for markets to function well.
''Respect for people and for the environment''this is something else''are central to successful economic policies.'' And let me just close by reading the final paragraph of your speech.
''The greatest source of squalor and inequity in the global economy today is not integration, but exclusion. A failure to grow and integrate that keeps large populations trapped on the bottom rung, if we are serious about preventing a global race to the bottom, we must be serious about helping those at the bottom to rise up. And U.S. support for strong and effective international development institutions can and must play a crucial role in our efforts to achieve this.''
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It's a very good speech, Mr. Secretary, and I commend you. And I introduce it.
Chairman LEACH. Thank you for bringing that to our attention.
Mr. SUMMERS. Thank you very, very much.
Chairman LEACH. Let me just briefly conclude by saying this Committee has worked cooperatively with the Treasury. In fact, we believe we've perhaps bolstered the Treasury a bit on several issues.
I would only underscore that the initiative of this Committee on the World Bank Trust Fund is something we take exceptionally seriously. I realize it is not in the Administration budget, but there is a very decent chance it will come to the floor in the near future, a very decent chance that this Congress is going to act forthrightly on this issue and I look forward to excellent cooperation between your institution and this Committee on this issue.
Mr. SUMMERS. Absolutely, Mr. Chairman.
Chairman LEACH. Thank you. Let me thank you for your testimony.
Mr. CAMPBELL. Mr. Chairman, may I have a unanimous consent request?
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Chairman LEACH. Of course.
Mr. CAMPBELL. Mr. Chairman, I'd ask unanimous consent that the testimony of Marta Fedoriw who was asked to submit testimony to our Committee be entered into the record. She has a case study of investor problems in the Ukraine which is the subject of this hearing and I've already spoken with you about that.
Chairman LEACH. Without objection that statement will be placed in the record.
Chairman LEACH. Our second panel is composed of Mr. Charles W. Calomiris who is Professor at the Columbia University; Mr. Adam Lerrick, of Lerrick & Co., who is also a member of the Commission as a staff member; Mr. C. Fred Bergsten, who is Director of the Institute for International Economics; Mr. Jerome I. Levinson, who is a Professor at the Washington College of Law. And in this regard, is Professor Calomiris with us? Yes, please. I would like to begin with Professor Calomiris, and then move to Mr. Bergsten, but it's upFred asked that he leave for the speech, but I want to givewould that be all right with you, Mr. Calomiris?
Mr. CALOMIRIS. I didn't hear you.
Chairman LEACH. Would it be all right with you, because of Mr. Bergsten's time constraints to begin with him? It's disorderly, and so I would like to ask your permission on this.
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Mr. CALOMIRIS. Are you suggesting that Mr. Bergsten is going to be disorderly?
Chairman LEACH. No, no.
Mr. CALOMIRIS. Please, with my permission, go right ahead.
Chairman LEACH. Fair enough. Then we'll begin with Dr. Bergsten and then turn to Professor Calomiris and just so that the record is straight, Dr. Bergsten has submitted a minority report and that is what causes the disorderliness. We should rather have begun with the majority report, but because of the delivery of a principal lecture this evening, we'll begin with Dr. Bergsten. Please.
STATEMENT OF C. FRED BERGSTEN, DIRECTOR,
INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. BERGSTEN. Mr. Chairman, thank you very much and Charles, thank you for deferring. The tradeoff is that I will be very brief, because I still do have to run quickly.
I want to assure Mr. Frank that the lecture will not be too long, it's simply that I have to get to the vehicle to get me to the lecture.
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Mr. FRANK. After the last twenty minutes, none of us are in any position to complain about things being dragged out. So just go ahead.
Mr. BERGSTEN. Let me be very brief and just make three central points. They are developed in detail in the written statement I've given you.
The first is to step back for just a moment from all the details we're discussing and ask what the bottom line looks like. My suggestion is that the bottom line, in terms of the economic performance of the world over the last fifty years, and even the recovery from the crises of the 1990's, is quite good. The international financial institutions, both Fund and Bank, have played an extremely positive role. Every one of the crisis countries of the 1990'sMexico, the East Asians, and even now, Indonesia, Brazil, and Russiaare all recovering extremely quickly from the crises they faced.
The world economy is running extremely smoothly and indeed is now into a new era of worldwide prosperity despite, as Secretary Summers said, a fear less than eighteen months ago that we were in deep crisis. So the system has worked. The institutions' results, while certainly not perfect, and while these institutions certainly need reform, have been very, very favorable and I think that this bottom line should be the surrounding environment for this debate.
Second, I want to pick up on something you said, Mr. Chairman, just a moment ago. There have recently been submitted two reports on this topic: the one from the congressionally-created Commission, and the one from the Council on Foreign Relations that you mentioned and that Congressman Bereuter mentioned before. I'm in a unique position. I'm the only person who was a member of both commissions. I will try to be objective. I think it is fair to say that the depth and breadth of expertise on the Council on Foreign Relations Commission was much greater, and that the report was much more balanced. For example, the CFR report looks at the arguments for and against all of the proposals it made, rather than offering a one-sided and somewhat biased approach as does the Meltzer Commission report. As you said, the CFR report was extremely bipartisan. It included former colleagues of yours, Lee Hamilton and Vin Weber; President Reagan's Council of Economic Advisors Chairman, Marty Felstein, along with economists Paul Krugman, Barry Eichengreen and myself; President Reagan's Chief of Staff, Ken Duberstein and other notable Americans, including four or five former Cabinet members. It was a very balanced group, a high quality group, and I'm delighted that you like some of its proposals, and that Congressman Bereuter did as well. I hope you will consider those alongside the new report as you go about this process.
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Finally, since, as you said, I am a signer of the dissenting report from the new Commission, let me simply give you the two basic reasons why.
The first is that I and Mr. Levinson and the other two dissenters believe that the Commission majority's proposals would gut the ability of the International Monetary Fund to deal with financial crises. I was delighted to learn this morning that Secretary Summers has endorsed our analysis, echoing our concern over the two critical flaws in the majority's proposals. First, if you rely solely on prequalification criteria, you will rule out lending to countries that may need it to head off a world crisis. I agree with Secretary Summers: under the majority proposals, lending would have been impossible to any of the East Asian crisis countries.
The second flaw is that, under the majority's proposals, the Fund would not be able to use its lending to promote improved macro-economic policy in the countries that were being helped. There was no mention of monetary policy, and fiscal policy was brought in as an afterthought, with no explanation or no definition of terms. I think it's fair to say the Fund would be prohibited from levying the kind of conditions on the countries' macro-economic policiesfiscal, monetary and exchange rate policiesthat would be required to overcome the crisis, get the countries back on track, and use public resources in a responsible way.
My second criticism is that the proposals to deal with the World Bank, which were not considered by the Council on Foreign Relations, would have the effect, if not the intent, of setting back, rather than improving the global fight against poverty. They would shut down two major programs: the non-concessional lending program of the World Bank, which is $20 to $25 billion a year and the Poverty Reduction and Growth Facility of the IMF. Closing the two together would sharply reduce the flow of resources to developing countries and indeed the majority propose what I think of as reverse foreign aidtaking some of the World Bank's capital and all of the IFC's capital and giving it back to the rich donor countries, reversing the flow of aid at a time when the opposite is what is required. What the majority would do in essence, with debt relief as well, is to rely totally on big increases in appropriated grant aid by this Congress and other parliaments around the world to offset the cutback in non-concessional lending, which is the current use of capital by the World Bank, the other development institutions, and the IFC. It seems to me that's a reckless gamble and it's unlikely to succeed, even if it were desirable. I therefore think the results would be counterproductive.
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Mr. Chairman, I again apologize, but I am going to have to run. I apologize to my colleagues on the panel for being so cryptic and not being able to stay for dialogue and cross-questioning. Mr. Levinson signed the minority report and I will turn my brief over to him.
Chairman LEACH. Not at this point, but I appreciate that very much. At this point we want to turn to Professor Calomiris and Mr. Lerrick and give the majority a chance.
Let me just say, in a way this is a very unfair introduction to allow the minority to come before you and I apologize for that, Mr. Calomiris. You should be given a straight shot at your report and so I thank you for your deferring. That's very thoughtful. Professor, proceed.
STATEMENT OF PROF. CHARLES W. CALOMIRIS,
MEMBER, INTERNATIONAL FINANCIAL INSTITUTIONS
Mr. CALOMIRIS. Thank you, Mr. Chairman.
It is an honor to have the opportunity to address you and the Members of the Committee here today. Before summarizing my remarks, I would like to ask that the full text be entered into the record.
Page 89 PREV PAGE TOP OF DOC Chairman LEACH. Without objection the full text of the report will be in the record.
Mr. CALOMIRIS. I meant my comments.
Chairman LEACH. As well as each of the statements of the individual participants. And you may proceed as you best see fit, Professor Calomiris.
Mr. CALOMIRIS. Thank you, Mr. Chairman.
Chairman LEACH. By the way, I think I should say you come not only as a Commission member, but as someone with a very high reputation as one of the most thoughtful young economists in the country and we welcome you in that context as well.
Mr. CALOMIRIS. Thank you very much, Mr. Chairman.
The debate over the Meltzer Commission's proposals for reforming the IMF, the World Bank, and the regional development banks, I'm sorry to say, got off on the wrong foot, I think, last week, with calumny and caricature, as some critics mischaracterized, I think, misinterpreted our proposals, some even dismissed us as ''isolationist'' less than a day after the release of our report. I believe those reactions reflect formidable obstacles that any reform blueprint for the international financial institutions will have to overcome. It is not enough to offer improved means for achieving economic objectives; it is necessary to overcome the powerful forces that resist transforming the multilateral lenders into bona fide economic institutions.
Page 90 PREV PAGE TOP OF DOC Our recommendations presume a well-defined set of goals for the multilateral financial institutions, limited goals. These include: ensuring global capital market liquidity, what we take to be the IMF's appropriate mission; alleviating poverty and encouraging crucial institutional reforms in the legal and financial systems of the poorest countries; and providing under-supplied global public goods that would spur development, improve public health, and protect the environment, what we take to be the goals of the development banks.
We identified six principles that any credible reform strategy should satisfy, and which underlie our proposals: One, respect for countries' sovereignty; Two, separation of tasks across institutions to avoid waste and counterproductive overlap, and to enhance accountability of the individual institutions; Three, credible boundaries on goals and discretion to prevent undesirable mission creep; Four, effectiveness of aid, that is, ensuring that the mechanisms chosen to channel assistance are likely to succeed and to avoid waste; Five, accountability; and Six, fair burden-sharing of the cost.
That combination of goals and principles underlies our specific recommendations. With respect to the IMF, the Commission unanimously voted, I want to emphasize ''unanimously voted,'' to end long-term lending. The 8-3 majority went further, recommending that the IMF focus on maintaining global liquidity. By providing lines of credit to countries that meet minimal standards, and lending to them as a senior creditor at a penalty rate, the IMF could prevent avoidable liquidity crises without sponsoring counterproductive bailouts at taxpayers' expense.
For poverty alleviation, Mr. Lerrick will discuss this, we recommend relying on grants to service providers, rather than loans earmarked for purposes to governments, as a mechanism more likely to deliver results. We recommend focusing aid on the poorest countries, where it is needed the most, a distinct departure from current practice. And we suggest devolving much of the authority over country-specific programs that combat poverty or support institutional reforms to regional development banks, leaving the World Bank to pursue neglected global public goods provision, for example, in the areas of health and the environment. The Commission also voted unanimously that the IMF and the development banks should write off all claims against the highly indebted poor countries once those countries have established credible development programs.
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The challenges of global development policy invite a thorough debate about ways to design institutions that will effectively satisfy the goals and principles our Commission identified, and thus promote stable, sustainable development. But I think it's fair to say that alongside that economic debate a less apparent controversy lies beneath the surface which is more important perhaps, and one that explains the acrimony of some of the criticisms I think we've received.
Not everyone shares the goal of narrowing the latitude of these organizations. Some believe that the IMF and the development banks should be used as cost-effective vehicles of U.S. foreign policy broadly defined. From that perspective, any limits on the ''flexibility'' of these institutions are undesirable, as is transparency in accounting, open voting, and other procedural reforms since they only get in the way of flexibility.
Indeed, to those who view the multilaterals this way, their principal advantage is the absence of accountability. Aid can be delivered, and the embarrassing details that lie behind it are not easily traced. Time-consuming parliamentary appropriation debates can also be avoided. This point of view is not often voiced openly, but it is nevertheless a very important part of the current debate over reform. And I think there's reasonable difference in this argument. I won't go through all of the reasons that are listed in my statement, explaining why I think this is not an appropriate way to conceive of these institutions, why it's so beneficial to give them clearly defined economic objectives and to make those limits on their objectives real through credible reform, not just lip service.
I want to go on now before turning the microphone over to Mr. Lerrick to talk about the development banks, to explain our proposals about the IMF. Our main goal is not just to criticize the IMF for its sins of commission, but to help the IMF overcome an omission which we think is important.
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We want to strengthen the IMF's ability to combat liquidity crises, while avoiding counterproductive subsidization of bank bailouts, and also avoiding the intrusiveness and ineffectiveness, and I want to emphasize ''ineffectiveness'' of IMF conditionality. The details of the rationale behind this recommendaton are in the report. Since I know I'm running low on time, I'll also mention that in my statement at the end I have an addendum with twenty questions posed and answered and I managed to anticipate all of the objections that have been voiced here today, both by the Secretary of the Treasury and by Mr. Bergsten. So I won't take you through all of those, but I want to touch on a few.
First of all, liquidity crises which are self-fulfilling, avoidable financial implosions are well-defined events in economics and distinct from other emergencies that happen very quickly. To address them, there isn't time for countries to enter into the protracted negotiations, or to demonstrate that they are innocent victims of external shocks as the IMF's stillborn contingent credit facility mandates. If the IMF is to focus on liquidity assistance, and if liquidity assistance is to be effective, there simply is no viable alternative to having countries pre-qualify for lines of credit.
I note that the testimony before our Commission of the IMF's acting managing director, Mr. Fischer, concurred with the majority's view on that point.
Now, people can disagree about how to manage that process of setting up lines of credit and prequalification requirements. I think that there's a lot of room for further discussion on that. But I just want to emphasize, if you want the IMF to provide liquidity, you simply have to have the arrangements in place in advance, as for any individual or firm that goes to a bank to arrange a revolving line of credit. And that means that limits on qualification have to be established in advance.
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I also want to emphasize that the IMF currently does not lend at a penalty rate. We in our recommendations emphasize the need for a combination of a penalty rate, seniority and limits on total borrowing capacity to make the seniority effective. If you do that you effectively remove the subsidy component of the IMF support which means there can be no moral hazard. If there is no interest rate subsidy flowing to a country, there can be no moral hazard about accessing that subsidy.
The interesting point to note is that you can still provide protection against a liquidity crisis when lending at a penalty rate, because it's the immediacy and it's the quantity of funds available that can save you from the avoidable implosion of a liquidity crisis, and such threats are very brief, so countries won't mind paying a little bit above their pre-crisis market cost to avoid a liquidity crisis.
So we think that a penalty rate with some prequalification actually has the promise of delivering greater liquidity without moral hazard. That's really the gist of our recommendations on the IMF.
I want toand I know that I've run out of timebut, I just want to talk about a couple of things that are misunderstandings I've heard today. And I'm very encouraged by the positive tone of both the Secretary and others that have spoken today. I think we have a real opportunity, an unprecedented opportunity for moving forward on a bipartisan basis with sensible reforms. I really have enjoyed listening to Members of this Committee and to the Secretary today. There's a lot of common ground.
Page 94 PREV PAGE TOP OF DOC I want to clarify a couple of things. First of all, on the HIPC question, the Commission took no position in the report and we never discussed the political question of whether HIPC relief within the multilateralswhich is the only aspect of HIPC relief we discussed at our Commissionwould be linked to adoption of the other recommendations of our report. There simply, to my knowledge, is no Commission position on that question. I'd be happy, if you would like me to during the questioning period, to describe what my own position is on that issue.
Mr. BACHUS. Mr. Chairman, could he be given an additional five minutes? I think it would be more helpful to the Committee to allow the speakers to have additional time if they need it as opposed
Mr. CALOMIRIS. I would appreciate it.
Chairman LEACH. Well, first let me say to the gentleman, the Chair is always lenient with witnesses and the gentleman has doubled what would be the normal length, but I am very willing to allow him to continue. And as a matter of fact, I think in a sense that this is the majority report, it ought to be given more time than the minority.
Mr. FRANK. And Mr. Chairman, the alternative is the budget debate. So we might as well stay here.
Chairman LEACH. Please continue, sir.
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Mr. CALOMIRIS. Thank you. I appreciate that very much.
Let me say then briefly that I heard a lot of discussion of HIPC. My own understanding of this is that there are at least two separate issues, one of them is the U.S. bilateral debt, the appropriation of the funds for that purpose and the other is the multilateral debt.
Again, I'll just reiterate that the Commission, as far as I know, and I hope it hasn't been misrepresented by anyone, that the Commission took no position on linkage.
I want to move on to some other questions that were raised today which I would describe as perhaps inaccuracies or disagreements at least with the written statement that the Secretary of the Treasury delivered.
First, and this also is a disagreement with Mr. Bergsten's comments, on page 16 of the Treasury Secretary's statement he makes several criticisms of our report. One of them is that under our conditions there wouldn't have been access for the Asian financial crisis countries. We heard that again from Mr. Bergsten. That's simply not true and it really needs to be made very clear.
First of all, we're talking about a phase-in. Our proposal is that these policies would be phased in over five years. So the right way to ask about Asia is to suppose that we could turn the clock back to 1990, and we ran our Commission in 1990 and we had implemented these recommendations in 1990, so that they would have been fully phased in by 1995.
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Now, let's look at Korea. Would it have qualified as a solvent banking system in 1996? The answer is, probably not. It was well-known, I think, by 1996 that the Korean banking system was effectively insolvent. If there had been prequalification it's possible that the Koreans would have taken steps when it was still easy to do to fix that problem. So the first point is that if we had turned back the clock, it may have been that we would have had a much less severe Asian financial crisis if prequalification criteria that were effective had been in place nudging Korea back from the insolvency of the mid-1990's.
The second point is that the IMF, even if Korea had not qualified for IMF borrowing, might have waived those prequalification requirements, but maintained the seniority, the penalty rate, and the lending limits. So, again, it's inaccurate to say that Korea wouldn't have been able to access the proposed facility if it had been important enough to let them do it.
But keep in mind, because it would have been at a penalty rate, the IMF even if it had lent to Korea would not have been complicit in the bailing out of international banks, in the bailing out of domestic cronies. That is very important, because there would have been no subsidy flow. So even if those bailouts had taken place, which is less likely given the absence of a subsidy, the IMF wouldn't have been complicit in that bailout. I think those are important points.
Also, I want to emphasize that we don'tcontrary to the Secretary's report on page 17only focus on financial sector criteria. We do emphasize very heavily the importance of promoting financial sector competition internationally. More than 50 countries have signed on the WTO provisions in this regard, and we think that's very important. Competition promotes stability in banking sectors. We have an enormous amount of evidence on that.
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I realize I've gone over time and so I'll stop at this point, but I want to just end with a couple of small points responding to Mr. Bergsten. Yes, it's true that the world has done remarkably well over the last fifty years, nevertheless, we've had one-hundred financial crises of major proportion over the last twenty years worldwide, and that's historically unprecedented.
Also, I think that while we can all look at GDP growth and capital market growth very proudly, I imagine that if you were a poor or middle class person in Indonesia or Mexico right now, you wouldn't be so happy about the way the bailouts in Mexico in 1995 or in Indonesia in 1997 had been managed, because not everyone gained from the way those bailouts were managed. And I think that if you lived in Sub-Saharan Africa in many of the countries there, you wouldn't necessarily think that we were in such a glowing situation. So I'm not saying that we haven't made enormous progress, but there is enormous room for improvement.
Thank you very much, Mr. Chairman.
Chairman LEACH. Thank you, Professor.
STATEMENT OF ADAM LERRICK, SENIOR ADVISOR TO
THE CHAIRMAN OF THE INTERNATIONAL FINANCIAL
INSTITUTIONS ADVISORY COMMISSION
Page 98 PREV PAGE TOP OF DOC Mr. LERRICK. Mr. Chairman, first of all, it is a privilege to address you and the Members of the Committee.
I would first ask that my written testimony be entered into the record.
Chairman LEACH. Without objection all the statements are in the record.
Mr. LERRICK. Mr. Chairman, I am Adam Lerrick, I served as Senior Advisor to the Chairman of the Meltzer Commission and Chairman Meltzer asked me stand in his stead because of the extensive work I performed on behalf of the Commission and in particular my background in investment banking and at the Massachusetts Institute of Technology where I was awarded a Ph.D. in International and Monetary Economics and an Institute scholarship.
First, the focus of my remarks will be the Multilateral Development Banks. But before any discussion of the banks, it's important to understand the principles guiding the Commission's work. These were threefold, they were: accountability, effectiveness, and transparency.
Much of what the Commission has recommended is purely a refocusing of the Institutions on their core competencies and the elimination of overlap of function. No valuable program undertaken under the current system would not receive equal, if not increased, attention under the Commission's proposals. I think this is important to underscore, because many of the writings in the press, many of the testimonies are trying to create the impression that important areas will somehow not be addressed under the Commission's proposals, and this is absolutely not true.
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In the debate that has followed the release of the Meltzer Commission's report, the most important message regarding the development banks has passed virtually unnoticed. All sides agree on the two key issues. The first is that the goal of the banks is the alleviation of poverty among the poorest members of the world.
The second, the effectiveness of the institutions must be dramatically increased if this goal is to be achieved and the use of donor country taxpayer monies to be justified.
This consensus has been publicly announced across the entire political spectrum ranging from Treasury Secretary Summers and World Bank President Wolfensohn to House Majority Leader Armey and Senate Banking Committee Chairman Gramm. The message is clear: The American people are generous and ready to increase aid resources for the poorest countries significantly if effectiveness can be assured.
Unfortunately there is a wide gap between the banks' rhetoric and the reality of their operations. The banks claim to devote their efforts to countries denied access to private sector resources and to social projects that cannot command the interest of private lenders. Yet five key facts on which all participants, including the banks themselves, agree, belie this image:
The first is that the dominant share, 70 percent of World Bank funds, is devoted to eleven countries with ready access to private sector capital. The seven leaders are: China, Argentina, Russia, Mexico, Indonesia, Brazil, and Korea.
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The second is that the funding provided to these countries is insignificant to them, only 1 percent of the resources received from the private sector. One must realize that what is coming to these countries from the World Bank is 1 percent of the flows that are coming from private sector investors.
The third is that just as the banks only lend to governments, private investors finance health, education, and institutional reform every time a developing country sells bonds in the global capital market.
Fourth, money is fungible. My grandfather used to say that ''money has no name.'' He wasn't thinking in economic terms. But here it's very important, because if money is fungible, there is no link between bank financing and specific projects or policy reforms.
And finally, based on the World Bank's own research, countries only implement reforms if they wish to reform, and no amount of funds offered or withheld will alter this outcome.
The logical conclusion of these facts is that in countries with substantial domestic and foreign resources, bank lending does not add to available funds and does not influence the policy reform process. All that is occurring is the provision of subsidized fiscal and balance of payments financing.
The overlap between the World Bank and the regional banks is almost complete. They compete for donor funds, clients, and projects. All banks operate at the national level and their patterns of lending are virtually identical. Four to six of the most creditworthy borrowers, all with easy capital market access, monopolize non-aid resource flows: 90 percent in Asia; 80 to 90 percent in Africa; 75 to 85 percent in Latin America. In Africa, the three largest borrowers over the last three years, both from the African Bank and the World Bank, accounting for 80 percent of all loans were Morocco, Tunisia and Algeria. Sub-Saharan Africa received less than 15 percent of loans from the two institutions.
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One of the key problems with the institutions is the high failure rates to achieve sustainable satisfactory results. A review of the World Bank's projects shows that 55 to 60 percent of projects fail to achieve, what the Bank determines on a self-evaluated basis, sustainable satisfactory results. In Africa, the failure rate is much higher, it reaches almost 75 percent.
The principal recommendations of the Commission regarding the development banks were four:
All financing to countries that enjoy substantial capital market access, and here the delineation was substantial access, meaning an investment grade bond rating, not just purely a rating in the capital markets, or per capita income in excess of $4,000 would be phased out over the next five years. The focus of institutional financial effort should be on the 80 to 90 poorest countries without access to private sector resources. This ensures that development aid adds to available resources. Over the last seven years, only 20 percent of World Bank loans and 37 percent of combined loans and concessional credits were extended to countries with per capita income below $2,000 and which did not have investment grade ratings.
The second recommendation was that all country and regional programs in Latin America and Asia should be the primary responsibility of the Asian and InterAmerican Development Banks. This would allow the elimination of costly duplication and confusion that arises from the overlap of function and resource flows between the World Bank and its regional partners.
Page 102 PREV PAGE TOP OF DOC The World Bank's responsibility would be the production of global public goods and to serve as a centralized resource for the regional banks. Global public goods include treatment of tropical diseases and AIDS, rational safeguarding of environmental resources, inter-country infrastructure, tropical agricultural technology, and the creation of best managerial and regulatory practices.
The Commission believes that development Bank effectiveness is reduced because of their incentive systems and the tools they are utilizing. In an attempt to remedy this situation, the Commission recommended that poverty alleviation grants to subsidize user fees, paid directly to the supplier upon independently verified delivery of service, should replace traditional bank tools of loans and guarantees for infrastructure and social service projects.
Lending for institutional reform would be continued, but would be conditioned upon implementation of specific policy changes and supported by financial incentives to promote continuing implementation.
A number of objections have been raised, certain of which you heard this morning and are incorporated into the Secretary's testimony. What I will say is based on a quick reading of the Secretary's testimony. The Secretary recognized in his statement that the Treasury has had only limited opportunity to review the Commission's report. I'm sure that most of the concerns raised will be eliminated by the Treasury's careful study of the report and the supporting documents which address most of these questions. But let me try to focus on three that have been raised during the Committee's hearing.
The first is a concern that phasing out of lending to middle-income countries and to countries with substantial access to private sector finance will eliminate loans to 60 percent of the world's poor. This is the wrong criterion.
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The objective should not be the number of poor people. Scarce development resources should be concentrated on poor people without alternative financing. China has 25 percent of the developing world's population, but holds $150 billion in foreign exchange reserves.
Total World Bank-subsidized loans of $1 billion per year are insignificant to China compared to annual foreign investment of $60 billion. To those that have few resources to call upon, it is survival. In countries where financing is abundant, the banks should continue to offer what is lacking, and that is technical assistance. It's not that these nations don't have the funds to perform the tasks, it is that they need the technical assistance and advice to help them execute the programs successfully.
One of the problems is that the banks claim that countries ignore their advice unless subsidized financing is offered. The international institutions are the only consultants that pay clients to take advice. Yet the World Bank's own research shows that countries only implement reforms when they choose to reform and that because ''money is fungible,'' links between specific programs and loans are weak. Since the volume of lending to the major borrowers is insignificant in relation to private flows, the banks have no leverage over borrowing governments.
The banks claim that private lenders do not lend for social purposes such as health, education, or institutional reform. They neglect that the banks insist that recipient governments guarantee repayment. There are no World Bank or development bank loans that do not carry this guarantee from the central government. This divorces entirely project success from repayment on the loan. When private lenders receive the same guarantee, they are not concerned about how the loan is used. Every time a developing country sells bonds, the bond buyers are financing development change.
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Because we are short on time, I wish to focus on one last issue that is related to some of the criticisms. It is claimed that increased reliance on grant funding is politically naive. That donor countries will not provide the requisite financing. And that, in essence, you will beas Mr. Bergsten saidputting the banks out of business.
The Commission does not agree with that position because it believes that if effectiveness is assured and no funds can be expended prior to independently verified results, thereby ensuring the responsible utilization of taxpayer monies, grant funding is easily justified and should be forthcoming on a significantly increased scale.
In conclusion, the current expenditures are too much for ineffective programs, but too little for effective programs. If the institutions do not redefine their areas and methods of intervention and increase their effectiveness dramatically, they will be relegated to insignificance in the development process.
Before concluding, I would like to address briefly a number of the political aspects of the reform process which Professor Calomiris has discussed. First, American taxpayers are not going to tolerate the waste of the Bank's current operations.
Second, the continued use of these institutions as tools of U.S. foreign policy will not be tolerated by the rest of the world. Discussions are already occurring at two of the major regional banks regarding the repurchase of the U.S. shares in these institutions. If this is proposed and refused by the United States, the alternative will be the creation of new regional institutions without U.S. participation.
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It is time for the United States to return to the unprecedented definition of a nation's interest that it espoused in 1944. It defined its position in terms of the peace and prosperity of the rest of the world. It differentiated the concepts of interest and control. This was the spirit that created the Bretton Woods institutions. Global economic growth, political stability and the alleviation of poverty in the developing world are in the national interest of the United States.
Finally, I think it's important that the Committee understand the background of the Commission's deliberations. The final report was voted by a bipartisan majority of eight to three. Of the three dissenting members, Mr. Torres dissented from the majority because of an absence of recommendations for the promotion of worker rights. Mr. Torres further stated that he would not sign any report that did not incorporate worker rights issues.
As you can see from Mr. Levinson's dissent, and I am sure he will discuss it today as well, worker rights were also one of his primary concerns. The majority did not believe that international financial institutions are the appropriate forum for this issue because they are financial institutions. It was discussed at length whether the ILO was the appropriate forum, but since the ILO was not under the purview of the Commission, we did not reach any recommendations regarding that process.
It is unfortunate that the Democratic leadership chose not to fill the vacancy created by Mr. Volcker's resignation for a period of four-and-a-half months, at which time virtually all of the Commission's meetings and work had been completed. This did not permit the final dissenting member, Mr. Bergsten, the opportunity to benefit from the extensive testimony and discussions which led the majority to its conclusions.
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Chairman LEACH. Well, thank you, Mr. Lerrick.
STATEMENT OF PROF. JEROME I. LEVINSON, DEMOCRATIC APPOINTEE, CONGRESSIONAL ADVISORY COMMISSION ON INTERNATIONAL FINANCIAL INSTITUTIONS
Mr. LEVINSON. Well, as the wind-up speaker for a very long day, I will take the unspoken admonition to be brief.
I want to deal with three principal issues, although what has been said warrants a detailed discussion. But I'm not going to engage in that at this point.
I want to address three issues. First reference has been made to the unanimous vote with respect to HIPC and the unanimous vote with respect to ending long-term financing at the IMF.
With respect to HIPC, let me be clear, I proposed that the debt relief not be linked to substantive conditions, because the majority report itself says that the debt is unrepayable. If the debt is unrepayable, you are conditioning forgiveness of a debt which you have admitted cannot be repaid, so what are you conditioning that forgiveness on? It's logically inconsistent and seemed to me really foolish. But nevertheless, the Chairman was absolutely adamant that he would not accept under any circumstances that proposal and the majority of the Commission followed his lead on that. Rather than vote against debt relief I voted for the second-best solution, which is forgiving a debt which cannot be repaid subject to conditions which make no sense to me.
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What lies behind this apparently is the idea or fear that you're going to lose leverage, which again, it seems to me, is totally unfounded. If you forgive the debt, wipe the slate clean, give the countries a fresh start, they are not going to disappear from the need for finance. So if they misuse that opportunity for a fresh start, you don't give them additional resources.
Second, with respect to access to the financial markets, renewed access to the financial markets, our experience with the Brady debt initiative in 1989 was that it was the forgiveness of the debt that enabled the countries to reaccess the market, because the markets then perceived that the countries had a chance to be creditworthy again. With this overhang of the debt, they have no chance.
The Commission majority was explicit on that point. I don't see the logic of linking debt forgiveness of a debt which cannot be repaid by their own admission to conditionality. That's the first point.
The second point with respect to the alleged unanimity goes to the question of long-term IMF lending. And that, I think, may be a question of semantics. There was unanimous agreement, with which I agree, that the IMF should not be a front-line poverty reduction agency. That's not its business, that's not its expertise. it is a staff of monetary economists. Therefore that function is misapplied in the IMF. It is perfectly reasonable and, indeed, essential that in connection with an IMF program, the IMF make a judgment as to whether or not the burden of adjustment is being equitably allocated within the society and between creditors and debtors. That's the distinction I would make.
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Now, with respect to what is long-term lending, this gets to the question which Mr. Calomiris addressed, which is that the majority see IMF financing as strictly a short-term liquidity issue that is rapidly resolved as soon as the country is able to pay its creditors. But time and time again the financial markets withhold judgment as to future creditworthiness until they see whether a credible program is in place. Yet at page 44 of the majority report they would prohibitprohibit the IMF fromthe IMF would not be authorized to negotiate policy reforms.
So when the markets look at a country to see whether or not the country is addressing the underlying conditions which led it to need IMF assistance the majority says, ''No, you can't discuss that with a country, you can't agree on a policy of reform limited to IMF financing.'' That's prohibited under their proposals which, again, seems to me makes no sense whatsoever.
Now, the three other points that I want to bring to your attention are with respect to the World Bank and the IDB. I don't think there should be any illusions about what is being proposed. It is demolition, not reform. The World Bank is divested of any operational responsibility in Asia and Africa, it is then left temporarily as a super development agency or bank, whatever you call it, for Africa. That's all.
And as the African Development Bank becomes more mature and able to take over operations in Africa, the World Bank is then shrunk to what they call, ''providing public goods,'' namely public health solutions to intractable disease problems in tropical Africa. Well then, why do you have the World Health Organization? What reason is there to think that the World Bank is going to be more successful than the World Health Organization in addressing those kinds of health issues with which the World Health Organization has been dealing for forty years?
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Second, the World Bank is supposed to then be a coordinator of aid of other entities. In effect what you're saying is it then simply duplicates the United Nations development program. Because without resources it just becomes another UNDP. You may want to adopt the majority Commission recommendations with respect to the World Bank, but have no illusions, the World Bank or the World Development Agency does not survive in that kind of shrunken form. It is a proposal for demolition.
Now, the majority says, well, the responsibility for financing development in Asia and Latin America will devolve upon the regional development banks. The InterAmerican Development Bank is a truly regional institution. It arose as a reaction to the World Bank.
Latin American countries have investment ratings; they also drop out of investment ratings. As I see it, for the most part, the IDB becomes a lender to Central America less Cost Rica, Bolivia, Guana, and Paraguay and maybe one or another of the English-speaking Caribbean islands. The IDB does not survive as that kind of a truncated institution. It loses its regional character as a regional development bank.
And this brings us, I think, to the heart of the issue with respect to development banks. The majority does not believe in the legitimacy of development finance as distinct from commercial finance. For them a dollar is a dollar is a dollar, it's the same dollar.
Mr. Wolfensohn testified from his own personal experience as to difference between the two. Mr. Wolfensohn, as you know, was an investment banker and now he's President of the World Bank. And this is what he said: ''When we go in from the World Bank, we go in on the basis of trying to look at what's happening to the country and what's happening to the people in the country and what's happening to social stability and what's happening on issues like governance, on openness of financial systems.'' Can you imagine the head of Goldman Sachs or Merrill competing for business going in and talking to them about whether they should have a bigger education program?''
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In essence that statement captures the difference. You are talking about the long-term development prospects in the country, its problems and how the international community through these multilateral development financial institutions can help the countries address those long-term structural issues.
Commercial bank financing, as he points out, it is inconceivable the head of Goldman or Merrill is going to enter into that kind of a dialogue with a country. You may say that is of no value, and therefore it doesn't matter. But that is the difference between a development bank and a commercial bank in terms of what accompanies the dollar, in terms of what the institution is concerned about.
I think that we had a very clear illustration of this in the Brazilian crisis, because there the InterAmerican Development Bank coupled its participation in the financial rescue operation to a commitment from the Brazilian authorities to maintain an agreed level of investments in the human capital resources of the country, namely education and health. In contrast, on previous occasions, those two sectors were the first sectors to be cut.
So to summarize this particular point, development finance, in my view, had not been rendered obsolete by the emergence of the financial markets. We have had twenty-five years of experience with the financial markets which have given us the debt crisis of the 1980's in Latin America, the 1995 Tesobono crisis, the 1997 East Asia crisis, 1998 Brazil and Russia. The accessibility of countries to resources can be cut off very, very rapidly. As soon as a crisis arises in Brazil it spreads to the rest of Latin America, or in Mexico it spreads, and suddenly the money dries up. The development banks provide a balance addressed to the value human capital investments in these countries.
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Chairman LEACH. Professor, could I ask you to sum up?
Mr. LEVINSON. May I just conclude with one last point?
Chairman LEACH. Please, go ahead.
Mr. LEVINSON. No, I'm just going to
Chairman LEACH. No, go ahead, please.
Mr. LEVINSON. The other thing is the issue of the basic equity of the trade investment and finance system seen as a whole. The Congress, in my view, wisely included in the definition of international financial institutions for purposes of this Commission, the World Trade Organization. Why? Did someone slip a mickey into the water supply here so that someone could slip that in unobtrusively? I do not think so; rather, you recognized that one had to see international finance within the context of a system as a whole; trade, investment and finance.
The issue which the Commission, the majority of the Commission, did not want to confront at all was do we go on the present two-track path in which we have a rule-based system for the protection of corporate property rights and no protection for core-worker rights and the environment? In my view, you cannot construct in this country, and rightly so, a broad-based consensus in support of a more open international trading, investment and finance system if you continue to fail to address that basic inequity in the system as a whole.
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I think it is extraordinary, and I'll wind up on this sad note, if you will, that the World Bank in the year 2000 is studying to form an opinion as to whether it can support freedom of association and collective bargaining for workers, as to whether that is justified. This is not 1936. This is the year 2000. In my opinion, the Treasury ought to have instructed the U.S. Executive Director the go to the Executive Board of the World Bank and to say that for this country, that issue, for all workers, not only in the United States, but in every country, is settled, it's not open to further study.
Mr. Lerrick referred to the fact that the majority did not wish to discuss core-worker rights or really the environment in any serious way in its report. You will not find a word in the majority report on core-worker rights, despite the fact that we had testimony from the president of the AFL-CIO, people from the AFL-CIO, other witnesses which went into extensive discussion, illuminating, provocative discussion on the subject. They simply refused to address the issue. I do not see how you can have a broad-based consensus that's not only in support of these institutions, or any revised version or of the international trading investment and more open international trading investment and finance system, without addressing this fundamental issue which goes to the equity of the system. And on that note I'll close.
Chairman LEACH. Thank you very much.
Let me just make a couple of comments.
First I think the majority report is on the right track when it calls for shorter-term liquidity lending and the IMF sticking to a particular mission and the World Bank to another mission. It could be the shorter term might be too constrained. I know Dr. Bergsten has some concerns in this regard.
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I also think that there are other aspects of this report that make a lot of sense and that we're all going to have to think them through. They're not particularly unique to this Commission though, I would stress.
The big picture, however, to some degree, I'm not sure has been captured in the majority report. And I'd lean a little closer to the minority report on some of the big picture issues.
And let me just give a couple of ironies that have been presented today. Mr. Lerrick has indicated that there are several countries that have indicated concern about American membership in the regional banks. Well, first, one should be very careful about countries exhibiting concern and that being the policy of the regional banks. But second, your reportthe majority report calls for the United States to turn over many functions to the regional banks that are done by the IMF and the World Bank.
Well, the IMF and the World Bank have the greatest American input and the greatest American control. So it is, if you take an American sovereignty perspective, and American sovereignty, in my view, has been overestimated as a political issue in this country, but the United States has great influence in the World Bank and great influence in the International Monetary Fund, and minimal influence in the regional development banks. Yet your report says, turn it over to the institutions where we have the least influence. There's no evidence in your report of a study of a track record that would indicate these regional banks are doing a better job than the World Bank and the IMF. And so I stress this irony to beat the band.
Page 114 PREV PAGE TOP OF DOC I'm also concerned when you note that only 15 percent of interest rate lending of the World Bank is done in Sub-Saharan Africa, implyingand this was the implication that was firmly leftthat the World Bank is overlooking Sub-Saharan Africa. The Bank does concessional lending in Sub-Saharan Africa, giving those countries the advantage, which is in the direction of the majority's report recommendations. So I'm just mystified at that emphasis.
I guess I have to tell you, Mr. Lerrick, that with regard to Dr. Bergstenand I'm not here to defend himbut it is a shame that he came onto the report late. But he's no novice to this field and I do not think an implication should be left that he would have been overwhelmed by the arguments in the other direction. But I think Dr. Bergsten would be the one who should respond to that.
In any regard, I would like to ask on what basis of American national interest or of good judgment is the recommendation, in the majority report, to turn over to the regional banks things that the Washington-based institutions are doing, other than the obvious that there is some duplication as there is in the delivery of almost every public service in the United States. I recognize duplication can be a concern. But what is the basis for that recommendation?
Mr. CALOMIRIS. May I answer?
Chairman LEACH. Yes, Mr. Calomiris.
Mr. CALOMIRIS. Let me explain my thinking on it. And while I fully endorse the recommendation, I also want to emphasize that, at least in my thinking, the issue of where the functions are performed within the Multilateral Development Banks is a second-order issue compared to the issue of how the aid is delivered, that is, it's going to actually be delivered to people who need it in ways that make it effective. So I really have to say in my own view, I regard this as a secondary recommendation. I don't represent the Commission majority in saying that, just my own view.
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Chairman LEACH. Fair enough.
Mr. CALOMIRIS. Let me say though why I think it makes some sense. The idea is, in designing this new architecture, we're not looking just at the present. If you were going to be realistic about when such changes could be implemented, you have to be thinking about roughly ten years from now. Think about what the world is going to look like ten years from now and this devolution to the regional development banks looks a lot more reasonable. Here's why: Western Europe and much of Eastern Europe is about to embark on what I think will be a very productive decade. Japan similarly. But even more importantly, a lot of countries that we now regard as emerging market countries, Korea, Chile, Argentina, Brazil, Mexico, ten years from now are going to be much wealthier, industrialized countries. Their demographics also indicate they'll be less reliant on foreign capital, by the way.
In other words, there are going to be a lot more countries ten years from now around the world who are going to move from the beneficiary side of the balance sheet to the benefactor's side of the balance sheet in financing Multilateral Development Banks. That world view of a polycentric global economy fits better with devolution of financing and authority to a more polycentric development bank structure. That's the thinking in my head, but I want to emphasize I view that as my own view.
Chairman LEACH. Good. I appreciate that. That is very helpful.
Let me just conclude, because we're trying to live with time constraints. There's an aspect of the majority report that I find preferable to the Minority. And that is, in the majority report you put a very strong emphasis on banking reform and a very strong emphasis on ending protectionism in finance. And I think that's exactly right. Whether you do it with the right methodology, that's open to some question, because I don't know if you can get all the prerequisites in advance, but I think your emphasis is right and I would also say this emphasis on opening up finance is another way, and it's the only way I know of for an effective assault on certain anticorruption policies in other countries.
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That is, if a Western financial institution goes into a corrupt society, it comes under that country's laws, but also the Western laws. So you get the rule of law by default to the secondary society. You also get rules of engagement in banking of a very different nature in that nothing is more helpful in all areas of commerce than to get rid of protectionism in the financial area. And that is more important in finance than any other commercial endeavor.
And so I want to congratulate the majority for focusing on that issue, and I'm a little surprised the minority report criticizes that to some degree.
Mr. LEVINSON. Might I respond to that?
Chairman LEACH. Yes
Mr. LEVINSON. That specific observation?
Chairman LEACH. Yes, but briefly.
Mr. LEVINSON. Yes, very briefly. Some weeks ago a former president of the Brazilian Central Bank, Fernao Brasher, observed that in every industrialized country there are limitations upon foreign ownership in the financial sector to prevent domination by foreign institutions. And he asked the question, why should Brazil be exempt from that policy?
Chairman LEACH. In every industrial society there are limitations?
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Mr. LEVINSON. That's what he said.
Chairman LEACH. That's false. In this countryand let me just stress, in this country we're the only country in the world where we give advantages to foreign institutions over domestic ones, in the sum total, the United States law.
Mr. LEVINSON. Well, OK. He may have misspoken, but the essential point that he raised was, does a country have a right and a concern about not having its financial system dominated by foreign capital? In the Brazilian context it was pointed out that the Brazilian-owned banks finance the government, even through the most desperate times. The foreign-owned banks advised their clients that it was too risky, they should not purchase government securities. Does a country like Brazil, which doesn't exclude foreign capital, have a right to say, ''Wait a minute, let's think hard about whether or not we want the sector dominated by foreign capital.'' As I read the majority Commission, they would not be eligible to be prequalified. So I just want to introduce that caveat that there is something called ''nationalism'' and national interest which can verge over into excessive protectionism, but may be a valid expression of concern as well, as reflected in the Brazilian context, which has led to some limitations on the entry of foreign capital.
Mr. CALOMIRIS. Mr. Chairman, if I can just interject very briefly?
Chairman LEACH. Yes, briefly, because I want to turn to
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Mr. CALOMIRIS. Thank you. I just want to emphasize that the goal behind that recommendation is not to interfere with countries' internal affairs, per se. I think that we've all been chastened by seeing Indonesia with bank bailout costs on its taxpayers of 55 percent of annual GDP. We really don't want our international financial institutions to be complicit in imposing those costs. So if you're going to have access to those international financial institutions for support, we don't want you to run a banking system that's likely to produce those costs.
I recognize that there's some merit to what my colleague is saying, but I think that when you look at the numbers like 20 percent loss in Mexico, 55 percent in Indonesia, 30 percentall relative to annual GDPin Thailand and Korea, 15 percent in the world's second largest economy, Japan, which, of course, didn't access the IMF, the world needs improving in this direction and that was the logic.
Chairman LEACH. I find your logic compelling and if you'd reference Russia where the banks are often money laundering platforms you even strengthen your argument.
Mr. LERRICK. Mr. Chairman.
Chairman LEACH. Yes.
Page 119 PREV PAGE TOP OF DOC Mr. LERRICK. I would just like to address briefly the issue that you started with about the regional banks.
Chairman LEACH. If you can do it in one minute, please.
Mr. LERRICK. In one minute. First of all, I agree with my co-panelist, Professor Calomiris, that where the function is located is of secondary importance. The rationale in terms of devolving it to the regional banks was based on a simple fact. Based on all the testimony we received and all the papers that were commissioned by the Commission, the evidence was overwhelming that the borrowers have a better working relationship with the regional banks than they do with the World Bank. And that they felt closer to them, that they were their banks as Professor Levinson said, and that they preferred dealing with them.
Second, based on the development bank tools that the Commission proposes, where you're talking about much greater effectiveness, it becomes much less relevant where the actual function is located. But as you said, where the function is located is of secondary importance compared to the issue that the function be implemented in an effective manner.
Chairman LEACH. Thank you, sir.
Mr. LAFALCE. Thank you, Mr. Chairman.
First of all I want to say that I respect all the individuals on the Commission and the sincerity and the knowledge and the wisdom that they've brought to their deliberations, but I also want to take this opportunity to express my reservations about commissions in general and the worthiness of commissions in general. More often than not, I consider them a waste of time, a waste of money. Not always, but more often than not.
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And why is that the case? Because so often you can determine what recommendations are going to be in advance of the so-called ''study'' by looking at who does the appointing and who is appointed. And if you're studying an issue, for example, and you take an individual from the CATO institute and you take an individual from the Economic Policy Institute, you might have a pretty good idea where each is going to wind up. And that's the difficulty that I have. I'm wondering to what extent the Commission in its majority and minority report are primarily reflective of prejudgments that were brought to the Commission prior to a day's deliberation. I'm curious what prejudgments were brought to by the work of the staff?
So often if you look at work of a Member of Congress, you have to understand what staff assistants he had five years ago, what staff assistants he had three years ago, what staff assistants he or she has today, and you might be able to understand the inconsistencies in the Members' positions. That's not always the case.
Mr. LAFALCE. And I don't know of anyone personally.
Chairman LEACH. We have an MIT prejudice.
Mr. LAFALCE. Well, they're schizophrenic.
Page 121 PREV PAGE TOP OF DOC Mr. LERRICK. I have to confess that it is a uniform rule that those who go to MIT favor Chicago, those who go to Chicago favor MIT when they get out. Maybe it's a reaction to the extreme.
Mr. LAFALCE. Now, I haven't mentioned schools. I mentioned institutes, OK. That's all.
Does anybody want to make any comments?
Mr. CALOMIRIS. I would very much like to make a comment.
Mr. LAFALCE. A general, and I'm not saying anything in connection with this Commission, but that's a problem I have with commissions in general.
Mr. CALOMIRIS. I have very limited experience, this is the only Commission I've served on, but I have to say that this was a real learning experience for me. And I say that very enthusiastically.
Let me give you three examples of things that I fundamentally changed my mind about on the basis of our deliberations and debates within our Commission. I could only think of three immediately, but I'm sure there are others.
First of all, in 1998, I wrote a paper on how to redesign the IMF and I'm currently revising that paper. I noticed how different some aspects of that paper are from what we ended up with. One thing in particular: I had some ideas about collatralization of sovereign debt. Well, with the help of the Treasury Department officials, their lawyers, and other private lawyers who we talked to, I became convinced that this was not a practical way to go.
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Mr. LAFALCE. What were the big philosophical differences on the collateralization of sovereign debt? That seems like a technical issue to me more than a philosophical.
Mr. CALOMIRIS. I'll tell you. To me it was something I spent a lot of time thinking about. Another thing was the HIPC situation. I did not have strong views prior to the Commission. Jeff Sachs had an enormous effect on my thinking.
Also, the ideas about substituting grants for loans which are, I think, a stroke of genius as an economic idea, never occurred to me. I had not thought about it, and it wasn't my idea, and I like it very much.
Mr. LAFALCE. You had never thought about that issue?
Mr. CALOMIRIS. I hadn't thought much about it. It was a new idea to me.
Mr. FRANK. If the gentleman would yield? I hope nobody tried to copyright it.
Mr. FRANK. I think they would have had prior history there.
Page 123 PREV PAGE TOP OF DOC Mr. CALOMIRIS. I'm not saying that it was a new technique, all I'm saying is, quite honestly, that the way that we discussed these issues really changed my thinking.
Chairman LEACH. Thank you.
Mr. LERRICK. To follow up on one of Professor Calomiris' points, I don't think Professor Calomiris is claiming to have been unfamiliar with the concept of grants. I think what Professor Calomiris is saying is that the use of grants to subsidize user fees as an effective means of delivering aid, as opposed to outright grants, such as the USAID utilizes, or concessional credits that are used by IDA or the Asian Development Fund, was novel to Professor Calomiris' work. I'm not saying it's novel to the profession of economics, but it was novel to this application.
Touching on Congressman LaFalce's original question, I think it would be interesting for any of the staff, who would wish to take the time, to read the transcripts of the Commission's meetings. Anyone who is appointed to a commission has a predetermined position and that's one of the reasons they're appointed. But one of the phenomena that you'll observe by reading the transcripts is that this did not preclude serious deliberations. And in fact, there are a number of members who modified their positions based on the discussions that occurred, as Professor Calomiris alluded to. And I think that would be a worthwhile exercise and we would certainly be happy to go through and try to highlight those passages for the Committee staff if that would be helpful.
Mr. LEVINSON. If I might justyou asked what were the philosophical overriding issues and this is where I think the Commission missed a potential opportunity. With the emergence of the financial markets and the access of countries to financial markets, does that make obsolete development finance? The majority of the Commission concluded that it did. Unfortunately, we only heard from Mr. Wolfensohn and Mr. Fischer really at the end of the process when the report was already three months underway. I don't think that overriding issue didn't achieve the importance that it should have in my view, but that was an overriding philosophical issue on which the differences were very clear. They concluded that it really is irrelevant to a very great extent. I say that it's still relevant and even more so in light of the evolution of those financial markets.
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The other issue was the basic issue of equity in the system, the issue of core worker rights and environmental protection in contrast to the protection of corporate property rights.
You're right, I think the majority came at it from a position which never deviated, an excessively narrow economic view and as Professor Joseph Stiglitz, former Chief Economist to the World Bank had characterized it, the even more narrow lens of neoclassical economics, that never changed, although you will find, as Mr. Lerrick points out, really an extraordinary in-depth discussion of the issue of the relationship of worker rights to the international financial institutions, the World Trade Organization, a whole day of testimony from a variety of witnesses spanning the spectrum. For anyone who cares, it's really one of the more illuminating and provocative discussions. But you won't find a single word in the majority report about the subject. In other words, I wouldn't even care if they said, ''We conclude differently,'' or ''That it shouldn't be.'' But, at least, address the issues and the arguments that were raised and the colloquy that took place.
Mr. CALOMIRIS. May I interject?
Mr. LEVINSON. See, the issue that we had was Professor Calomiris said, ''income inequality is unimportant, we shouldn't even be discussing it.'' Freedom of association and collective bargaining don't rise to the level of human rights. So it's outside of the frame of consideration. And that, unfortunately, I think, led to such a constricted view of the mission of the Commission that it was never able to come to grips with the issues even though it might have come to different conclusions than I would have come to. If you read this report, the majority report, you would never even know that these issues were extensively discussed.
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Chairman LEACH. Professor, you can have a 30-second comment.
Mr. CALOMIRIS. Even less. I just want to say for the record that in the last meeting in our drafting meeting that I actually proposed that we write a couple of paragraphs noting that we had deliberations on the question of workers rights, noting that certain arguments had been made on one side, other arguments had been made on the other side, and that we could not reach agreement. There wasn't interest in the Commission to pursue that, partly because of the constraints of time, I think, but also partly because there wasn't consensus. And so I think I would be happy to, at another time come back any time anyone here would like and discuss at length why I think poverty is the right issue to be discussing and not inequality, per se, and why I made the statement, more or less, that Mr. Levinson attributed to me. I don't think that we were ignoring the issue. I think there were time constraints, there wasn't consensus and we just didn't think it was that relevant that we had to reach consensus on it.
Chairman LEACH. The Chair would note then that there are honest differences of judgment on the Commission and second, Professor Levinson that neoclassical is not a four-letter word.
Mr. LERRICK. Mr. Chairman, if I may, just 30 seconds?
Chairman LEACH. Briefly.
Page 126 PREV PAGE TOP OF DOC Mr. LERRICK. Briefly. Thirty seconds.
The quote that Mr. Levinson is referring to regarding neoclassical economists refers to the World Bank in general. I'm unfamiliar with that quote being applied to the Commission's work.
Mr. LEVINSON. I didn't imply that. I said that Stiglitz referred to that in characterizing the World Bank. And I would say that it as much characterized the Commission. That's my characterization.
Mr. LERRICK. Mr. Levinson has focused on one of the core issues of development finance which is, does conditionality work? I agree with him 100 percent, having started my career working for Mr. Wolfensohn as an investment banker, that no investment banker goes to a government and says, ''We want to lend you money, but by the way, are you going to use it to finance schools, innoculate children or build nuclear weapons?'' An investment banker does not ask those questions. And certainly the World Bank does and should ask those questions. That does not mean, however, that the asking of the questions or talking about the issues or attempting to link money to projects means that the money is used for those purposes. That is one of the problems. There is very little ability to influence or exert leverage over the borrowing governments. The Commission believes that the World Bank and the Multilateral Development Banks should discuss those issues, should help the countries devise the right policies and use their funds correctly, but the linking of lending to that transfer of knowledge is neither necessary nor feasible.
Chairman LEACH. Thank you.
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Mr. BEREUTER. Thank you, Mr. Chairman.
Gentlemen, thank you very much for the time that you've devoted to the Commission. I think it's an important contribution and I appreciate it very much.
I am interested in pursuing in the time that I have available the IMF prequalification criteria. I think it's one of the more important things that's recommended. Whether or not it's correct is a matter for us to focus upon, I think, and Mr. Levinson is one of four in the minority dissenting views in this respect. So I would ask three questions and the first would be just to Professor Calomiris and Mr. Lerrick, and then the other two to any or all of the three of you.
The four contend that the limiting the IMF to a set of prequalifying criteria would preclude certain countries which were central to global financial stability from receiving assistance and I would like to know if in fact you believe that contention is valid as members of the majority?
Second, is there a valid distinction between the type of items one would find under prequalification and what we would normally call conditionality? And if so, what are those differences likely to be?
And three, can the IMF successfully act as a lender of last resort and restore confidence to markets without requiring macro-economic and structural reforms?
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Mr. CALOMIRIS. Well, let me get at those questions briefly. And what I'll probably do is leave the third one off the list, because I know that the first two are going to take me some time.
Prequalification, as I mentioned using the example of the Asian crisis countries, would be phased in over five years. The specific prequalification criterion that is most clearly defined is allowing international competitiveness in the financial sector. Already, fifty countries have signed on to this, we think over a five year period virtually no emerging market country would be unable to make a transition toward that policy.
And all of the important Latin American countries, for example, and emerging Asian countries are already moving very much in that direction. Even China is moving in that direction, and Brazil certainly has, and Argentina for a long time has, and Mexico has. So, I can't think of too many countries that our specific criterion would exclude.
The other criteria leave a lot more latitude to the IMF to decide. Given the transition period and given the latitude, and also given the fact that we anticipate that prequalification could be waived, I don't see the basis for the argument that a lot or even a few countries would be precluded in the event that you would want them to be included.
Now, what's the difference between prequalification and conditionality?
Mrs. ROUKEMA. Professor, is it specified when a waiver may be granted? Are there certain criteria that must be met or considered in your recommendations?
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Mr. CALOMIRIS. No, we actually, I think, give broad latitude. We say, systemic risk, which is, of course, just a buzz-word for the IMF decides that it's important enough to do it. We were giving the IMF an enormous amount of discretion because we think that discretion is unavoidable in setting those prequalification criteria and enforcing them. The IMF still has a lot of work to do under these standards.
But what's the difference between prequalification and conditionality? Well, first of all prequalification allows assistance to be delivered rapidly. You cannot assist a country experiencing liquidity crisis by having weeks of negotiation followed by dribbling out small amounts of funds, it just doesn't work. You don't have a choice.
Second, prequalification applies rules across the board and only rules that are really necessary, so it limits the intrusiveness into a country's sovereignty to make sure you're not complicit in something that's objectionable, but it doesn't insinuate you into every aspect of that country's economy.
And, third, and this is important, it hasn't come out yet today, it does come out in our report, and I would like to discuss it more, IMF conditionality is a terrible failure. The studies that have looked at whether conditionality is actually enforced, conclude that in the vast majority of cases it simply isn't.
Now, in crises, that's almost inherent. In my experience working in Argentine banking reform over the past five or six years, it takes about three to five years for a country to really reform its financial sector after is has decided that it wants to. But if you have an emergency loan to a country, and the emergency loan lasts for one or two years, if you set conditionality on the financial sector reform, it's meaningless. I experienced that in Mexico, I was part of the multilateral team that tried to get conditionality enforced during 1995 in Mexico. I went there, they had to listen to me for a day to get a half-billion dollars, the man in charge of the meeting took me aside afterwards and said, ''You're a very nice young man. Interesting ideas, of course, the banks won't let us do this. Thank you for the half-billion dollars.''
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Now, I say that to indicate that conditionality doesn't work for emergency lending. I also want to emphasize that Mexico has since changed quite a bit and is really making progress right now and I'm still participating in that advisory role. But it had nothing to do with the conditionality set by the IMF in my view. So conditionality simply isn't viable and prequalification, if you're going to deliver liquidity assistance, seems like the only way to go. The IMF is currently doing it in many cases, it just needs to do more of it and get out of long-term lending.
The recent agreement signed with Argentina is a good example. It's a stand-by facility. Argentina isn't going to access it unless it has to. But it's not at a penalty rate and it doesn't have all of the elements that we are recommending that it could have to make it better.
Mr. LERRICK. Mr. Bereuter, I would like to address just two of the smaller points that you raised that Mr. Calomiris was short on time for. First, in terms of macro policy, and this is an issue that has come up, if the IMF has preconditions to credit access, then countries can just borrow, there's no macro policy review, there's no conditionality. If this is the case, how do you stop the problem from reoccurring if they don't change the underlying source of the problem? First, the Commission has proposed that the IMF continue its Article IV consultations. That is the annual process where the staff reviews the policies, the economic structure of the entire country and the country has to justify its policies and its structures.
The Commission went further and said that those reports should be published. If those reports are published, the market has those reports. The market has a review by, in theory, a knowledgeable objective observer of what is the institutional and macro-economic policy of that country.
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It was very sad to me, during some of the investigations, to come across an instance where a country in crisis came to the IMF, this was Colombia in 1985, and said, ''We don't want your money, we just want the policy advice.'' They said, ''We want to sit down with you and come up with a package of policies and reforms that both of us think will be good for our country, that will stabilize our economy and then we will take that policy reform package, institute it and go to the markets and borrow the money to finance it.''
I thought that was a wonderful example of how the IMF could function in this world. The IMF thinks that it was the greatest catastrophe practically in their history. They think the idea of actually giving advice and helping to draft a policy reform package without providing financing was terrible. And I cannot come up with a valid reason why. The only reason they were able to give me was they felt that if they provided policy reform advice without funding, that the IMF would not pay attention to what the advice was, and therefore it would degrade the value of their advice generally. But I thought that was an excellent model of intervention.
Finally, one last issue, because I know it's come up. People refer to the IMF as the lender of last resort for the international financial system. I think it's important for this Committee to understand that the IMF is not and cannot play the role of lender of last resort for the international financial system. The IMF does not have the resources to play that role. If Brazil is losing $1 billion per day in foreign exchange reserves, $40 billion can support Brazil, but if there was a crisis in any of the major economies or financial systems, $40 billion would be gone in a nanosecond and the IMF would be wiped out. The IMF has $100 billion of resources, if there is a problem in one of the core systems, you are going to have to rely on the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England. The IMF's function is to stabilize the emerging market economies, it is not for the core financial system.
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Mr. LEVINSON. With respect to your first question with respect to preconditions and prequalifications, what do you do with the countries that don't prequalify? Do you hang them out to dry after the five-year transition period? Often the crisis itself is what precipitates reform. Often the absence of reform is the reflection of deep social and political impasse in a country. So the crisis occurs and that provides the stimulus for reform. According to the majority recommendation you just leave those countries out to dry.
Mr. BEREUTER. I did read your dissenting views, so I know your responses and questions, that's why I wanted you to focus on the last two.
Mr. LEVINSON. OK. Then on the last one, with respect to the conditionality of a program, again it seems to me that it comes down to a fundamental misconception that the problem is only a short-term liquidity problem where the market will restore liquidity as soon as you pay the outstanding payments that have to be made. But, at least in my experience, very often the market says, ''Hey, wait a minute, what is the program that is going to address the underlying conditions that led you to go to the IMF in the first place?'' And if the market perceives that there is no credible program, then you aren't going to get that quick liquidity. The IMF, in effect, is the ''Good Housekeeping seal of approval'' for the international financial community that the country is going to address those underlying conditions. It seems to me, you are really eviscerating the IMF if you strip them of that function, as they do explicitly.
Mr. LERRICK. Mr. Bereuter, I would just like to say that this is one of the few times in my interchanges with Mr. Levinson that I agree with almost 99 percent of what he said. Because he's absolutely right that what the IMF is providing is the seal of approval. But seal of approval doesn't necessarily mean financing. You can provide a seal of approval and come up with a valid program, because the fact is, the markets are not going to provide financing if there isn't a valid program. And that is the core issue.
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Chairman LEACH. Mr. Frank.
Mr. FRANK. Mr. Calomiris, you said you would tell us what you thought about linking. I was a little surprised to have you tell me that the Commission took no position on whether or not debt relief to the HIPC countries should be conditioned. That seems to be a pretty big issue to duck. I thought we generally ducked tough issues. But maybe it's catching. But what is your personal position on whether or not we should withhold further assistance for debt relief until and unless the rest of this report is implemented?
Mr. CALOMIRIS. Let me clarify. All I was trying to say is, I don't think the Commission took a position or even considered the political aspect of how you would try to achieve these reforms, what kind of leverage
Mr. FRANK. The linkage, right. I understand that. I haven't got a lot of time, you said the Commission didn't take a position.
Mr. CALOMIRIS. Right.
Mr. FRANK. And I said I was surprised.
Mr. CALOMIRIS. Let me say, the other question I would ask for a little clarification, because there are many aspects.
Mr. FRANK. All right. And I'll give it to you.
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Mr. CALOMIRIS. Well, no, let me tell you what I want clarification on. There are different aspects of the HIPC question. One aspect is, are we talking about U.S., bilateral, or multilateral?
Mr. FRANK. We are talking about the process this Committee started the last time, which is funding fully both the multilateral and bilateral that has already been agreed to. Now, the Commission appears to recommend going even beyond that which I would like to see. But there was an agreement here and the question is, should we continue funding to completion right away? The Administration is asking for the supplemental, those multilateral and bilateral pieces of debt relief that have been agreed to.
Mr. CALOMIRIS. I can only speak for myself.
Mr. FRANK. I understand that. You're the only one I'm asking.
Mr. CALOMIRIS. OK. In my view, I do not think that it's very desirable to slow down the process of debt relief. In my view, I would want to see the appropriations go further than they have, as I understand them. Someone on the Committee earlier raised the question of whether Nigeria should be added to the list.
Mr. FRANK. Leave Nigeria out. Let's just stick with the
Mr. CALOMIRIS. Let me put it to you this way, I would go farther than the Secretary of the Treasury and faster. And I would not attach linkage.
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Mr. FRANK. So you would have no linkage, and I say this because, you know, this is not a store matter, as I said, the letter that was read in by this coalition of groups specifically says, debt relief, do not want to see IMF reform stall this initiative and not make it conditional. The Majority leader of the House and the Banking Chairman of the Senate are quoted in an article in the Dallas Morning News as saying they may withhold this, and that's why it's important.
Mr. Lerrick, what is your position?
Mr. LERRICK. Well, my position, Mr. Frank, and maybe this will sound strange to this Committee, is that I don't believe in tying agreements in any form. This is my personal view.
Mr. FRANK. I'm aware. I'm justlet me stipulateexcuse me, let me stipulate that having noted that the Commission didn't take a position, whenever I ask an individual, I am under the impression that I am talking to that individual unless it is otherwise specified.
Mr. LERRICK. My personal view is that debt relief is an important issue, that it has not proceeded as quickly as it should have and on the scale that it should have.
Mr. FRANK. And there should be no linkage, that is, we should not withhold debt relief, completing the debt relief for the HIPC under the Cohen agreement until we implement the other parts of the Commission report?
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Mr. LERRICK. No, I don't think any linkage is appropriate.
Mr. FRANK. Right. That was a very important question that I wanted to raise. I'm not asking
Mr. LERRICK. Congressman Frank, they're separate issues in my opinion.
Mr. FRANK. Well, I understand that, but I'm raising it because they weren't linked by Mr. Armey and Senator Gramm, and I would hope, because I know that Mr. Armey, in particular, has expressed a great deal of enthusiasm for your work that you will try to convert him on this one point where he appears to disagree with you. And, as I said, it was sufficiently worrisome so that this group raised that. So I hope that you will make that point to people. I also ask thatI know you didn't mean it that way, but at one point in your questions, which I just want to get to, you did say it was in another context, but people don't always look at the context that you think the recommendation should be considered as a package, and some people could have interpreted that, given this debate, to mean the debt relief as well.
Mr. CALOMIRIS. I'm sorry, I don't know what you're referring to.
Mr. FRANK. The questions you appended to your
Mr. CALOMIRIS. May I clarify?
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Mr. FRANK. I think in answer to one of them you said that this should be considered a package. Now, it's clear to me you did not mean this. I'll read it to you. I want to go onthis is the question about, is it feasible to have higher appropriations, question 13 on page 15 where you said, ''We Americans have a lot to gain economically from helping the world's poor to climb out of poverty. It is also the right thing to do. I want to go on record as saying that saying the recommendations in this report are presented as a package.'' Now, it's clear from the context that what you mean is, and this is the next thing I want to get to, you are not for cutting off loans and converting them to grants unless we are prepared as a Congress to increase the appropriation, is that what you mean by ''as a package''?
Mr. CALOMIRIS. Let me clarify. Let me start with a little bit of accounting about these institutions, because it's necessary
Mr. FRANK. I haven't got time for comments. This is very straightforward, on several places here you and the Commission say, ''the appropriations should be increased.''
Mr. CALOMIRIS. That's right.
Mr. FRANK. I think you are, in fact, not very persuasive. Your answers are good answers, they're real answers, except in one case where the question is, ''Isn't it going to get hard to get the appropriation raised?'' And your answer is, ''Well, it should; you should do it.'' You don't address it politically. So when you say ''package'' are you saying thatand here's the issue, converting loans to grants and doing an effective job of fighting poverty, to which you give a high priority, requires you to say an increased appropriation.
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Now, you seem more optimistic about getting that out of this Congress than I do. We're about to pass a budget, frankly, which I don't think is going to leave any room for such an increased appropriation, or you have time to get down to the allocation. When you say that you want these as a package, does that mean that you don't go from loans to grants unless you get the higher appropriation that would be necessary to make the grants?
Mr. CALOMIRIS. I have a very clear and specific answer to your question, but it is going to take more than ten seconds to give it.
Mr. FRANK. Oh, it can take more than ten seconds, go ahead.
Mr. CALOMIRIS. All right. The question and answer that you're reading from, the reason that's in there is it's inspired by the cynicism that I encountered by a lot of people about the majority proposal. The cynicism was, this is really a Trojan horse. You guys are really coming in here trying to trash
Mr. FRANK. Just tell me.
Mr. CALOMIRIS. You're not letting me answer.
Mr. FRANK. I know I'm not, because you're not.
Mr. CALOMIRIS. I'm going to answer you
Page 139 PREV PAGE TOP OF DOC Mr. FRANK. Excuse me, you're justifying yourself, we can all do that.
Mr. CALOMIRIS. No.
Mr. FRANK. I'm sorry, but that is irrelevant to the question. Yes, people are skeptical that the appropriation would come forward. I understand that. You were trying to
Mr. CALOMIRIS. So what I was trying to say
Mr. FRANK. What's the answer?
Mr. CALOMIRIS. Please don't use this report as a club just to beat up the multilateral institutions, and if you try, I will oppose that with every breath that I can. So that's the point of that.
Now, let me answer your other question. Would it be an improvement on current practice without adding any new appropriations to the development banks to simply convert them from lending to grant-based organizations? I believe that it would be an improvement to do that if you just retained all of their paid-in capital. And that's why I wanted to go into the accounting a little bit.
Mr. FRANK. We understand the accounting here. But my question then, I would say that they're notthen the phrase ''as a package'' I think is a little more than you meant, because the report says, go to grants and raise the appropriation. And you're saying, go to grants even if you don't raise the appropriation; correct?
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Mr. CALOMIRIS. I believe
Mr. FRANK. Believe that if we couldn't get the appropriation base it would still be good to go to grants and loans?
Mr. CALOMIRIS. I would love to explain why. But the simple short answer is yes. I think it would be an improvement. And the reason is, as Mr. Lerrick can testify probably better than I, when you think about where the resources come from, from let's say the World Bank, it's not the amount of lending that it does, it's the subsidy element of the lending, and the subsidy flows from the fact that that institution doesn't have to pay dividends on paid-in capital and accumulated surplus.
So, it can either generate that equivalent amount of present value of subsidy through grants or through loans. Even with no additional appropriations, its resource base remains the same. And I think it could deliver those resources more effectively through grants. So that's why I would answer the question, yes, as long as no capital is taken out of the institution it would be able to better fulfill its function through grants.
Mr. FRANK. But there is a
Mr. CALOMIRIS. I would prefer it to also get more appropriations.
Mr. FRANK. But there is a repayment flow that comes from some of the loans. Now, that would be lost in the future and at some point there would be asee my own view is, I would like to raise the appropriations, but, again, I think your weakest answer is where you say, well, some people say we wouldn't be able to raise the appropriation.
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In fact, what you say is you wish that wasn't the case, but you don't explain how it won't be the case. And I would be very pleasantly surprised, because I think exactly what you fear is going to happenshouldn't happen, will happen. That a number of people, particularly on the Majority side, but some on the left as well, will welcome your criticisms and will not in the least be interested in raising the appropriation and we won't have that. So what about the absence five years down the road from reflows?
Mr. LERRICK. Congressman Frank, I would like to divide your question into two parts. The first one is, what are the most effective tools.
Mr. FRANK. No, that's not my question.
Mr. LERRICK. I understand, and I think
Mr. FRANK. No, excuse me. You can't divide my question into those things I didn't ask. I have a specific question.
Mr. LERRICK. I know you do.
Mr. FRANK. What's the effectlook, you had a lot of time to testify, you can spend more, but I have some questions. People don't always like to answer the questions, I understand that, but
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Mr. LERRICK. I intend to answer your question.
Mr. FRANK. The question is, if we aren't able to raise the appropriation, does the loss of reflowsif you go in the future to grants instead of loansreduce the amount you have down the road somewhere? That is, there is a reflow backthere is some repayment.
Mr. LERRICK. Certainly. First of all, you're assuming that the concessional credits, which is what you're describing as grants, from IDA, from the Asian Development Fund
Mr. FRANK. Excuse me, grants is whatI'm using your word.
Mr. LERRICK. I understand. All right. Fine.
Mr. FRANK. Was I wrong to use your word?
Mr. LERRICK. When you're talking about the reflows?
Mr. FRANK. No, I'm talking about the reflows from loans, concessional loans, you are saying
Page 143 PREV PAGE TOP OF DOC Mr. LERRICK. I understand.
Mr. FRANK. No, you don't understand. Excuse me, I'm going to start over again.
Mr. LERRICK. OK.
Mr. FRANK. You are saying, stop the lending, go to grants. Some reflow comes back into the World Bank through repayment of loans even at concessional interest rates. If you are no longer having those and it's all grants, now, one way to keep the level up is to raise the appropriation. But what happens if you go to grants and then there is no more, no repayment?
Mr. LERRICK. First, I would like to define terminology. A loan at the World Bank is an IBRD loan which carries an interest rate based on the Bank's cost of borrowing. You then have concessional credits from IDA which carry a half percent or three-quarters percent interest rate. Now, first of all on the loans that come from the IBRD, those loans do not generate any extra resources for poor countries. Those are just recirculated.
Mr. FRANK. Right. I'm talking about the IDA reflows.
Mr. LERRICK. That's what I said.
Mr. FRANK. They are IDA reflows.
Page 144 PREV PAGE TOP OF DOC Mr. LERRICK. There are IDA reflows.
Mr. FRANK. And they do get a reflow, which they tell me in a couple of years is going to be up in a couple of billion dollars.
Mr. LERRICK. First of all, Congressman, you're assuming that those IDA credits are going to be repaid.
Mr. FRANK. Right.
Mr. LERRICK. All right. I think that based on the distribution of those credits, it is highly likely that a substantial portion will be subject to debt relief and will be written off. That's the first question.
Mr. FRANK. A substantial portion, but some will be repaid.
Mr. LERRICK. Some will be repaid. Second
Mr. FRANK. It's still going to be a question you're going to have to answer at the end here.
Mr. LERRICK. I understand, but
Mr. FRANK. There will be some revenue loss, and what do we do about it?
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Mr. LERRICK. First of all, I think it's important to understand that the amount of grants in the report's terminology that are required to replace a concessional credit is substantially less. And I'll give you an example. If you extend to a poor country a $100 million concessional credit to finance a projecta hospitalto replace that with a grant does not require $100 million of grants. It only requires somewhere between $5 million and $7 million per annum. That's the first thing.
Second, the World Bank has paid-in capital, as do the other institutions, and their retained earnings. These funds generate an income stream today of between $2 and $3 billion. That is one source of your grants that is not going to be used up. Now, if you use those resources, you have $2 to $3 billion of annual income stream to use for grants, that is equivalent to having somewhere between $30 and $50 billion of loans to extend on concessional terms. So you have a very strong starting point for your grant system based solely on the income on the existing capital and reserves of the institutions.
Now, your question is, eventually at some point this might run out. And that the return that you're going to get from the repayment of the concessional credits will not be able to supplement your new flows.
Mr. FRANK. It diminishes.
Mr. LERRICK. Now, the question I would counter is that under the system proposed by
Page 146 PREV PAGE TOP OF DOC Mr. FRANK. You're going to counter the question with a question; you're not going to answer it, is that correct?
Mr. LERRICK. Counter the argument would be this
Mr. FRANK. But are you going to answer the question?
Mr. LERRICK. Yes, absolutely. Under a concessional credit the funds are provided to the borrower and it has to repay the funds at some point, in theory. What the Commission has proposed in place of those types of credits is a system of grants to subsidize the user fees.
Now, the grantsyou're right, the money goes out and never comes back when you give a grant. You've paid it, and it never returns to the World Bank or IDA. However, the Commission's proposal is that the country has to co-pay the user fees on a current basis along with those grants. The Commission is not proposing that the World Bank or the World Development Agency will pay 100 percent of the cost of the projects or of the user fee, it's proposing that if it's an extremely poor country, the Agency would pay 90 percent. But the country has to pay 10 percent on a current basis. As the income level of the country rises, the co-payment of the country rises, until finally, when it's no longer a poor country, it pays 100 percent of the costs.
So, if you look at the flows that are going to be coming in and going out, the net effect on an economic basis is going to be minimal. So the question you've asked is, should one only convert to grants if you can get greater appropriations? Again, you do not need that linkage. Shifting to grants under a system of co-payment will actually increase effectiveness for a given level of development programs. You do not need the greater appropriation to achieve the same result.
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Mr. FRANK. I'm glad. That's the answer I was looking for, because I think there's a factual question there.
Mr. LERRICK. It is a factual question.
Mr. FRANK. Excuse me, and I think you are
Chairman LEACH. You need to conclude with this.
Mr. FRANK. Yes. Excessively optimistic, and I think what's happened is, as I read this, the Commission's language is much too optimistic about increasing the level of grants from the U.S. Treasury. I wish I could agree with you. But I think you are ignoring what's going on right now with the appropriations process. I said, we are adopting a budget today in the House which buys your optimism. And what you're saying is, ''Well, OK, that doesn't really make any difference, because we'll be about the same.'' That's a factual question which I want to pursue, because I appreciate that.
Mr. LERRICK. Absolutely. I will be delighted to assist the subcommittee staff in its analysis of this question.
Mr. FRANK. You believe that an increased appropriation wouldn't be necessary to go to a greater granting, and that's a specific question on which we can now focus further.
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Chairman LEACH. Thank you, Mr. Frank.
Mr. BACHUS. Thank you.
First of all, I would like to focus back on and just make a comment on what Mr. Bergsten said before he left, and he said that we should remind ourselves thatI think in his thing, we should take notes of events that could have happenedbut didn't, in assessing the World Financial Institutions. The Asian crisismore AmericansI mean, Americans have more wealth invested in the stock market right now than they do in their own homes, and had there not been some response by the world financial institutions, they could have lost a considerable amount of that investment. Do you all agree with that?
Mr. CALOMIRIS. It's very hard. I would characterize myself as an expert on the history of financial crises and their effects. I think it's very hard to answer questions about a counterfactual about a specific crisis, and I don't think that the answer is obviously that you're right.
Mr. BACHUS. OK.
Mr. CALOMIRIS. I don't think I know the answer to that.
Page 149 PREV PAGE TOP OF DOC Mr. BACHUS. All right.
Mr. LEVINSON. We had an excellent paper from Eichengreen and Portus, and let me just quote a little bit: ''Clearly, life would go on in the absence of the IMF with a greatly reduced role for IMF lending. Lenders would still lend, borrowers would still borrow, but to say debt problems would be resolved by the consenting adults involved without additional costs being imposed on the principals and innocent bystanders is a leap of faith.'' And I think that summarizes it to a very great extent.
Now, Mr. Fischerwho admittedly is an interested party, also testified; I asked him precisely that question that you asked: what would have happened if there had been no IMF intervention? This is what he said: ''I believe that the crises would have been bigger, not smaller, that is, each country at the moment the crisis broke out would not have had the external financing available; would have had to stop external payments. I do not believe that could have been done in an orderly way, and I think you would have turned off financing for developing countries all over the world. In addition, I believe that without the international assistance effort, policymaking solutions and responses in those countries would have been much weaker.''
I think you can extrapolate from that, that the financial markets would have constricted, economic activity would have declined, and all of this would have had a ripple effect which would have bounced right back into this economy.
Page 150 PREV PAGE TOP OF DOC Mr. BACHUS. Now, let me say I wish we would have a commission to look at that. It would be interesting to know what they would say.
Let me move on and I understand
Mr. CALOMIRIS. May I just interject? Your question was more difficult than the issue of just would there have been more constriction in capital markets. I thought you were asking a question that more or less translated into, would U.S. wealth-holders have been better off or worse off, let's say today
Mr. BACHUS. Long term.
Mr. CALOMIRIS. As a result of less IMF involvement generally. Remember that the IMF's liquidity provision in Asia was slow, and I would argue, inadequate and that there were lots of conditions attached to it that even the IMF officials in retrospect have said, weren't so wonderful in some cases. So it's much more difficult to answer the question you asked than to answer the question that Mr. Levinson answered.
Mr. BACHUS. And also, you know, even the independent task force said that smaller and fewer bailouts would probably have been the best approach. I do wish we knew the answer to that.
Let me move on. I'm not sure we totally do, but I think that we certainlynow that we've gone through it and we had those institutions, we know that it could have been a lot worse and they were present. But I would like that addressed at some point. Not enough time here.
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I also want to say that one of the members commented that he didn't really think Commissions did a lot of good. I think that this Commission and the independent task force has done a tremendous amount of good, because there are people who know a lot more than this Congress about the issues that we have to address and take sides on. And if they will read the Commission reports, both of them, I think they'll be more informed to make informed decisions. So I applaud your work.
Let me focus on this. I think, Mr. Lerrick, in your testimony, you said the goal of the banks is toone of the goals is the alleviation of poverty among the poor nations of the world, or the poor citizens of the world. And I think there was broad consensus that one of the goals of the global financial institutions is to eliminate poverty. That being the case, and I'm somewhat confused, but with debt relief, is it unconditional? And some of the things that you all have said, I mean, as individuals you've said, it should be unconditional. But then, in fact
Mr. CALOMIRIS. We said, ''not linked.''
Mr. BACHUS. Not linked, OK.
Mr. CALOMIRIS. Not linked to the other recommendations of the report.
Mr. BACHUS. Not linked, OK, not linked. OK. If you makelet's just talk about whether it's conditional or not, just that
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Mr. LEVINSON. I think there are two aspects of conditions. One aspect is, should it be linked to the other recommendations of the Commission.
Mr. BACHUS. OK.
Mr. LEVINSON. That's one condition. The condition that I was saying should not be attached to debt relief is the question of whether or not there should be a condition with respect to economic policy approval by the World Bank. And all I'm saying is that if you say the debt cannot be repaid, you're conditioning the non-repayment of a non-repayable debt.
Mr. BACHUS. Well, you know, let's focus on that. Because the Commission has said that debt relief will be given when the country develops an economic plan. I think that's effective economic and social policies or something.
Mr. LEVINSON. That's right.
Mr. BACHUS. Can they develop an economic and socialthey certainly can't establish economic and effective social and economic policies with such crushing debt.
Mr. LEVINSON. Absolutely true.
Mr. CALOMIRIS. This is one area where if you go and read the transcripts of our hearings, you'll see that Mr. Levinson and I very much agreed on this, but I want to qualify that a little bit.
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I think he's correct when he says that the current level of debt in many of these countries is impossible to maintain, but that doesn't mean that some of the debt would be impossible to repay. So, given that we are suggesting a 100 percent elimination of the debt, there is some logic to attaching conditions to a 100 percent elimination of the debt as opposed to a partial elimination of the debt.
Now, let me try to summarize what the thinking was. I didn't have the same recollection that Mr. Levinson did that the Chairman had such strong views on this. I could just not be remembering it right. I do remember that Mr. Huber had strong views on it and some other members of the Commission. And I shared with Mr. Levinson the view that you can't really attach a lot of conditions if there isn't a lot of bargaining power, because countries really can't repay very much of it. So I don't think that our Commission reached clear consensus on what the meaning of these conditions is, and maybe with more time we would have been able to.
Mr. LERRICK. I would just like to add, Congressman, the goal, as Professor Calomiris has said, is not to create a repetition of the process that placed these countries in this position all over again. There's no point in writing off the debt and letting them incur new debt and then writing off the debt again. So the goal was, and that's why the Commission said an effective economic strategy, that you do not let them write off the debt until they come up with a viable strategy. You're absolutely right, they cannot implement the strategy, they cannot become good performers before you write off the debt. If they could, we wouldn't need to write off the debt. But, one of the Commission members, Mr. Huber, wanted to go further in terms of the conditionality of the HIPC debt write-off and attach a very specific condition, which was that there should be full privatization of all state-owned enterprises. But the consensus of the Commission was that there should be an effective economic strategy so as to avoid a repeat of what had occurred in the past.
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Mr. BACHUS. I will tell you this, some of us who supported debt relief the strongest felt like that to grant debt relief and not require some strategy of plan by the country, was really irresponsible in that we could lose a tremendous opportunity.
And, you know, I would say this, any country which is unwilling, and we talk about the difference in implementation and adopting a strategy, or, you know, is vastly different. Any country that doesn't have a plan or a strategy is not going to implement economic and social changes. I mean, so I would think that that fundamentally would be something we could at least agree on.
Now, I know that the ''the devil is in the details.'' How far you go, and it shouldn't be implementation, it ought to be strategy or plan, and then, you know, it's up to those countries whether they do it or not is
Mr. LEVINSON. I would only supplement what you've said. I think the assumption is that the debt relief in the sense of wiping out the debt, the country never comes back for any additional financing, which I think is, especially with these countries, that's a completely false assumption. Countries are going to continue to need external financing. All that wiping out the debt does is gives them a chance to start over. If they mess it up, if they mishandle that opportunity, don't give them any future money. But instead of engaging in the fantasy that you are forgiving a debt which you have already said cannot be repaid, what sense does that make?
Mr. BACHUS. Right.
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Mr. LEVINSON. Condition it, condition your future assistance on what they do with that opportunity. We've already had some experience with forgiving debt in the Brady plan in 1989. That's what enabled Latin America to go from a net outflow between 1983 and 1989 of $116 billion to a net inflow of $200 billion between 1990 and 1994. Because the markets then perceived the countries were creditworthy again. All I'm saying is, of course, you're going to still look at whether or not they have a strategy. You're just giving them a breathing space, they are not going to then be on their own forever. They're going to continue to need external financing. So condition that additional external financing on what they do with the opportunity. But recognize that you if you say it can't be repaid, don't condition what can't be repaid.
Mr. CALOMIRIS. Mr. Levinson made an important point and I want to emphasize it and it also relates to something that the Secretary of the Treasury was worrying about earlier today. The important point that he made was that it was after the renegotiation of the Latin American debt that Latin America recovered from its lost decade. And I want to emphasize that the IMF's complicity in the delay of that renegotiation contributed to that delay.
I think that another important point to mention, based on the history of debt defaults, is that when countries default due to force majeure, that they're not penalized very much. And I think again, Mr. Levinson is right, that the great inflow of capital into Latin America in the late 1980's and the early 1990's testifies to the fact that private markets don't penalize reasonable and necessary debt reduction. So the Secretary's concerns earlier today about not wanting to go too far on HIPC out of fear that the markets would react adversely, I think, is a misplaced concern. But I want to reemphasize though that there's a little problem with the logic of Mr. Levinson's comment.
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It is true that the countries currently can't repay all the debt, but they could repay some of the debt. So by wiping it all out, Mr. Levinson, we are talking about going beyond just realizing what has to be true to actually providing a real benefit. That's the carrot.
Mr. LERRICK. Congressman, I would like to add just one clarification. There is a substantive difference between the countries that would receive debt relief under the HIPC program and the countries that received it in the 1980's. None of the HIPC countries are going to be creditworthy and be able to access the private markets at this point, even if you wipe out their debt. So, they're going to need external official resources immediately, not at some future date. And so that is a key difference and that's why you can't wait to see whether they implement the program once you've written off the debt before giving them new resources. It must happen simultaneously.
Mr. BACHUS. And, yeah, I think it came loud and clear from both these reports that HIPC countries needed debt relief, they needed it now.
Let me move on to one other
Chairman LEACH. Make this the last one.
Mr. BACHUS. I'll let Mr. Campbell and then come back, because I do have a question I would like to follow up.
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Mr. CAMPBELL. I appreciate that, thank you.
Chairman LEACH. Yes, Mr. Campbell.
Mr. CAMPBELL. I don't think there will be a vote, but if there is one, Spence, I would appreciate your courtesy.
I had three points and the first is really directed to the Chairman. I think it's important to give my point of view on this. I was a member of the Commission and your comment that you favored, I think it was something of that nature, as more balanced, the Council on Foreign Relations Report I cannot comment on, because I have not read the Council on Foreign Relations Report and I know you are a serious man in all respects, and so if that's your judgment, that's your judgment. I can't fault it until I've at least read the other.
But there was something about this Commission which was special and I don't think Mr. LaFalce is here, I know he's not here and it's a shame, because he also raised a question about this Commission.
Maybe what's unusual is that you've got people who are not in the normal stream to get a chance to participate and put a view forward. Whether that's Professor Levinson regarding bringing into World Bank and IMF conditions of laborwhich is a legitimate question, which was not a traditional point to be brought forwardor somebody from the other side, in this particular case me, who challenged whether we should have an IMF at all. And I did and I advanced that on the Commission and I was out-voted. I have a dissentingnot a dissentingI have a small concurring opinion, saying that I really don't think the small role left for the IMF is justified.
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Well, believe me, I would not beI think I would not be a Member of the Council on Foreign Relations Task Force and I have the highest regard for the co-chairs, Pete Peterson and Carla Hills, but basically what you had was a different way of getting input and with great respect the Council on Foreign Relations, is a traditional way of getting input. And it doesn't surprise me that the traditional way of getting input comes up with a recommendation in favor of continuing the traditional mechanisms with a twist here and a nudge there.
But if the time comes, and maybe the time is not at hand, but if the time comes for radical change, of either side, that we should combine the original idea of the International Labor Organization, World Trade Organization, and IMF, and I don't necessarily characterize that as anybody's particular view, or that we should abolish some of these, you won't get that from the CFR. You won't get that from the Council on Foreign Relations, I believe. And so in this particular case it was, I think, constructive to go outside the usual.
Also, let me just say, since Mr. Bergsten had to leave, I understand, Lord knows, this conflict of schedules. I had to essentially drop out of the participation for the last half because I declared for U.S. Senate in California. That was a regrettable consequence of what is otherwise, I hope, a non-regrettable decision.
But, Fred Bergsten came in at about that time. And I would no more have issued a dissenting report on the basis of hearings that I did not attend than I think any Member should. And it troubled me that today, again, not because he was doing anything inappropriatenor youin granting him the courtesy, but it was difficult that I could not ask him why he authored such a strong dissent and then recommended the CFR report over our report and then left. I could not put to him the questions as to whether he could have been wrong. Had he participated in those parts that I was able to. And I asked that question with humility, because I wasn't there for the second half. OK.
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As to the
Chairman LEACH. Will the gentleman yield?
Mr. CAMPBELL. I will yield.
Chairman LEACH. I think it's only fair to respond.
Mr. CAMPBELL. Sure. I yield to the Chairman.
Chairman LEACH. Non-traditionally, if in the U.S. Senate they received a thinking man, I would urge that upon the people of California.
Mr. CAMPBELL. Thank you, Mr. Chairman. And God bless you.
I have two other points. So the first one is, I hope, from an open heart, but an open mind as well.
The second was, there was a confusion introduced by our good friend Mr. LaFalce regarding whether the recommendation of the Commission to write off the HIPC debt in its entirety was conditioned upon accepting all the rest of the recommendations of the report. I believe the colloquy for the last hour has made it clear that there was no such requirement and it bear attention that at page 8 and at page 4 of the report, the unanimous Commission recommendation is that the World Bank and Regional Development Banks should write off in their entirety all claims against heavily indebted poor countries that implement an effective economic and social development strategy in conjunction with the World Bank and the regional development institutions. And that recommendation does not say, provided the rest of the report is accepted.
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Professor Calomiris, in responding to Congressman Frank, said that he was unaware that the Commission had had any linkage, and that was a polite professorial way of saying it didn't. Which Congressman Frank, I think, may have slightly misinterpreted. And, again, I regret he's not here to say that the Commission dodged it. That was Congressman Frank's comment, that the Commission dodged it. And he said, well, Congress dodges a lot and perhaps it's catching. The Commission did not dodge it. The Commission did not make a condition of writing off HIPC debt that the rest of the Commission's recommendation be adopted. It did not. Therefore, it did not dodge it. It chose not to make that linkage.
And lastly, I went over to talk to Congressman Frank before he left to ask him the source of his concern and he said it was a Dallas Morning News article wherein Majority Leader Armey and Senator Phil Gramm are saying that if IMF doesn't make some changes, they're going to have a hard time asking for money, more or less, and that's my paraphrase. Then outside the quotes of Mr. Armey and Mr. Gramm, outside the quotes, the reporter says, ''the occasion will come this spring when the Clinton Administration asks Congress to forgive the debt owed the IMF and the U.S. Government by the world's poorest countries.'' They then continue, Mr. Gramm said, quote: ''My inclination is to study very carefully the report of the Commission and to use that legislation to implement necessary reforms.'' The juxtaposition of the reporter sentence, namely that the next time we think anybody will come to Congress on an IMF issue is this debt forgiveness one, and Senator Gramm's comment is, I think, an inappropriate basis to infer that either Armey or Gramm are saying that the write-off of HIPC debt will be conditioned upon anybody's set of recommendations for reform of IMF. A very thin read indeed, if any at all.
Those two points having been my most important burden to satisfy, I now have a question which I would like to put and it's the only question I put, but it's a real important one, because we have conflicting testimony today as to whether the HIPCs are paying back anything, can be expected to pay back anything, and that's rather critical in our fiscal assessment and our responsibility to be careful with the taxpayers' money.
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Professor Levinson, and Dr. Lerrick both spoke to the very low probability of repayment and I'm going to turn to you, you know, if I mischaracterize here in any way you can correct me, so you were here and you can speak to this. But I took Professor Levinson's comment as saying that the premise of the report was, we're not getting money from these HIPCs anyway. As a member of the Commission that was my understanding as well. And then when the question was put by Mr. Frank to Dr. Lerrick regarding whether there was a revolving fund, Dr. Lerrick pointed out that a lot of what we might expect to go into this revolving fund is not paid back anyway. And so you would have to have a huge discount.
Nevertheless, when I put the question to Secretary Summers, he said, these institutions have AAA ratings because they have priority status, get repaid, and the money just keeps flowing in. And, hence, in Secretary Summers' testimony he tells us that the cost of a write-off is going to be moving up between from $14 billion to $43 billion. So we have a factual question here on which I would like the experts' testimony. What is your best judgment, each of the three panelists, what is your best judgment on the basis of the testimony all of which you heard, only part of which I heard, as to what the real cost will be to the institutions from going to a full write-off of HIPC borrowing as our Commission recommended? I'll start with Professor Levinson.
Mr. LEVINSON. Well, I would like to quote from page 2 of the majority report. ''Debt relief. Debt of HIPC countries cannot be repaid under any foreseeable future developments. IMF or other lending to make debt service appear current repeats the mistake made in Latin America in the 1980's.'' Then it goes on, ''HIPC debt should be forgiven in its entirety'' and then it says, ''conditional on the debt of countries implementing institutional reforms'' and then ''effective development strategy.''
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I won't repeat mynow I've said it three times, but saying that it can't be repaid under any foreseeable future.
Mr. CAMPBELL. Thanks professor. I would say your testimony is at odds with the Secretary of the Treasury.
Mr. LEVINSON. Yes, I agree.
Mr. CAMPBELL. It is apparent.
Mr. LEVINSON. Mine is at odds with the Commission as well as with the Secretary. I say, let's recognize the reality. And I just want to addmay I add one comment?
Mr. CAMPBELL. It's only polite, I think, as far as I'm concerned, great, but I stole time essentially from my colleague. So I'm going to ask my other two colleagues to answer the question and then believe me, it is up to the Chairman whoever else talks. So just on this point, if I might, Dr. Lerrick.
Mr. LERRICK. First of all, Congressman Campbell, I think it is important that you understand that the AAA ratings of the Multilateral Development Banks do not depend on the loan portfolio that they have. And in particular, their loan portfolio to HIPC countries. The AAA ratings of the development banks depend on one simple fact, and that is the callable capital that comes from their industrialized members. If you look very carefully at what the bond markets do, they look at the debt outstanding of the development bank, the World Bank, and add up the callable capital that comes from the industrialized countries, the United States, Japan, all the non-borrowing members and because that callable capital can only be used to repay the debt of the bank, as long as the callable capital is very close to the bank's outstanding debt, it doesn't matter what the banks have as a loan portfolio.
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Mr. CAMPBELL. Thank you, you've given a complete answer and I will say that your testimony would appear to be of the nature as to suggest that Secretary Summers was less than accurate in referring to the AAA rating in answering my question about the HIPCs repayment.
Mr. LERRICK. I would like to add one final thing which will tag onto this. The vast majority of what the HIPCs owe is not to the banks, but to their concessional arms: to IDA, the Asian Development Fund, the FSO of the InterAmerican Bank, and so forth.
Mr. CAMPBELL. Very good, I have to cut you off just to give Professor Calomiris a chance and then yield back.
Mr. LERRICK. And just one last thing
Mr. CAMPBELL. No, I can't, I'm sorry. Professor Calomiris.
Mr. CALOMIRIS. I just want to reiterate that there's an important but subtle distinction and the way I would, if I were going to edit this text, I would have put the words, ''in full'' after ''cannot be repaid.'' And that's important. That is, what we're suggesting is not just recognizing something that's already true. The value of that debt is not currently zero in the marketplace; it has a value. What we're suggesting doing is getting rid of that value. So it really is more than just recognizing a loss.
Mr. CAMPBELL. Thank you.
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And Mr. Chairman, both of the first two witnesses wanted to add more, but it is in your hands now how you would like to proceed. My colleague from Alabama has
Chairman LEACH. Since Mr. Bergsten is not here, 30 seconds only.
Mr. LEVINSON. All right. Thirty seconds. With respect to Mr. Bergsten's participation, as you pointed out, he's not a novice in this area. He read and he assured me that he read a great many of the transcripts as a preliminary to his participation. So with anyone else, I think, Congressman Campbell's critique might be valid. I think it is less valid with respect to him.
Let me also express my appreciation to Congressman Campbell; even with his brief participation, his intervention enabled us to get a more diversified staff and he also made an extremely valuable intervention with respect to vetoing, in effect, a vice chairman, which would have been highly inadvisable.
So I regret that his participation was not more full, but I think it is not quite fair to Fred to say that he came in late and just plunged in. He knew the subject matter and he read the transcripts. Thank you.
Mr. CAMPBELL. Thank you for your comments regarding my participation.
Page 165 PREV PAGE TOP OF DOC Chairman LEACH. The Chair would like to conclude that the Committee is massively disadvantaged, because it has one Member that knows so much and the rest of us are so limited.
Mr. CAMPBELL. I yield back my time.
Chairman LEACH. Mr. Bachus.
Mr. BACHUS. Thank you. I had intended to address this even before Mr. Campbell brought it up again. It is core labor standards. We have a very prosperous rich country. And a good part of the reason for that is that we do have labor standards in this country. American workers have certain protections which I think we in America allmost Americans support. And which extend the wealth to the middle class and allow many more people to participate, because there areeven though I think we all endorse the free market system and embrace it, and free markets are greatwe know that there are some adverse consequences if there's absolutely no standards established.
Would you all agree with that, first of all?
Mr. LEVINSON. If I might respond to your observation. There's a great deal of confusion about core worker standards. The most important ones are freedom of association and collective bargaining.
Page 166 PREV PAGE TOP OF DOC Mr. BACHUS. Right.
Mr. LEVINSON. In effect, what that says is, let workers be able to choose unions of their own choosing without government interference and then let them negotiate within their own economy and context what is appropriate with respect to wages and working conditions.
All of those of us who have advocated core working rights are not saying that we should set a minimum wage or a living wage from Washington, or anything like that. And one of the innovative things that came forward in the colloquy on this issue with the AFL-CIO representatives was that they said that they had backed off from that idea of standards, and were emphasizing freedom of association and collective bargaining to enable workers to be empowered to negotiate within their own context. That's all that's involved. Of course, there's also the question against slave labor, you know, and that. But I think that it gets confused with the accusation that we're attempting to impose American standards; we are not.
Mr. BACHUS. And I think part of that confusion, when you go to Africa and you're talking about some of the cultural things where children at 13 and 14 participate, when you get the OSHApeople always say, OSHA rating, you know, you get into that, but I thoroughly agree with you that I think those standards that we have in this country which have allowed the workers to have essential rights or freedom of association, collective bargaining, might add the right to strike, but, you know, those and I think at some point, it may be premature, but at some point as we integrate the global economy we certainly should begin to address child labor. Certainly at this time we ought towhere we have countries that still have slave labor, certainly that should be a core labor standard.
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But let me say this, here's a concern that I have. As we continue to integrate globally, we are benefiting tremendously from quote: ''cheap foreign labor.'' But there will be a time when it will lessen our standard of living as we integrate our economy with the globalization.
Then if workers in other countries do not have certain fundamental protections that our workers have, then our workers will lose to them and workers in those countries will replace our workers. And I'm not talking about simply because workers in other countries may be more productive or more effective or efficient, that happens in our country. But in our country we don't have that problem. And so I would say, and maybe I'll ask you this question. You know, NAFTA we had a side labor agreement, I don't think it would have passed this Congress without it.
There were certain essential labor protections. I think that's something that we really need to focus on. Do you think that it was justwere you thinking that it was premature or that it was unworkable to address these issues or certainly I don't think you can say it is unnecessary to address them. Maybewhat was the thinking?
Mr. CALOMIRIS. I have a lot to say in response to your questions which I think are very thoughtful. I think it is perfectly reasonable to define a set of basic human rights and to decide that you won't trade with or send aid to a country that violates some set of very basic human rights. But as we heard from the Secretary of the Treasury today, 1.3 billion people in the world make less than a dollar a day. If you tell a ten-year-oldif core labor rights means no child laborif you tell a ten-year-old to please stop working, then you better have an answer for how that ten-year-old is going to have enough food to eat and how that ten-year-old's family is going to survive if its survival depends on that child's working. So I think that there's a very hard issue there.
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I think another hard issue is, what do we mean exactly by collective bargaining? Some countries have union laws that I think restrict unions across firms while allowing unions within firms. Should countries be able to make those decisions for themselves?
So I think that part of the disagreement reflected a reluctance to make very specific decisions that should be left to sovereign nations in areas that aren't what I would call ''core human rights,'' particularly in recognition that it would be the poorest countries that would be hurt by setting standards even about things like child labor, which I don't think any of us
Mr. BACHUS. But as I mentioned, I understand that's a difficult
Mr. CALOMIRIS. Does core worker's rights include child labor?
Chairman LEACH. Excuse me, if I could interrupt. We have about four-and-a-half minutes on a vote on the floor. Could you
Mr. BACHUS. Well, let me simply say that this is something that I think that the Congress is going to look at because of the exploitation of workers, and in particular, the effect that that has on our own workforce is important.
Mr. LEVINSON. Might I just summarize it at the end?
Page 169 PREV PAGE TOP OF DOC Chairman LEACH. Let me askI'm not sure we can. We have four minutes to a vote, so let methere is no other Member presentdo the following. First, I want to thank all of you for outstandingly thoughtful testimony that I think this Committee is going to want to take a little time to review. It is, I think, of major interest to each of us.
Second, let me stress that this is a report that we reviewed that the United States Congress precipitated and therefore is of special importance and that we take it in that light. And we are obligated to assess it with great seriousness. There are differences of opinion and that's the American system.
But I want to thank each of you for your testimony, for your time, and most of all for your work on the Commission.
At this point I will recess pending the vote. I will excuse this panel, and when we return we will deal with the issue of the third panel on the subject of the Ukraine.
The hearing is in recess pending the vote.
Chairman LEACH. The hearing will resume.
We are pleased to have before us for our final panel, James Healy who is Managing Director of Credit Suisse First Boston who resides in the London Office. And he's accompanied by Mr. David Brodsky, who is the General Counsel for the Americas at Credit Suisse First Boston.
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STATEMENT OF JAMES P. HEALY, MANAGING DIRECTOR, GLOBAL HEAD OF EMERGING MARKETS, CREDIT SUISSE FIRST BOSTON, LONDON OFFICE; ACCOMPANIED BY DAVID BRODSKY, GENERAL COUNSEL
Mr. HEALY. Thank you, Mr. Chairman.
Chairman LEACH. Mr. Healy, you're welcome and you may proceed as you see fit.
Without objection your full statement will be placed in the record and you may read it in its entirety or summarize as you choose. Please proceed.
Mr. HEALY. Thank you, Mr. Chairman. First of all I would like to start and say I'm pleased to testify before you today to discuss the allegations of misuse of economic assistance from the International Monetary Fund.
We appreciate the opportunity to present the facts on the record which will hopefully correct the many misconceptions and speculation that have been part of the public dialogue to date. I am here to provide you with any information we can to clarify the transactions we conducted with the National Bank of the Ukraine association, referred to as the ''NBU,'' from 1996 through the present.
There appear to be three allegations surrounding the transactions we conducted with the NBU. The first allegation is that the IMF funds were somehow diverted for the enrichment of third parties. We have thoroughly investigated this matter and have no evidence to support any such allegation.
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The second allegation is that these transactions involved the misuse of IMF funds. CSFB had no indication from the NBU that its proposed transactions would constitute or facilitate a violation of any existing IMF restrictions or requirements. Nor did CFSB have any knowledge from the IMF or any other source that the NBU's entering into these transactions could be regarded as such a violation.
Moreover, CFSB could not divine the source of the funds used in these transactions with a sovereign central bank, especially when its reserves came from a variety of sources.
Finally, we relied on the fact that all our transactions with the NBU were approved by duly authorized officials of the central bank and the reasonableness of what we understood to be its economic rationale for these transactions.
The third allegation is that the transactions resulted in the misrepresentation of the NBUs reserves to the IMF. CFSB was not aware of the reserve requirements imposed by the IMF, nor could we have been aware. Furthermore, the NBU gave us no cause to believe that misrepresentation was their intent, nor did we have any reason to believe that misrepresentation would be the accounting outcome of the transactions.
But, let me step back and talk for a minute about CSFB's role in the Ukraine and in Cyprus. Since the collapse of the Soviet Union, we have been a major banker to the emerging democracies of Eastern Europe. We trade and structure fixed income and foreign exchange products, not only in Eastern Europe, but also in Asia, Latin America, Africa and the Middle East.
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Our products include sovereign and corporate debt, foreign currency, derivatives, futures contracts, money market instruments, repurchase agreements, and precious metals.
One of our companies that does this business is CFSB Cyprus, a wholly-owned subsidiary of CFSB that conducts investment banking and sales and trading activities mainly in Eastern Europe. Cyprus is, and has been for some time, a commercial center for Eastern Europe and other countries. Cyprus has favorable tax treaties with those countries.
The National Bank of the Ukraine is the Central Bank of the Ukraine, equivalent to the Board of Governors of the Federal Reserve System. The NBU came into existence when Ukraine's independent banking system was established in 1991. Like many central banks throughout the world, the NBU administers monetary and exchange rate policy and engages in various transactions in order to maintain the stability of the financial system, including granting credits and making loans to domestic banks.
The NBU is also responsible for transactions involving Ukraine's gold and currency reserves.
From the earliest stages of Ukrainian independence, CSFB has been committed to helping Ukraine develop its capital markets and attract foreign investment. CSFB opened its Kiev office in 1996, and in addition to the CSFB, has done business with other Ukrainian clients, such as providing trade finance advice for clients in the Ukraine's telecommunications, steel, and oil and gas industries.
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With that as background, let me turn to the specifics here.
From 1996 through 1998, CSFB and the NBU entered into several transactions which fall into six general categories. First, we executed foreign currency swaps for them. Second, there were foreign exchange options; third, there was gold reserve management; fourth, there were time deposits; fifth, there was Ukrainian financial sector support; and, sixth, there was short-term debt management.
There are a few important principles and facts that are common to all of these transactions between CSFB and the NBU that I would like to emphasize.
First, all the transactions were legal, and they were entered into by CSFB at the request of duly-authorized officials of the Central Bank of the Ukraine. Neither the NBU nor any customer has made any complaint or raised any issue concerning the discharge of our duties to it.
Second, based on the available information and surrounding circumstances, it was CSFB's general understanding that the Central Bank of the Ukraine entered into these transactions to encourage foreign investment, to maintain the stability of its interest rate and currency exchange rates, to manage its gold reserves, to provide Ukrainian financial sector support, and to reduce the cost of Ukrainian Government's foreign debt.
The NBU disclosed its reasons for entering into these transactions. We relied on its representations which appeared reasonable to us. There was nothing in the facts available to us that indicated any purpose other than those disclosed to us by the NBU.
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Third point is, there are things that we can do and things that we cannot do in transactions with the Central Bank. We could check the credit history and reputation of the Central Bank, which we did. We could assess the Central Bank's economic rationale for the transaction, which we did.
We could require the transaction be approved by duly-authorized officials within the Central Bank, which we did, and we can make sure that the transaction is appropriately documented, which we did.
We could not, however, audit the cash flows of a Central Bank, nor could we monitor how the Central Bank calculates its performance criteria in its IMF program, because these things are kept confidential.
In our view, the facts concerning these transactions demonstrate that CSFB's conduct has been entirely appropriate. I trust that what I have shared with you today will put to rest the allegations that have been circulating about CSFB's transactions with the NBU. We do not take such allegations lightly. CSFB regards its reputation as one of its principal assets.
Thank you, again, for the opportunity to testify before the Committee, and I would be happy to answer any questions you may have.
Chairman LEACH. Thank you very much, Mr. Healy.
One, I think it is important that the Committee allow Credit Suisse First Boston to make its position clear, and that is reasonable and fair.
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Second, my concerns as a Representative of the Congress relate to a series of things, some of which are involved in the transactions described. One of the great questions in world finance is whether the best, the most sophisticated and the most reputable financial institutions may from time-to-time be used to facilitate imperfect behavior. That is the question on the table. And it's less a question that relates to any precise malfeasance of the intermediary, but the fact of intermediaries being needed.
At this particular time in Ukrainian history, it would appear that the government was on a corruption scale anything but perfect. And U.S. Government assessments that were public, press assessments were very much in this direction. Your institution, which had become specialized in Central and Eastern European lending, certainly would be privy to most of this as a situation. In fact, in September of 1998, the former Prime Minister of the Ukraine actually purchased a house in the San Francisco Angeles area that I think belonged to a prominent American actor, a $6- or $8 million house. In many ways this is philosophically offensive, because it underscores what I believe is a circumstance that some countries have become vulnerable to communist apparachics being replaced by kleptocrats and that this is a difficult situation.
There is also some unusuality to the Credit Suisse relationship here. That is the notion that a central bank would take in IMF money to give to an offshore institutionin this case in Cyprusraises questions of propriety. I mean, why does one do that sort of thing?
You've indicated to me that you then relayed the money back into the Ukrainian banking system and all of which was repaid except about $15 million; is that correct?
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Mr. HEALY. That is correct.
Chairman LEACH. And that relates to a single institution; is that institution still in existence?
Mr. HEALY. Yes, it is, Mr. Chairman.
Chairman LEACH. And do you know, was that tied into the political process with alleged oligarchic type of thing, as in Russia they have different terms and Ukraine?
Mr. HEALY. No, we have no knowledge that that's the case.
Chairman LEACH. But there was no repayment of any nature on that particular
Mr. HEALY. Right. Of the $705 million in transactions that were on lent to domestic entities, $15 million is missing.
Chairman LEACH. Fifteen million is missing?
Let me ask you some rather basic questions. First, it's my understanding that typically investment banks and commercial banks will consult with the IMF and the World Bank before entering into circumstances with central banks of this nature related to their resources. Is that valid or not?
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Mr. HEALY. No. In my experienceand I worked at the IMF almost twenty years agobut, in my experience, bankers meet with the IMF really quite infrequently and it is typically to discuss economic developments in the country.
Chairman LEACH. So you wouldn't have discussed this with the World Bank or IMF?
Mr. HEALY. No, I don't believe that's standard. I don't know that any of our competitors do that and we would not discuss with the IMF, the specific transactions we would conduct with the central bank without permission, of course.
Chairman LEACH. Now, at the time your bank was dealing with these particular resources, I'm told that as an institution you also were selling eurobond issues to investors. Would you then be in the business of communicating your view of the creditworthiness of the Ukraine in this type of circumstance?
Mr. HEALY. Yes, we do. We have an emerging markets research group which publishes research and views on all the emerging markets.
Chairman LEACH. One of the interesting aspects here is that your bank might have been in the unique position of having a monopoly of knowledge on what appears to have been, and what has been reported to have been, a kind of double bookkeeping on behalf of Ukrainians vis-a-vis the IMF. And obviously, one of the IMF's concerns is that they did not realize this was occurring. And they wouldn't have realized it. Partly because you didn't feel obligated to communicate with them, partly, apparently, the Ukrainians chose to mislead, and partly they may not simply have been astute enough to inquire or oversee. Do you view any conflicts in your bank in this regard or any advantages that might accrue to your bank?
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Mr. HEALY. No. First of all, it's not clear to me that we indeed had a monopoly in these transactions. The NBU represented to us in most of them that these transactions were transactions that they brought to us and that we were in competition in terms of executing the transaction with other banks that are competitors in the business we are in.
So, as to a monopoly, I don't think we were in a privileged position. Also, if you look at the numbers that seem to be IMF reports, in particularly the March 14th press release, and then you look at the transactions we executed, they don't foot perfectly at all. The numbers that the IMF mention in that report do not foot perfectly to transactions we executed. Clearly, if those numbers are correct, there are clearly a number of transactions which were not done by us.
Chairman LEACH. It's my understanding that when this money would go through your bank in Cyprus, you would sometimes lend it, or maybe entirely lend it back to Ukrainian banks; is that correct?
Mr. HEALY. Yes, in some of the transactions that's correct.
Chairman LEACH. How did you choose them?
Mr. HEALY. We didn't choose them.
Chairman LEACH. They designated you?
Page 179 PREV PAGE TOP OF DOC Mr. HEALY. They would designate them.
Chairman LEACH. Do you know, were any of these banks tied into political figures or oligarchic figures?
Mr. HEALY. We've seen that allegation and we have checked it and we don't see any indication that they were tied into political figures or oligarchs.
Chairman LEACH. It's my understanding that your bank notes that commissions were relativelyin your term, small1 to 2 percent.
Mr. HEALY. Correct.
Chairman LEACH. Yet, given the magnitude of some of these transactions, that could be a rather substantial sum of money, couldn't it? I mean, were the total profits not rather significant rather than trivial?
Mr. HEALY. No, I don't think it was too significant. We are in the business where we do intermediate large sums of money and the fees here were not inappropriate in terms of their magnitude.
Chairman LEACH. Do you have any sense of what the total profits on the transactions with NBU in this particular time period, let's say 1996 to the present, had been?
Page 180 PREV PAGE TOP OF DOC Mr. HEALY. Well, in terms of the on-lending transactions, the spreads on those transactions were typically 1 to 2 percent. I mentioned there was about $705 million of them that went through. So that would lead you to a high number of $14 to $15 million.
In addition, though it's difficult to precisely dimension that question, we also trade the treasury bill market and we also had positions on the foreign exchange market. The trading profit that we could make can be significantly larger than that. But that is our trading position, it's not these on-lending trades.
Chairman LEACH. Did Mr. Lazarenko use any of your bank's capabilities?
Mr. HEALY. No, not to our knowledge.
Chairman LEACH. Anyone at the central bank as an individual?
Mr. HEALY. As an individual, no. We've researched this and there's no evidence that that's the case.
Chairman LEACH. Mr. Bachus, do you have any questions?
Mr. BACHUS. Thank you, Mr. Chairman.
Mr. Chairman, I'm glad that Mr. Healy finally had an opportunity to publicly testify today about a series of events involving the IMF and the National Bank of the Ukraine as it dealt with CS First Boston. He's been under certain privacy constraints which has basically allowed only one side of the story to be told. And I think that, as a result of his scheduled testimony here today, the Republic of UkraineI guess, is that right? The Republic of Ukraine, or Ukrainian Republic
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Mr. HEALY. Ukraine.
Mr. BACHUS.Did give you permission to testify.
I want to say this as Chairman of the Subcommittee, that representatives of CS First Boston have been very cooperative in briefing the staff of the Committee about the transactions. They've gone to some length in doing so, those transactions in which they were a party to, and they've been very forthright and I want to thank them for that assistance. In no way have you been evasive. And I would just say that I am pleased that CS First Boston has had a chance to testify here today, wanted to testify, relished the opportunity to clear the record and to set the record straight. So I think that obviously, had there been an intent to evade public scrutiny, they would not have been here today. I think that speaks well of CS First Boston. Thank you.
Mr. HEALY. Thank you.
Chairman LEACH. Thank you very much for putting that on the record, Spencer.
One of Committee's concerns relates to offshore financial havens. Why would it be that you would use Cyprus, let's say, instead of London or Switzerland?
Mr. HEALY. Let me answer that question. Cyprus is a commercial center and has been for Eastern European countries. Really the dominant reason, aside from historical relationships with the former Soviet Union, reason that Cyprus has become a center for Eastern Europe is that it enjoys favorable tax treaties with those countries.
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Any non-resident investor in Cyprus or in the Ukraine would typically suffer a 15 percent withholding tax when they own Ukranian treasury bills. But, Cyprus has what's called a ''double tax treaty'' with the Ukraine, whereby there's no withholding tax for non-resident holdings of Ukranian domestic instruments. That is not unusual in the world. There are other jurisdictions that also have double tax treaties that exempt you from withholding taxes which are typically non-recoverable. The predominant reason that Western banks, such as ourselves, have established banks in Cyprus is because it's a tax advantaged location to transact in those markets. It is not because of secrecy aspects of the jurisdiction.
Chairman LEACH. According to some preliminary findings of the IMF, it is suggested that during the period mid-November 1997 to the end of January 1998, some $270 million in reserves was deposited by the Ukraine Central Bank at your Cyprus branch and they believe in an effort to promote artificial demand for Ukrainian government bonds and treasury bills.
In late 1997 or early 1998, these treasury bills of Ukraine were earning approximately 60 percent interest reflecting the speculative nature of the investment. I'm told that Price Waterhouse Coopers is attempting to trace the profits from these T-bills to determine whether they ended up back in the central bank or used for other purposes.
Does your company have any understanding of where the proceeds of these T-bill investments were sent?
Mr. HEALY. Mr. Chairman, first of all, the $275 million is a number that, again, doesn't foot to transactions we know. There was one transaction of that nature which is a $75 million transaction. In that transaction, the deposit was placed with Credit Suisse First Boston, and the terms of the deposit were such that it could return that deposit with interest, a normal dollar interest rate, or alternatively could return it with a specified amount of treasury billsUkrainian treasury bills.
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We took that depositand it was our option as to what we returned. We took that deposit and we did over some period of time buy Ukranian treasury bills. When the Ukrainians wished to unwind the transaction, it was at our election as to whether we returned their deposit or whether we returned the treasury bills that we were holding. We chose to return the treasury bills that we were holding. The treasury bills we returned were normal treasury bills, so they didn't pay a coupon, they were like zero coupons. The values of those T-bills on the day we returned them was some $80 million. So, in the transaction that we know, there was a deposit made of $75 million and the return to the central bank was $80 million. That happened over about a ten-month period, I believe.
So there wasn't this concept of 60 percent yields in the sense of realized returns. During that period the exchange rate had devalued. It had moved from 1.9 to 2.25. So the value that they got of their $75 million deposit was $80 million coming back when you adjust for the fact that they did get the 60 percent yields in each currency. In fact, they weren't 60 percent, they were closer to 40 percent, but they lost the money on the exchange rate devaluation. Net/net, they end up with a rate of return over that ten-month period which was a bit better than if they had gotten the dollar return of 6 percent, but not materially better.
Chairman LEACH. Is Credit Suisse aware of any evidence that might suggest that any profits or any advantage accrued in these transactions to the benefit of personal use of any Ukrainian citizen or government official?
Mr. HEALY. No, we have no evidence that that's the case. And in fact, as I mentioned, in this transaction the deposit was placed with us by the National Bank of the Ukraine, it was returned by us to the National Bank of the Ukraine. And there was nothing that happened in between.
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Chairman LEACH. Do you have any further questions, Mr. Bachus?
Mr. BACHUS. I would say this, in the course of performing due diligencehave you gone into thaton transactions with the National Bank of the Ukraine, have you followed up any of that line of questioning, Mr. Chairman?
Well, I would say this, what information either direct or indirect did Credit Suisse First Boston officials have whether it was in Kiev, in Cyprus, or in your head offices have about the terms and conditions of the IMF financial support for Ukraine?
Mr. HEALY. Both directly and indirectly, we had no information in terms of the performance criteria.
Mr. BACHUS. OK.
Mr. HEALY. We were aware and read closely the IMF press releases that there were inflation targets to try and get inflation down to, say, 1 percent a month. They had growth targets, they tried to reduce their trade deficit. But in terms of anything specific in terms of performance criteria either directly or indirectly, we had no knowledge. That information was kept confidential.
Mr. BACHUS. So they did not supply you with their IMF documents or any terms and conditions and say, we ask that you be aware of these?
Page 185 PREV PAGE TOP OF DOC Mr. HEALY. No, absolutely not.
Mr. BACHUS. No further questions.
Chairman LEACH. Well, I have no further questions and I want to underscore the cooperation of Credit Suisse First Boston in the Committee's inquiry. And both in terms of testimony before the Committee and private consultations, the company has been very direct. These are very awkward times, and my own personal view is that Western financial institutions may or may not be tied to some imperfect practices of others, but the alternative of suggesting at the extreme that they all pull out of this region would be a desperate mistake. And so one of the questions is, how do you not only stay, but operate as prudently as possible and with two different legal systems and value systems that come into play?
And from time to time, we are going to have to be very concerned that imperfect behaviors of others don't spin off into our own systems. But I think we err to say we should just turn our back on this neck of the woods.
And so these events that have taken place are possibly not all perfect and possibly have some tarnishing implications for some. But we've got to be careful that they don't reflect maybe in an imperfect way on those that may or may notthey should.
Anyway, I thank you both. I thank you for your testimony, Mr. Healy.
Mr. HEALY. Thank you.
Page 186 PREV PAGE TOP OF DOC Mr. BACHUS. Mr. Chairman, I would just like to also say this, the fact that a branch in Cyprus was used, all the leading financial institutions have these branches in the Caribbean and Cyprus and they're perfectly legal, they're utilized by these financial institutions on a daily basis and they do that quite legally.
Chairman LEACH. Well, one of my concerns with your particular bank is that you don't have a branch in the Island of Iowa.
Mr. HEALY. I'll convey that to our head office.
Chairman LEACH. Fair enough.
Mr. BACHUS. And, you know, we have expressed some concerns about some of these offshore locations, but as long as they're legal and used in international financing, you're going to continue to utilize those as are other institutions and if you don't, you're going to suffer a competitive disadvantage and so it is not an indication of any wrong-doing or in any regard.
Chairman LEACH. Thank you. The hearing is adjourned.
[Whereupon, at 4:52 p.m., the hearing was adjourned.]