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TUESDAY, MAY 22, 2001
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.

    The committee met, pursuant to call, in room 2128, Rayburn House Office Building, Hon. Michael G. Oxley, [chairman of the committee], presiding.

    Present: Chairman Oxley; Representatives Leach, Roukema, Bereuter, Bachus, F. Lucas of Oklahoma, Kelly, Paul, Weldon, Ose, Biggert, Shays, Miller, Capito, Ferguson, Tiberi, LaFalce, Waters, Sanders, C. Maloney of New York, Bentsen, J. Maloney of Connecticut, Hooley, Carson, Sherman, Meeks, Lee, Inslee, Schakowsky, Moore, Jones, Capuano, Hinojosa, K. Lucas of Kentucky, Shows, Crowley, Israel, and Ross.

    Chairman OXLEY. This hearing of the Committee on Financial Services will come to order. Pursuant to the Chair's prior announcement, I will recognize myself for 5 minutes for an opening statement, as well as the Ranking Minority Member, and the Chair and the Ranking Minority Member of the Subcommittee on International Monetary Policy and Trade for 3 minutes each. All Members' opening statements will be made a part of the record, and it is so ordered.

    Today, the committee is meeting to hear from the Secretary of the Treasury, Mr. Paul H. O'Neill, on the state of the international economy. This hearing is mandated by the fiscal year 1999 Foreign Operations appropriations bill. That law provided for an $18 billion increase in U.S. funding to the International Monetary Fund. To ensure that the IMF would effectively use these funds, Congress included as a requirement, authored by Representative Mike Castle and a Member of our committee, that the Treasury Department report annually on IMF reforms and testify to this committee on the state of the international financial system.
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    Earlier this year the committee heard from Federal Reserve Board Chairman Alan Greenspan, about the conduct of monetary policy and the state of the domestic economy. Given the interdependence of the U.S. with the rest of the world, economic growth in the United States is greatly affected by disturbances or crises in the international economy. For instance, the recent 30 percent drop in the Turkish lira caused Ohio-based Procter & Gamble to blame the Turkish economic crisis for a decline in earnings projections for the second half of 2001.

    Accordingly, the committee welcomes this opportunity to oversee U.S. international economic policy. An important way the U.S. has influenced the direction of the international economy is through its participation in international financial institutions, principally the IMF and the World Bank. These two institutions, as well as the General Agreement on Tariffs and Trade, were the result of the Bretton Woods Conference in 1944 and comprised the Western world's response to the Great Depression and World War II.

    The IMF's traditional focus has been on exchange rates and balance of payments and how they effect trade and the stability and growth of global economy. The World Bank has traditionally focused on providing loans to assist countries in developing their basic infrastructures. As the international economy has evolved, so too have the institution's programs, with the IMF now also providing longer term loans for ''development'' purposes and the World Bank providing short-term structural adjustment loans.

    Most commentators agree that the Bretton Woods institutions were successful in reconstructing post-World War II Europe and Japan, assisting in the economic development of a number of less developed economies and avoiding international economic depressions. What there is not agreement on is their success in providing development in poorer countries and combating economic crises in a more interdependent world.
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    The last half of the 1990s was marked by recurrent financial crises and a recognition that the economic situation in some of the world's poorest countries has gotten worse, not better, despite billions of dollars in development loans. As a consequence, both the international financial system and the multilateral lending institutions have been the subject of widespread calls for reform.

    In that regard the IMF legislation also had a provision, authored by International Monetary Policy and Trade Subcommittee Chairman Doug Bereuter, calling for the establishment of an advisory commission to review the need to reform the World Bank, IMF and other multilateral organizations. This so-called Meltzer Commission issued its report last year and will no doubt be the subject of review by this committee today and in the future as it conducts its oversight of the international financial institutions under its jurisdiction.

    In addition to U.S. participation in international financial institutions, I am sure the committee will want to hear the Secretary's thoughts on how the U.S. should respond to some of the economic problems in other countries and in other regions of the world. Japan's economic stagnation, Turkey's and Argentina's currency woes, EU's interest rate policy and foreign exchange policy may all be subjects on which the committee will seek guidance from the Secretary today.

    In closing, this hearing gives this new committee with its enhanced jurisdiction over the financial services sector a chance to hear from a new Administration on how best to use these international organizations to encourage trade and economic growth. From my own perspective, I am supportive of international efforts to improve trade and economic cooperation among countries. While some would prefer to take a more isolationist stance and withdraw U.S. participation and leadership from these institutions, such a stance is neither desirable nor conceivable in the 21st Century. A much more constructive route is to focus on how to best reform and use these institutions to increase economic prosperity for the United States and our trading partners.
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    With that, I welcome you to your first appearance before the committee, Mr. Secretary, and I look forward to your testimony.

    I am now pleased to yield to the Ranking Member, the gentleman from New York, Mr. LaFalce.

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

    Secretary O'Neill, I want to welcome you to your inaugural appearance before our committee. Oversight of the United States interests in the international financial architecture is without doubt one of the important functions of our committee. So I think it is appropriate that this topic is the occasion for your first appearance.

    Reform of the international financial institutions is a continual and complex task. For our part this committee and Congress have provided specific guidelines of reform over the past 3 years, and it is critical that we achieve good communication between our committee and the Treasury Department in order to ensure that these guidelines lead to good policy reforms. I hope today's hearing is only an initial step in what will be a continuous and cooperative effort.

    I would like to raise a conceptual issue that I believe is nonetheless critical to the reform effort, and that is identifying the proper mission of the IMF, the development banks, and especially the World Bank, and I am troubled by the impression that may be left by some of your remarks, correctly or incorrectly, regarding the nature of World Bank activities. There has already been some confusion and some reading of the tea leaves regarding your recent statement on this topic, and I look forward to clarifying your views here today.
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    As some have interpreted your comments, distributional concerns should not be a part of the Bank's mission and the exclusive guiding principle for bank activities should be the promotion or productivity in per capita income growth. If that impression is accurate, I would be troubled. All should recognize that productivity is central to the long-term success of all economies, rich or poor. And I note that you rightly point to education as a critical productivity enhancing investment which the bank should be supporting.

    Indeed, in the Reagan era I authored the bill creating the White House Conference on Productivity, chaired by one of your predecessors, William Simon. The working chairman was Bill Seidman, the chief White House liaison was Roger Porter. So my concern is not with emphasizing productivity, but my concern is with any attempted exclusivity of this focus.

    Those of us who follow the history of the World Bank recognize a pattern of policy shifts over the years between so-called growth policies and policies that emphasize poverty reduction. I think the McNamara era firmly established the moral imperative of poverty reduction at the bank. This was followed by a period coinciding with the Reagan years which ushered in a much more focused, some say exclusive focus on growth policies, however badly designed. But starting with the tenure of President Bush, the senior, and continuing through the end of the Clinton Administration, I believe the Bank has sought a path toward what could ultimately be an appropriate combination of growth and poverty reduction policies.

    We are not there yet, but I do believe that reform efforts already under way at the Bank may well succeed in stimulating long-term growth in developing countries while also providing desperately needed immediate relief from poverty. Both are necessary, but the latter is critical, in my view. Growth policies constitute a good long-term anti-poverty strategy, but they are insufficient for meeting the needs of those trapped at the bottom of the income ladder in the interim, and the interim could last for generations. The so-called long term can often amount to decades or even lifetimes, and the bottom of the income ladder often means less than a dollar a day.
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    So it is unacceptable to suggest that the World Bank should ignore conditions of desperate poverty while exclusively pursuing growth policies, the benefits of which may trickle down to the poor, but only after many, many years.

    There are a number of other issues that I am extremely concerned about that I can't discuss in great length, but in 1988 I included a provision in the omnibus trade bill which called for Treasury to make 6-month reports on the exchange rates and have a policy with respect to exchange rates, which is enshrined in law, and I worked this out with David Mulford. And we are entering trade agreements all the time with little regard to the effect of exchange rates and it is difficult to enter into a trade agreement with a country for free trade when it might be 1-to-1 and all of the sudden within a month it is not 1-to-1, it is 1-to-3 or 1-to-100.

    So we need much more attention on exchange rates, and note the Treasury has to give us a report every 6 months. The report preceding the Mexican debacle of 1994 did not even mention potential problems with the peso. So it has got to be a good report though, too. And so much is going on today around the world, Argentina and Turkey. I would like a glimpse of your views as to what is going on there and what we might be able to do.

    Thank you very much.

    Chairman OXLEY. The gentleman's time has expired.

    The Chair is now pleased to recognize the Chairman of the Subcommittee on International Monetary Policy and Trade, the gentleman from Nebraska, Mr. Bereuter.
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    Mr. BEREUTER. Thank you, Mr. Chairman. Since my remarks are lengthy, I would ask unanimous consent to summarize and just make a point or two.

    Chairman OXLEY. Without objection.

    Mr. BEREUTER. Thank you, Mr. Chairman, and, Secretary O'Neill, welcome to the committee. As my colleagues know, we look forward to a productive working relationship with you and your key assistants, Assistant Secretaries or Under Secretaries, when you get them in line that is. And I would tell you that our subcommittee's agenda includes some work on authorization for the Export-Import Bank, the Asian Development Fund, something called the IFED, and then we will move into trying to knock down some of the trade barriers to the export of our financial services from the various types of institutions. But after that I think the most challenging, politically and intellectually challenging task before us is a fundamental reexamination of the international institutions architecture.

    The IMF in particular is controversial, especially charged now, in light of the fact that it is an element in the anti-globalization demonstrations and effort around the world. I would like to offer just a couple of comments about the IMF specifically.

    I believe that the IMF and the Treasury Department under the Clinton Administration was unwilling to admit some of its errors and misjudgments. During the Asian financial crisis the IMF, with strong encouragement from key members of the Clinton Administration, employed what I think were counterproductive policies in both Thailand and South Korea, inappropriately treating them as the usual fiscal basket cases at the beginning even though their fiscal situation was sound. Perhaps any Administration would have made that judgment, but it was a very different case, and I think we need to learn from these errors.
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    In addition, there were also loans to Russia, which might be better labeled as Yeltsin loans, and which will be shown over time, I think, to be one of the biggest blunders of the late 20th Century.

    However, at the same time we in Congress, I think, need to candidly admit that if we didn't have an IMF or an institution somewhat like it we would have to create one.

    The second area, as the Chairman already mentioned, I have a particular interest in the recommendations, majority and dissenting views of the Meltzer Commission, which resulted from language I first offered. That commission—and I would like to have your comments, your views on it today and later from the department.

    Looking at the majority and the dissenting views, they recommended that the IMF withdraw from questionable long-term concessional loans and focus instead on the extension of more manageable short-term, 4- to 8-month, credit areas. Moreover, the Commission recommended that the IMF should lend only to countries that meet certain prequalification criteria.

    I appreciate the independent judgment of the dissenting members of the Commission who contend that limiting the IMF to a set of prequalification criteria would preclude certain countries which are central to macroeconomic global financial stability from receiving assistance. For example, if this prequalification criteria would have been applied to the 1997 Asian financial crisis, global contagion may have been far worse.

    They have devoted most of their attention to the IMF and secondarily to the World Bank and not too much to the regional banks. But with respect to the World Bank, they propose that the World Bank shift from highly concessional loans to a system of performance-based grants to the poorest countries in the world that lack reasonable access to funds in the capital market. Furthermore, the Commission recommended that the World Bank defer to the regional multilateral institutions for lending activity in Asia and in Latin America.
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    I think the Congress should do a fundamental reexamination of their recommendations and the dissenting views, and I intend to in our subcommittee, with the assistance of both sides of the aisle, engage in that kind of activity as a major part of the subcommittee's activities for this Congress, and I look forward to your input, your recommendations in all respects.

    Chairman OXLEY. The gentleman's time has expired.

    The Chair is pleased to recognize the Ranking Member, the gentleman from Vermont, Mr. Sanders.

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

    Welcome, Secretary O'Neill, thanks for being with us. Since its beginning 55 years ago, the IMF has grown to become the most powerful financial institution in the world, with effective control over the economies of some 50 developing nations. But there is a growing sense among many people, including myself, that the IMF is not doing the job it was established to do and that it has taken on new jobs that it is not able to do.

    In Asia, for example, the IMF not only failed to warn of the financial crisis, it was largely responsible for creating the crisis in the first place. It did so by forcing countries to remove restrictions on capital flows and then made matters worse by requiring governments to raise interest rates and slash budgets, turning a financial crisis to a full-blown economic depression in Asia, with reverberations throughout the world.
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    At the same time, the new roles that the IMF has taken on for itself have led to dismal failures. The IMF's debt reduction program for the world's most heavily indebted poor countries, for example, has led to deeper poverty and continual debt for the poorest people of this world. In many of these countries, where HIV/AIDS, hunger and unemployment are rampant, it is common for governments to spend far more on debt service than on urgent human needs, such as health and education.

    In addition, by requiring poor countries to export their way out of financial and economic trouble, the IMF has forced American workers to compete against rising imports of low wage products. The IMF's misguided policies in recent decades are largely responsible for the lack of per capita economic growth in Latin America, plummeting per capita income in Africa, skyrocketing trade deficits in the United States, and a decline in real wages for American workers.

    Mr. Secretary, I hope you will agree with me that the IMF is an institution in desperate need of some structural adjustment of its own. For example, number one, the IMF and other international financial institutions should open themselves to public scrutiny and oversight. Where is C-SPAN when we need it? Major decisions, often impacting the lives of hundreds of millions of people, the most vulnerable people in this planet, are taken behind closed doors. In fact, the Congress, to be honest with you, doesn't even know the role that our representative in the IMF is playing.

    Number two, the IMF should make lenders pick up the tab for their losses in financial crises. If you want to invest in Asia, that is fine, but if you lose money there, don't ask the taxpayers of this country to bail you out. Our conservative friends call this moral hazard. I call it corporate welfare.
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    Three, the IMF should stop prescribing ''one size fits all'' austerity conditions that often lead to economic stagnation and poverty. Instead, the IMF should allow countries to pursue alternative policies to create stability without austerity; in other words, sustainable economic development.

    Fourth, the IMF should stop pretending to be a development institution. Its misguided development attempts have resulted in rising debt and deepening poverty for the poorest countries in the world. Developing countries need real transfers of resources and technology, direct investment and development aid, not austerity policies and more debt.

    And last, but not least, the IMF and the World Bank should cancel—and I hope that you will think about this and perhaps agree with us—should cancel and not just reduce the debt that they have created among the impoverished countries of the world. The IMF's current debt reduction program, according to the recent report by the U.S. General Accounting Office, is keeping poor countries hopelessly in debt and the IMF forever in charge.

    Mr. Secretary, I hope you will join me in calling for these reforms, and I hope that you will join Members of Congress from various political philosophies in working to make these reforms a reality. I thank you for joining us today.

    Chairman OXLEY. The gentleman's time has expired, and we will now turn to the Secretary for his statement.

    Mr. Secretary, welcome to the Financial Services Committee for your first appearance before our committee and hopefully, not the last. Thank you.
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    Mr. O'NEILL. Well, thank you, Mr. Chairman, Mr. LaFalce, the distinguished Members of this committee. It is a great pleasure to have this opportunity to be with you today to talk on these important subjects. Since there are so many of us and the time is already moving on, with your permission, Mr. Chairman, I will simply put my prepared statement into the record.

    Chairman OXLEY. Without objection.

    Mr. O'NEILL. Thank you, sir. And maybe just make a few observations and then engage you in the things that you are most interested in talking about.

    I believe the institutions we are here to discuss today have been, and are, and need to be important to the world. Having said that, I also believe that reform is both desirable and necessary, in the sense that I think we should expect a great deal from these institutions and from what they accomplish, and I think it is not too difficult to find, both in the experience and the analysis that has been done of these institutions, shortfalls in what one would describe as an ideal performance. So it is clear to me that changes are desirable and need to be made.

    It would be nice if we could stop the world so that we could do it all at once. I frankly don't think that is possible. As evidence, I would suggest to you that from January 20 we have been necessarily engaged with these institutions on matters of the moment, if you will, with Argentina and Turkey. It is simply not possible to say we are going to have a complete transformation of the way these organizations work and implement changes on the fly. This is not to say that we can't begin to reform and begin to have an opinion about directional changes, but perhaps that will come out in our dialogue in the next couple of hours.
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    I think these institutions developed over a considerable period of time and there is an expectation of practice and procedure in the world. I think, if we simply drew a line and said from this day forward these things will not rule, the relationships any more, that we would find we would not like the consequence of, in effect, shutting off the lights on policy the way it has been and insisting it change tomorrow in a sharp and distinct way. So I think for sure we need reform, and we need change, and we need to do it in a way that gives people around the world a clear indication that we are intent on changing the rules of engagement, if you will. But we need to be deliberate and certain in the changes that we do want to make. Of course, what we suggest to these institutions, I think we need to understand, is a voice among several. In most of these institutions we hold a significant position, but not an absolute controlling position. At the same time, I think those of us in the Administration do understand that what we say to these institutions we say on behalf of the American people. So it is very important that this not be an independent view; that is to say, not a view independent of the view of the Congress and the will that you work through legislation.

    But I do think working together we can help the rest of the world to attain a living standard at least directionally consistent with what we have been able to achieve in this country and in a fairly near term. Mr. Chairman, with that, I would be delighted to begin responding to questions.

    Chairman OXLEY. Thank you, Mr. Secretary. And let me begin. First of all, thank you for your remarks and for the prepared statement that I reviewed in regard to the proposal of reforms on the international front.

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    Mr. Secretary, I was interested to read this past Sunday an op-ed piece in The Washington Post in which you were criticized for remarks made regarding the World Bank anti-poverty programs and the OECD initiatives concerning international tax and banking safe havens. I thought it was a rather, shall we say, in your face kind of an op-ed piece and I thought perhaps since you were testifying today, it would be an appropriate time for you to perhaps reflect on that op-ed piece, assuming you have seen it or certainly your staff has seen it. I will give you an opportunity to respond.

    Mr. O'NEILL. Well, thank you very much. Indeed I did see it. I suppose from graduate school days I have been a consumer of four or five newspapers every day. Now that I am here I find I don't enjoy them quite as much as I used to. I did see this column, and frankly, I was surprised that if Mr. Hoagland was going to write what he did, he didn't bother to call me to find out if what he was criticizing me for was fair game or not. With regard to the issue that he raised about the statement that I have issued about the so-called tax haven process with the OECD, in fact, in a nutshell—I would be happy to supply this for the record as well—what I have said is this, and I believe it is a correct policy for the United States: we are intent and, in fact, we have a legislative mandate at the Treasury to ensure that all people who fall under the tax laws of the United States fully and faithfully pay their obligations under the tax laws of the United States. In that regard, we have before my time been associated with the OECD in working to develop an arrangement so that our country and reciprocal countries can provide information to each other to assure that information on individuals that fall subject to the tax laws of any of the reciprocal countries can be made available with probable cause. I reaffirmed and reasserted as strongly as I know how to in the English language that we were committed to that principle and we were committed to working with the OECD to accomplish that purpose with the countries of the world, not just the members of the OECD.
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    At the same time, I was getting lots of letters from respected Members of Congress from both the House and Senate, suggesting to me that the OECD was not only helping with this initiative to help us fully enforce our tax laws, but that the OECD project was wandering off the path and getting involved in so-called tax harmonization and trying to interfere in the tax structure judgment of sovereign nations. I went out of my way again to say as clearly as I know how to do in the English language that we did not wish to be associated with any such process.

    Those are the two principal issues in the debate in which I tried try to clarify the U.S. position in writing my opinion and making it available to the public. Mr. Hoagland, I think, perhaps without having read what I wrote, chose to characterize my intervention as somehow creating a difficulty for U.S. foreign policy because I was now advocating dirty money.

    Perhaps all of you who have lived in the public eye, most of you for a very long time, are accustomed to this. I am not so much accustomed to it. Perhaps I will become accustomed to it.

    On the issue of what it is I have said about the World Bank, and again I think Mr. Hoagland suggested that I was personally attacking Jim Wolfensohn, I must tell you this column appeared on Sunday and I really found it quite humorous to be at dinner at Jim Wolfensohn's house on Sunday night so we could have a laugh about it together. It is true that I have said that I think the IMF and the MDBs and the World Bank need to reform. These are not things that I say in the closet or to a selective audience. I have said it on the public record over and over again, as recently as at Jim's house on Sunday night when there was a distinguished group gathered to talk about the reasons why these institutions exist, which is the existence of 4.8 billion people who live in the world with living standards that I think we are all horrified by. And I said as directly as I know how in that company that I do believe we need to raise our standards and expectations of what these institutions deliver. That was not said in a way to be personally critical of Jim Wolfensohn and the things he has been trying to accomplish. Quite to the contrary, I think all of the good things that have been accomplished should be credited. On all of the shortfalls, we should work together, not in a mean-spirited way to find fault with the institutions, because I begin with the presumption that we all want to do good and it is useful to learn from our mistakes.
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    I must say there is an awful lot of room to learn, because if you look at what we have accomplished in terms of raising the standards of living around the world in the last 50 years, we have a very long way to go. Despite the fact that we have spent hundreds of billions of dollars or provided hundreds of billions of dollars, there is woefully little to show for it, at least as I would measure the productivity that one could expect to see from well-deployed money.

    So again, I guess I am not too surprised to find people writing things without what one would consider to be the necessary information, but I take it as part of the badge of having the honor to do public service again.

    Chairman OXLEY. The gentleman from New York, Mr. LaFalce.

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

    Mr. Secretary, I want to emphasize something that I just didn't emphasize enough before at that point. I do want to work with you in a very cooperative manner, in a very bipartisan manner. I look forward to that and I think I can speak for, if not all, virtually all of the Democrats on this committee, too, and we look forward to getting together with you in the near future to start that process.

    Let me just focus in on two areas: First, exchange rates and then; second, the roles of IMF and the World Bank with respect to two issues in particular, debt relief and AIDS. But first exchange rates.
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    You were the President of Alcoa Aluminum, and if you entered into a long-term contract with Mexico, would you have taken payment for a 30- or 40- or 50-year period in pesos without regard to the possible devaluation of the Mexican peso? How would you have accounted for that, and how would you, please, account for a free trade agreement, whether it is with Canada or with Mexico or Israel or Jordan or free trade agreement with the Americas? How would you account for the potential volatility of exchange rates, because our trade agreements historically have not done that?

    Mr. O'NEILL. Well, you are right. This is a subject that first as President of International Paper and then as CEO of Alcoa for 13 years.

    Mr. LAFALCE. I didn't mention International Paper, because they closed the plant in my congressional district, Mr. O'Neill.

    Mr. O'NEILL. I noticed that.

    Mr. LAFALCE. That is J. Stanford Smith.

    Mr. O'NEILL. That is right. I noticed that Tonawanda was part of your district, and I was happy to say that Tonawanda was closed before I got there. It was not on my watch. But as you know, there are other great International Paper facilities in the State of New York.

    In any event, how does one deal with this in the private sector? First of all, you do not make what I would call unbalanced contracts, actual relationships across country boundaries, because you are aware of the uncertainties and complexities that can develop over time. But you are quite right to put the time dimension on the question you did. Because in the kinds of businesses that I have been in, when you go into a country and either buy operating plants or build operating plants, those are decisions for 50, maybe even 100, years. So first of all, you do not go in unless you have a fairly high level of confidence that something like the rule of law that we know here and enforceable contracts and an ability to keep corruption out of your immediate activities exist. So there are some preconditions that intelligent people make before they put assets on the ground.
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    Mr. LAFALCE. If that was the case, we never would have gone to Mexico, because Vincente Fox campaigned on the imperative of cleaning up the endemic corruption.

    Mr. O'NEILL. I was careful to say within the framework of the work that you do as an individual company. I am one who believes you can pretty well secure for yourself an ability to work in a corridor of Western values if you insist on it. And I think I can demonstrate to you I was able to do that in Brazil and in Mexico and in Korea and a lot of other——

    Mr. LAFALCE. How would you deal with the exchange rate problems and how do we deal with that in our trade agreements?

    Mr. O'NEILL. I guess I think it is not possible to protect, nor probably is it desirable to protect, all of our individual companies and factors of production against shifts in the way the world is configured and the risk associated with changing government structures and rulers and presidents and parliament and Congress and all the rest of that.

    Mr. LAFALCE. Should your trade agreements have some escape hatches?

    Mr. O'NEILL. I do not think it is possible to create a safe corridor for capital that says no matter what you do we are going to ensure you that sovereign governments, in general, follow fair exchange rate practices. So no, I don't think that you can be protected by your government against exchange rate risk. But there are market devices that exist out there that those of us in the private sector use every day, in effect to make sure that for production purposes we work in the currency of the country so that whatever happens our production cost, in effect, remains protected against the rest of the world. Then the other thing you look at if you are good at making money in the worldwide operations, you look at the basic physical competitiveness of what you do, so that no matter what happens in the world you have an anchor that gives you a better position than anyone else in the world, and then you would use derivative contracts to protect your foreign exchange risk.
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    Mr. LAFALCE. With all due respect, Mr. Secretary, I find that unfortunately quite deficient, because I have too much experience with trade flows being dependent primarily upon currency fluctuations. You look at the trade we have with Canada and if we are dealing at 88 cents to the dollar, that is one thing. If we are dealing at 65 cents to the dollar, it is something else. Businesses close and people lose jobs and if you enter into an agreement on a certain set of assumptions, and that is a certain relationship between the two currencies, and then there is a 50 percent change or a 5000 percent change, the most basic fundamental element of the bargain has changed so drastically that you never would have entered into that bargain. And I just don't think we can enter into trade agreements without considering that question. And nobody, Democrat or Republican, has come to grips with that issue. And I don't find your response thus far adequate.

    Chairman OXLEY. The gentleman's time has expired. The Secretary may respond.

    Mr. O'NEILL. As I said to you, I was the Chairman of Alcoa for 13 years and at International Paper for 10. During this time I ran a company that lived in a world where the yen varied between 270 and 80 and mine was always the most profitable company in the world, without regard to exchange rate fluctuations between the yen. If you would like to talk about European countries, yes, it creates pain on a short-term basis if your financial management is not good at providing derivatives to cover exchange rate risks, but it is a fairly short phenomenon. If you know what you are doing, you can make money in a very substantial way in a world that is fraught with uncertainty and the uncertainty of sovereigns changing and currency rates changing, because sovereigns make big mistakes about the financial structure of their own country.
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    Chairman OXLEY. The gentleman's time has expired.

    The gentleman from Iowa, Mr. Leach.

    Mr. LEACH. Thank you, Mr. Chairman.

    Welcome, Mr. Secretary. Your written testimony very thoughtfully focuses on IMF reform and I think quite properly it underscores the effort to promote in three words, productivity, transparency and prevention. In that context, particularly of the first and the third, productivity and prevention, it is arguable that the greatest issue in the world today, particularly the developing world, is disease prevention. Here it is relevant to note that the so-called Meltzer Report called for greater attention to the AIDS problem. It also called for a greater grant, as contrasted with lending, component of the international financial institutions.

    Consistent with this reform approach, this Congress, led by this committee in the last Congress, passed authorizing legislation for the establishment of an AIDS trust fund and in the last 6 months there has been an awful lot of international discussions on the subject. In any regard, the legislation that emanated from this committee, which is the law of the land, directed the Secretary of the Treasury to negotiate the establishment of such funds to be housed at the World Bank. Could you update this committee on the status of those negotiations?

    Mr. O'NEILL. Well, as I am sure you know, a week or so ago the President announced the intention to provide $200 million as a beginning for a trust fund arrangement. We are still working out the details of exactly how this should be housed and administered, and the details are not quite finished.
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    Mr. LEACH. I appreciate that. I would only stress that the World Bank has more experience than many understand, and it has a mechanism of a 5-to-1 leveraging circumstance, of which the one is the United States. It seems to hold an awful lot of potential for an early timeframe addressing the trust funds issue. And I would only urge, as we have privately discussed, the Treasury put its oar in as strongly as it can. And I am pleased with the President's announcement. We all hope for more, but I hope this is a first step in that direction.

    Thank you.

    Chairman OXLEY. Does the gentleman yield back?

    Mr. LEACH. Yes, I do.

    Chairman OXLEY. The gentleman yields back.

    The gentleman from Vermont—he is temporarily gone.

    Mrs. Maloney.

    Mrs. MALONEY. Welcome, Mr. Secretary. In 1998, the world faced an Asian contagion so potentially massive that our leaders in this country feared that our domestic markets could be destabilized if it spread. Before this committee Secretary Summers said the contagion would put American savings at risk, because of what it would have meant for the broad pattern of financial markets if it had not been contained. Obviously, with the explosive growth of investing in this country through mutual funds and retirement plans, such a situation could impact tens of million of small U.S. investors.
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    Given the possibility that we could face another situation like that in the future, I have a question about how the Administration—the policy that you would put forth. Would your Administration actively work with our international partners to fend off such a crisis or would you stand on the sidelines and leave countries to fend for themselves? In such a situation do you support only IMF lending to countries that prequalify for loans under the conditions developed by the Meltzer Commission?

    Mr. O'NEILL. Thank you very much.

    Let me begin by saying I think in the world that we lived in then, and even the one that we live in today, that contagion is an issue that should concern us. At the time that Secretary Summers spoke to you I suppose I would have said to you what he did, but I frankly do not believe that we should accept the notion of contagion as something that God intended for us to have. In fact, I think the idea of contagion is one that we should work very hard to develop mechanisms to defeat.

    In this sense, if you look today at, let's say, some locations or nation-states that have had financial problems that have been in the news—everyone knows something about Turkey and Argentina and Indonesia. If you look at those three places, and you look at their geographic relationship to each other, and you look at their international trade with each other, I submit that you would be very hard-pressed to make a case that they were in any way related to each other. Yet we have this fashionable notion that if something happens to the financial condition of one, that it could be difficult for other countries, like the three that I mention and a host of others. It seems to me we should not accept this proposition that somehow a weakening financial condition in one difficult place is accepted as a basis for money to race around the world and be withdrawn from other markets on the basis of an experience in one country.
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    Now, I don't think it is so easy to solve the problem of potential contagion. But associated with recognition of the possibility of contagion has come what I would say is too frequent intervention, because, in fact, we have convinced ourselves we did not have a choice; that is to say, if we did not act, that the consequences would be multiplied like dominoes falling over. That may have been correct, but by making money available on that theory, I think we do promote the idea that the Meltzer Commission report found not a good one, that somehow we have got to intervene everywhere on the spur of the moment in order to protect ourselves against the consequences of someone falling. I think, as we work, that we can limit country problems to individual countries, and that we will, with that, have a much stronger ability to do preidentification of places that are getting into financial difficulty and, therefore, be able to intervene on a precautionary basis rather than standing back and waiting for things to come apart.

    So, yes, I think we need to be worried about contagion. I think in the most desirable of worlds we need to be identifying, unraveling financial conditions and working through the international financial institutions before there is a real problem. And in that regard I think we need to become increasingly insistent about the fundamental conditions for association with these institutions which are, as I said earlier, insisting on at least directional activity toward the rule of law and enforceable contracts and an accelerated effort to reduce corruption.

    Chairman OXLEY. The gentlelady's time has expired.

    The Chair now recognizes the gentleman from Nebraska, Mr. Bereuter.

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    Mr. BEREUTER. Thank you, Mr. Chairman. I wonder if you would comments on two things, Mr. Secretary. First of all, it seems to me we have an international problem of one or a few people having huge amounts of money which they can move around the world immediately or in very, very short order and that they can manipulate the currency market and the stock markets with devastating effect, that then the IMF is then asked to come in and pick up the pieces and it has a contagion effect beyond that.

    I remember leading a small delegation in the office of Donald Tsong, who has a very powerful position of Finance Officer for Hong Kong. He was badly shaken. He had just in his view taken on this group of pirates what were attempting to break the peg between the Hong Kong dollar and the U.S. dollar and he was successful because he intervened in the stock market, which was contrary to every ideological bone in his body, but he was sitting on $80 to $100 billion reserves at the time. A country with small reserves couldn't handle that situation.

    I wonder what you think we need to do to adjust to this reality that exists today. Does, for example, the Bank for International Settlements have a role? What do we do?

    The second question relates to the Asian financial crisis and how the IMF responded to Thailand, but particularly also the Republic of Korea. There it seems to me a major contributing factor was simply bad banking practices, a whole array of things, lack of transparency, crony capitalism, and I am wondering if you think the IMF did an adequate job of warning about those problems and those warnings were simply ignored and not given much attention or if, in fact, the IMF is up to this task, if it should be allocated in some sort of different fashion, because I think the consequences were severe and they eventually gave those countries fiscal problems that they didn't otherwise have.
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    I welcome any kind of comments, or perhaps you need more time to reflect on this. But any initial comments or proposals to follow up on will be appreciated.

    Mr. O'NEILL. I think we will give you something for the record in addition to what I will say. I think the IMF is up to doing the role that it should be doing, which in a way would scale back some of the breadth of what it is doing now and what it has in the recent past been trying to do, by becoming much more focused. So I think the resources can be there to do a job that is doable.

    With regard to renegade money, what I would call renegade money, I would say something else. I think we need to be especially vigilant of what I would call the presence of substantial amounts of hot money in places that have financial weakness. What I mean by that is money that is not invested in the hard, economy on the ground, because if it is invested in physical assets, it is not so easy to pull up a smelter or paper mill by its roots and run off with it whenever you wish.

    So I think there are some indicators of danger that one can see. I think the other thing we need to do is partly related to what I said about the dangers of contagion. If we can create a satisfactory way for dealing with the issues of contagion, then we can do a good job of preidentification of places that have difficulties. Let's say that the IMF would recommend to a country these are things that you need to do in order not to become a crisis country and a country chose to ignore that advice, to solve the contagion problems we could teach them very valuable lessons by letting so-called hot money take a bath. I think in places where capital rates of return are, let's say, 25 or 30 percent a year, you know that there is a reason for rates to be so much higher than the cost of capital and that reason is risk. I think the nasty part of what we have done in bailing out some of these countries is that we have, in effect, let people get away without paying the risk premium that was implied in the rate of return that they were able to get. We need to figure out a way that when somebody, in effect, bets the farm on a 25 percent interest rate environment, if the circumstances suggest they should lose it all, they should lose it all.
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    Chairman OXLEY. The gentleman's time has expired.

    The gentleman from Vermont, Mr. Sanders.

    Mr. SANDERS. Thank you very much, Mr. Chair.

    As you know, Mr. Secretary, we don't have a lot of time and I apologize for that. I would like to ask you three questions if I could.

    Number one, I and many Members of Congress and the public are concerned about the issue of transparency. And while I can appreciate that in rare circumstances every organization in this world needs secrecy, the fact of the matter is that the IMF is cloaked in secrecy. Can you assure the committee that you will do what you can to open up the IMF so that the citizens of this country and the world, in fact, can get a better understanding of what that institution does? That is question number one.

    Question number two deals with what some call moral hazard, some call corporate welfare. You are aware that the IMF essentially bailed out many large banks who made unwise investments in Asia. People all over this country are outraged. When they make bad investments, the United States Government and the IMF do not bail them out. Will you be prepared to stand up in a very strong way to say to the banks and financial institutions if you want to invest poorly, go ahead, but we are not going to bail you out?

    My third question is will you urge the IMF to not just reduce the debts of the most impoverished countries of the world, but, in fact, to cancel them? As you know, our country and other industrial countries have said that the IMF has not. According to a recent report by the GAO, the IMF policies are keeping poor countries hopelessly in debt. The question is will you urge the IMF to cancel, not just reduce debts?
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    Those are my three questions, Mr. O'Neill.

    Mr. O'NEILL. Thank you.

    On the first issue of transparency of the IMF, what I would like to do is meet with you, or have my staff meet with your staff, and understand exactly what it is you would like to have for the benefit of the public that you do not now find available. To the degree that we can agree that such information ought to be available to the public so they can understand what these institutions are doing with our money.

    Mr. SANDERS. Thank you. We will take you up on that, and we will give you a ring. Thank you.

    Mr. O'NEILL. To the issue of corporate welfare, what I was saying earlier to the previous question, was that I want to develop a way so that people who take a risk of earning 25 percent actually have an opportunity both to realize that 25 percent and to lose everything if that is what the circumstances of country suggest. I am certainly not for bailing out investors when they made a free will decision and it turned out to be wrong. I don't think that should be the business of government.

    Mr. SANDERS. Good, glad to hear that.

    Mr. O'NEILL. On the third issue of debt forgiveness I would say two things. First of all, I don't know of a single case, and I don't pretend to be 100 percent sure of the history of these institutions, but I doubt if there is a single case where a country was forced to take money from these institutions. That means that these loans that are now being the subject of forgiveness are something that was agreed between the granting institutions and the countries. So I think the idea that somehow the IMF and the World Bank and the MDBs somehow intentionally put countries into a financial tailspin, I don't know the evidence of that.
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    Mr. SANDERS. Mr. O'Neill, you are aware that in some cases the IMF lent money to dictators and really unscrupulous people who made debts in a very undemocratic way without input from their people, and now the poor people of these countries are stuck with these debts that the IMF should not have negotiated with dictators and corrupt people. I would just mention that.

    Mr. O'NEILL. Let me say again what I said about rooting out corruption. If you are a real investor, you don't knowingly go where corruption is because it raises the risk premium for your capital. So I am not one who wants to make a case that we should be—or that our intermediaries, which I consider these institutions to be—should be knowingly making money in the face of corruption.

    Mr. SANDERS. You are aware that that has happened, right?

    Mr. O'NEILL. It is certainly true in retrospect, as one looks at the fact that there have been people that absconded with the money. There is no doubt about that. I have said on public record, I may as well say it again here, sending the money that was sent to Russia was beyond belief, but it was sent by the previous Administration and actually at the insistance of the previous Administration through the IMF to Russia. I am not in favor of doing that kind of thing.

    Now, should we forgive money at a faster rate? I think we should see how this debt forgiveness program is doing. But given the opportunity, I would say this to you as well, as I begin to examine these programs and activities in more detail, I ask myself the question, what does all this look like from the point of view of the president of a recipient country? Then I look at what we have been doing with the so-called HIPC relief and we are saying to the sovereigns who receive principal and interest relief you must do this with the proceeds, it makes me wonder very much if we have really given careful consideration to what it is like to have a responsibility for running the country rather than being at the end of a direction line where there is no coordination among the different trusts that are being put on people. So, while in some sense one might say as we give relief through the HIPC activity and we reduce or eliminate principal payments or interest payments, there is something very attractive about more investment in education. But from the financial point of view, it may be the worst thing in the world to insist that a sovereign now take on new debt obligation as though it were suddenly financially secure, when maybe the best use of relief from principal and interest is simply to put the country on a sound enough financial basis so that it may some day have hopes of being financially solvent.
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    Chairman OXLEY. The gentleman's time has expired.

    The Chair will announce that there are two votes on the floor of the House, Mr. Secretary. There are about 3 1/2 minutes left on the first vote. The hearing will stand in recess.


    Chairman OXLEY. The hearing will come to order.

    I now recognize the gentleman from Alabama, Mr. Bachus.

    Mr. BACHUS. Thank you.

    Secretary O'Neill, last week you testified before the IMF/World Bank about the banking crisis in Japan, and you pointed to what we did here during the 1980s, that we wrote off the debt, we punished the wrongdoers, and we made a fresh start.

    Mr. O'NEILL. Right.

    Mr. BACHUS. I agree with you that is an appropriate thing to do on many occasions.

    I would ask you to look at that analogy with the highly indebted poor countries. I think you have correctly said that in many cases going forward, we ought to use grants as opposed to loans. In fact, in the past I would submit to you that we should have used grants instead of loans. Because we didn't, we have created a horrendous situation in these countries.
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    I am not going to cross-examine you about this, because I am sure you are aware that millions of people are dying in these countries because funds are being used to repay debt that could be used for health care, education, sanitation and infrastructure.

    I would ask you this: I am aware that President Bush in his second debate said and acknowledged that debt forgiveness is appropriate at times. Are you aware, number one, that the rich countries of the world have agreed to forgive the bilateral debt, but that we still have the IMF and the World Bank, and they say they are not in a position to forgive much of the multilateral debt?

    First of all, I would say are you aware of that, that we have a contrast between the rich countries forgiving debt, yet the multilaterals not taking that same step?

    Mr. O'NEILL. Well, I think it is true that we have some inconsistency even among what rich countries have decided to do. But for sure there is a difference, say, between the beginning initiative with the HIPC—and I would characterize it as that, a beginning initiative—and what some countries have done in a bilateral way, yes.

    Mr. BACHUS. Are you also aware of some of the successes that we are hearing from Zambia and other countries? There are countries we are hearing of success, the number of children enrolled in schools and beginning to turn some of these epidemic conditions around as a result of the debt relief that has been granted?

    Mr. O'NEILL. Indeed, I have looked at individual country reports and examined what has happened to life expectancy figures and attendance of children at school and the presence or absence of safe water and sanitation conditions and the other things we associate with economic progress or well-being of human beings. But as I said in my testimony, I think where you find there is real progress, the standard of living is going up as measured by the average earning power in the economy. I guess one of the things that I am interested in seeing if we can develop as we go along is, in fact, a very direct measure of what is happening to the average income of individuals and families in all of these developing places around the world, so that maybe we begin with that statistic at the top of everything we look at, because it is probably the best summary figure that tells us whether or not life is really improving in these places.
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    I suspect you probably have traveled as much or more than I have around the world. It is really difficult to believe the conditions that exist in some countries, and, in fact, to see places that lived under colonialism for a period of time that have actually receded far behind where they were when the rule of colonialism was lifted, and to wonder how we cannot only resolve to change these outcomes, but to accomplish a substantial change in direction and level of standard of living everywhere in the world.

    Mr. BACHUS. I would also submit to you in regard to income levels that we are having children go to school for the first time, and I think there is a lag time, but I think once you start educating children, there may be a few years before the income rises, but I think we would all agree in this room that education is essential to improving living standards, and in many of these countries they simply lack those schools.

    Chairman OXLEY. The gentleman's time has expired.

    Mr. BACHUS. Let me simply say this: I would hope that the Treasury would analyze the pros and cons of the proposals to go further with debt relief and provide 100 percent debt forgiveness for these countries. I would ask you, if you have already done so, to supply some of the information to us. If not, I would hope you would consider such an analysis.

    Chairman OXLEY. The gentleman from Texas, Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.
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    Mr. Secretary, let me say, reading through your testimony, I don't have any particular problems with what you say on its face, but I think when you dig a little deeper, I think it becomes much more complicated. I used to think I was sort of becoming somewhat of a rational expectationist, but now I think now irrational behavior is a more realistic economic model, particularly when it comes to international markets.

    Even in your testimony, I think you have some conflicts in how things have really played out, but I want to give you the benefit of the doubt, because you are new to the job, and you are going to have to ride through these things as it is. But I do want to get your viewpoints on a couple of these things. Your core objectives I agree with, but then you talk about later on page 3 that conditionality is sometimes a problem, and you reference Indonesia.

    We have had debates on this panel, left-right, right-right, left-left and in the center, on questions of conditionality and whether or not the Fund and the Bank and Treasury and the G-7 were too harsh on countries. But I think there come times when you want to promote sound monetary, fiscal exchange policy that it requires some pretty tough conditions that have to be imposed. I would concur that Indonesia has not worked, whereas South Korea has worked fairly well, and Thailand has worked fairly well.

    I would also agree with your comments regarding issues of moral hazard, and I am all for letting investors lose their money. What they do with their own money is their own business, as long as it is legal. But we also have to recognize, I think, that you have questions of capital flows in emerging economies and the impact that that has. I doubt you would agree with, and I hope you don't agree with the idea, of having some sort of capital flows regulation or capital flows tax. Malaysia, as you know, tried that, and it ended up being a failed experiment.
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    The I would like you to comment on those, but the three questions I have for you are this: Your Administration has said that you don't want to pursue the same policies that were pursued in the past in dealing with bailouts. I am curious of how you view Turkey different, and perhaps Argentina—maybe you don't want to comment on that—but, how you view Turkey different from what South Korea and Thailand were.

    Second of all, we had a hearing last week regarding the HIPC countries, and the GAO reported that it would take 15 years of 6 percent annual real growth for the HIPC countries, the majority of the HIPC countries, to grow out of the concessional lending program. You talk about the idea of lending to pay debt payments, which I think is a disastrous policy. What is the Administration's long-term view on trying to address that, or are we going to just continue to paper over? This goes back many Administrations.

    Finally, what are your views or the Administration's views on the issues of dollarization and monetary control boards?

    Mr. O'NEILL. OK, good. I don't think you asked me a question about conditionality. You were just commenting on what I said in my testimony. But I do want to make a point about conditionality, if you don't mind.

    You know, I believe it is fundamental and it is a question of management principle, if you will. If you have conditionality in any arrangement that you might have, in a private contract or understanding or in relationships between these international financial institutions and a country, if you have three conditions, and you have people to oversee three conditions, and you have measures that you can use to know whether or not the conditions are being met, I would suggest to you you are much more likely to actually accomplish what you want than if you have 300 conditions and they are very murky and immeasurable. It is in that sense—and I understand I am drawing polar extremes to make the case—that I see a need for these institutions to be very careful in the number of conditions that they put under the umbrella of conditionality, and include as a general rule only those that are measurable and, therefore, enforceable and necessary to the broader goal of improving the living condition of a people in the affected country.
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    Now, on the question of do we handle Turkey differently than Secretary Rubin or Secretary Summers might have done, I honestly don't know. What I can tell you is that what we did in this particular case was to be very clear that we thought the intervention institutions of choice should be the IMF and the World Bank, and that these are the institutions that at least in theory we have held out as the right way for the world to deal with financial crises, problems, and we ought not to become engaged in bilateral assistance on top of or in lieu of appropriate intervention by the IMF and the World Bank.

    The other thing I think maybe one can say is different from some of what has gone before is to be very strong in our suggestions to the institutions that they should expect the political leadership of Turkey to take a forthright, on the record, very clear position of ownership of the changes that were going to be made as a condition for the receipt of assistance, which they agreed to do.

    It has been, I think, too frequently the case that the institutions have dealt with supposedly empowered finance ministers and maybe with the appearance of the political leadership of the country owning the agreement, but without the reality of that ownership. We were really quite strong in suggesting to the IMF and the World Bank that they should ensure and insist on the ownership by the political leadership of changes that needed to be made, and then—in the case of Turkey for the 15 issues that they decided they were going to tackle—that they, in fact, take legislative action where it was needed before money began to flow.

    If you read the newspapers of record in the last few weeks, you will see they have begun to do things that most would have said were not possible. So, I suppose you were here and you can decide for yourself better than I whether these are, in fact, different in kind from what Secretaries Rubin and Summers might have done. They are certainly different from my impression of what has been done in the past as a general rule.
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    Chairman OXLEY. The gentleman's time has expired. Let me indicate the gentleman is almost 3 minutes over. We will have to move on.

    Mr. BENTSEN. If the Secretary could answer the others for the record, I would appreciate that.

    Mr. O'NEILL. I would be happy to do that. Thank you.

    Chairman OXLEY. Without objection.

    The gentleman from Texas, Dr. Paul.

    Dr. PAUL. Thank you, Mr. Chairman, and welcome, Mr. Secretary.

    Mr. O'NEILL. Thank you.

    Dr. PAUL. I appreciated most of all your comments in your statement about transparency and accountability, considering that to be very important, because you say it is essential. Of course, I would like also to have transparency and accountability in another arm of the U.S. Government in dealing with international financial systems, and that happens to be with the Exchange Stabilization Fund. The IMF was set up with funds from the Exchange Stabilization Fund in 1934, and in recent years it has seen to it that Mexico got $20 billion from the Exchange Stabilization Fund and $22.6 billion went to Russia.

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    This is all off budget, it is not appropriated, and there is a question of constitutionality here on whether or not the Treasury Department should be involved in this type of financing at all.

    But as far as the taxpayers' exposure goes, it is greater, I believe, with the Exchange Stabilization Fund than it is with the funding that we give to the IMF.

    Recently there were some minutes released from a discussion with the Federal Reserve that occurred in 1995 dealing with the Mexico City bailout, and in this discussion they recognized that the Exchange Stabilization Fund could be involved in gold swaps, and this was recognized as being legal.

    The question also came up whether or not there were any other agreements made, other than the one that was currently pending with Mexico, and the answer to that was yes, indeed, we had a swap arrangement with the Bundesbank.

    My question to start with is: did that swap arrangement deal with a gold swap, and does it continue to exist? I would like that answered in light of the fact that up until August of the year 2000, the status report on the U.S. Treasury gold always reported that gold at the West Point Reserves, the amount was 1,710 tons, was called gold bullion reserves. In September that label changed, and it changed to custodial gold. During that same period of time, the Bundesbank also had a reduction of gold that they held by 1,700 tons.

    I would like to know what is the connection between these two events, and what does this all mean? Do we have gold swaps with Germany, and could we have a little bit of transparency so I can better understand this process?
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    Mr. O'NEILL. Well, I will tell you, I would not probably be in a position to answer any of these questions except for the fact that on Sunday night when I was working through my briefcase, I found a report that it is my duty to transmit to the Congress providing the information on the most recent examination of the Exchange Stabilization Fund. Indeed, this was a fund set up in the Roosevelt Administration in 1934 for the express purpose of protecting the American financial system from the vagaries of the rest of the world's finance systems. Just as you say, it is empowered to operate in gold and in currencies, and there is a substantial latitude as to how this arrangement can work.

    My memory is that last year there was one transaction. It was a fairly small transaction involving an agreed intervention vis-a-vis the yen. It was the only transaction last year. I can assure you, and we will make sure you get a copy of this report, that I found the report really quite complete in its documentation of what was done in the past year.

    I don't know the 1995 circumstance. In fact, the funds in the Exchange Stabilization Fund are marks and yen, and, if I can say it this way, attributed dollars. But the U.S. Government does still have gold reserves, and just by coincidence, Chairman Greenspan and I were talking about those reserves this morning. It turns out, by his best recollection—I didn't check, because I assumed that his recollection is always right—but, he was noting this morning that the U.S. holdings of gold are some $80 billion, which I observed is just about the same as Bill Gates' net worth, for whatever that is worth.

    In any event, we will get you a copy of the Exchange Stabilization Fund report, and if there are additional details you would like to have, I would work with you to see if we can't get them for you.
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    Dr. PAUL. If I could follow up on this, thank you very much.

    Chairman OXLEY. The gentleman's time has expired.

    The gentlelady from California, Ms. Lee.

    Ms. LEE. Thank you, Mr. Chairman.

    Hello, Mr. Secretary. Let me follow up on a question Congressman Leach asked you with regard to the World Bank AIDS Trust Fund and my conversation to you about this.

    Last year, of course, we passed the World Bank AIDS Trust Fund. It was signed into law, and it was the responsibility of the Treasury to coordinate the efforts and to negotiate this Trust Fund. To date this Trust Fund has not been negotiated. One of the reasons we are very anxious about this is, of course, AIDS is killing many, many people around the world. Since the passage of the World Bank AIDS Trust Fund, we have estimated over 1 million people have died in Africa alone.

    What I want to ask you is what is going on in terms of the negotiations? You indicated that the details were not quite finished. Last week, or the week before last, the President announced his commitment, $200 million to an international trust fund, but we don't know which trust fund he is talking about. This Congress worked very hard, very diligently to negotiate the principles and authorities and all of the details for the World Bank AIDS Trust Fund, and to date nothing has happened.
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    So I would like to hear more from you with regard to the Trust Fund, which is the law, and what are you doing in terms of enacting that law, or are you trying to get around it by doing something new?

    Mr. O'NEILL. I honestly can't speak to the question of why the previous Administration didn't do anything about this.

    Ms. LEE. The previous Administration transferred $20 million only. It should have been $150 million. We were very disappointed at that dismal amount of money that was transferred.

    Mr. O'NEILL. Actually, it is my impression they didn't move anything. But in the budget we put together in January and into February, we did decide we were going to move $20 million to get started with this Fund and to make good on the legislation, just as you say. It has been subsequent to that that the President indicated we are going to now put $200 million into a fund. There is still work going on at the OMB as to exactly what vehicle should be used.

    Ms. LEE. Why is there a question about which vehicle?

    Mr. O'NEILL. Well, there are substantive discussions. Kofi Annan has suggested that the U.N. has a special capability for running this kind of activity. So there is a look to see what are the merits of the different devices one could use to make sure that this money does the highest value job that is possible in putting money where it accomplishes the most.
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    Ms. LEE. Mr. Secretary, these funds should not be mutually exclusive. We passed one fund last year which should be enacted immediately. The Secretary General of the United Nations is also talking about a fund which hopefully will be enacted immediately. But the nature of the pandemic is so enormous that we need both funds. My concern is, once again, Treasury being in the lead to negotiate the fund that was enacted into law, what is the problem with complying with the law at this point?

    Mr. O'NEILL. We are getting it done. I think it is not true that the Congress appropriated the amount of money authorized.

    Ms. LEE. No, we didn't appropriate it. We authorized it.

    Mr. O'NEILL. Right. So we are working on the structure that is required to respond to this legislation, and we should have it done fairly soon.

    Ms. LEE. It was my understanding also that in the legislation we wrote a provision that you would report back by April 30th on actually the status of those negotiations.

    Mr. O'NEILL. Do we have a report?

    The staff says the report is completed. We should get you a copy today.

    Ms. LEE. Today. Thank you.
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    Let me just ask one more question with regard to this $200 million. Do you know what accounts the President is intending to take its $200 million from in terms of the Trust Fund which he announced his support for?

    Mr. O'NEILL. We talked about this at the National Security Council. The Department of Health and Human Services is going to be the source of $100 million, and the State Department will be the source of another $100 million.

    Ms. LEE. Mr. Secretary, I would encourage you and urge you, in fact, to not take money from funds that are needed in terms of infectious disease control, in terms of U.S. peacekeeping, in terms of any kind of initiatives that don't need to be robbed. I mean, we have a surplus in this country, and $200 million is nothing in terms of new money. So I would just encourage you, whatever fund that is going in, make a pitch for new money, and also enact the World Bank AIDS Trust Fund immediately. The pandemic is such that we need as much money and as many resources as possible through as many vehicles as possible.

    Thank you very much.

    Chairman OXLEY. The gentleman from Connecticut, Mr. Shays.

    Mr. SHAYS. Mr. Secretary, it is wonderful to have you here. I want to thank you for your openness. I hope that over time you don't become so jaded that you aren't as open as you have been. I think in the long run it pays off.

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    Mr. O'NEILL. Thank you.

    Mr. SHAYS. I know you have so many different responsibilities and so many different areas, but I do want to just focus on debt to the IMF and Africa. I realize it is a small part of all the things you focus on, but I have a tremendous amount of regret as a Member of Congress that Congress didn't get more involved in Africa years ago, and I didn't get more involved.

    When Secretary of State George Shultz testified before Jesse Helms' committee last year, he said, ''People need to live in reality. There have been a lot of loans made to desperately poor countries that are never going to get repaid, and a lot of them have been extended by the IMF and the World Bank, and it seems to me these organizations should realize that reality and write them off just as if you were running a private bank.''

    So my question to you, Mr. Secretary, is shouldn't we stop the IMF and World Bank from making new loans just so they can pay off their old loans?

    Mr. O'NEILL. Well, as I said in my testimony, I believe this: I do not believe that we should confuse the recipients or ourselves or our people by calling something a loan when we really intend for it to be a grant, which is to say we have no hope that the principal and the interest are ever going to be paid. That is a grant. Frankly, to me, it is not an acceptable way to do business, to confuse those terms. That is not to say that from time to time you won't be disappointed about performance on a loan, but when you look at the amount of money that we are talking about forgiving, it is a huge amount of money. If I remember the numbers right, if we went to 80 countries——
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    Mr. SHAYS. We are talking primarily about 35 countries.

    Mr. O'NEILL. Let's talk about 35. As I understand, my recollection is that full forgiveness is $43 billion. My staff tells me my memory is good.

    Mr. SHAYS. We are not talking about Sudan and Somalia.

    Mr. O'NEILL. I am talking about the 35 countries that I am sure you are, the ones that are subject to debt forgiveness, $43 billion. It is very hard to make a case that anyone could make $43 billion worth of mistakes. So for sure we need to work on letting this money go. The process that has been put in place is working away.

    One thing, I think this is right, is that as we become more direct in what we are doing with loans and grants, that we not make new loans when it is fairly certain they won't ever be paid back either, so that we put our policy where our heart is and our programs where our heart is and face the reality when we are giving the money away that we are really giving it away.

    Mr. SHAYS. What tells you, though, that many of these African nations are going to be continuing to grow their economy? We are seeing the AIDS epidemic savage certain areas of various countries, where the kids have no teachers, they are all dead, their middle class is just dying off in large numbers, five million orphans. I just don't see what the IMF sees as the ability of these countries to pay back debt. So I would love to know what you see. What hope do you see in Africa for their ability to pay these debts?
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    Mr. O'NEILL. Well, I think you have to do this one country at a time. There are different degrees of capability to pay back new loans if all the old ones are forgiven and the interest is forgiven on the old ones. I was saying earlier I think we should not look at these countries through the lens of the IMF as though the IMF existed alone in the world. Intelligent risk-takers would look at these questions from the point of view of the leadership of the receiving country, and then they would look at the financial condition of the receiving country and understand what degree of risk or security there was with regard to the fiscal situation in the country. Then they would not just look at the IMF, they would look at the IMF and look at the U.N. and all of the sources, both public and private, of funds flowing into a country, and they would not necessarily follow what we have decided to dictate apparently to the IMF that they must say to countries: when you get principal and interest relief, you must spend the money on these new purposes, which we know better than you what you need to do.

    I think no one could argue that some of the things we are suggesting aren't desirable, but they certainly don't have anything to do with fiscal responsibility or the prospect of ever helping a country get on a good footing so that it can be responsible for itself.

    Mr. SHAYS. Fifteen seconds just to respond and say my concern is the IMF doesn't want to acknowledge that they made bad loans, that they then reinforced those bad loans by giving more loans to pay off the bad loans, and we have been doing it for years and years and years. That is my concern.

    Chairman OXLEY. The gentlelady from California, Ms. Waters.

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    Ms. WATERS. Thank you very much, Mr. Chairman, for holding the hearing, and I thank the Secretary for being present here today.

    Mr. Secretary, I sent you a letter February 16th that basically urged you to support complete debt cancellation for the world's poorest countries during the February meeting of the G-7 finance ministers in Palermo. That letter was signed by 73 Members of Congress, both Republican and Democratic Members. Unfortunately, until yesterday I had not heard from anybody. I did get a brief response yesterday, but I am sure that both you and I should have the opportunity to understand a little bit better where you stand on debt cancellation.

    I would like to just ask, I guess there has been a lot of conversation here today about debt relief. I don't know if you know what happened last Congress. The Appropriations Committee reported out $69 million in debt relief. We went to the floor cold with an amendment. We ended up with $225 million for debt relief from the U.S. When that ended up in the conference committee, the conference reported out $435 million for complete bilateral debt relief.

    Now, this was a result of a lot of hard work by a lot of good people, religious organizations, non-Government organizations, all under the banner of Jubilee 2000. We worked very hard to get us to live up to what was a commitment to deal with this issue of debt relief.

    We don't want to stop here. We want to continue to make a push for full debt cancellation, but, of course, we know that the United States would play a most important role. I mean, we are the 800-pound gorilla at the IMF and the World Bank.
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    Where do you stand on complete debt cancellation for these poor countries? Your letter back to me and the other 17 members really does not discuss that. Could you help me to understand?

    Mr. O'NEILL. You know, I have said on the public record, and I am sorry if you didn't think my letter really reaches your question, that I think we should proceed with the program we have in place, I think we ought to proceed with the process that has been put in place.

    I think if we are really going to entertain the possibility of writing off everything, we need to face up to how many billions of dollars that is. Before we adopt the policy, we need to put it to ourselves whether we are ready to appropriate the money that is required for, let's say, our 25 percent of all of the IMF debt forgiveness, whether we are prepared to ask the American people to appropriate it at this time. As long as we are at it, we should go beyond the IMF and the World Bank and the MDBs and look at all the bilateral loans that exist out there and see how we differentiate all the loan arrangements that we have, either directly or indirectly, through the Federal Government, and see what our taste is for doing this and on what basis we would do it.

    Ms. WATERS. Well, let me just share with you some information that I have. I am told that to provide complete debt cancellation to these 22 impoverished countries would cost only $287 million per year for the IMF and $215 million per year for the World Bank. To extend complete cancellation to all heavily indebted poor countries would cost an additional $81 million for the IMF and $138 million for the World Bank.
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    Considering this is a modest amount, considering the fact that Congress appropriated $435 million for debt relief last year alone, where are you getting your billions information from? Would you give me your figures again?

    Mr. O'NEILL. $43 billion for the 35 countries. I think the difference is that your numbers suggest that we are going to write off the principal and interest over the life of the loan instead of—if you are really interested in writing loans off, you write it off. You don't continue to carry it on the books as though somehow it only failed to be repaid 1 year at a time. Perhaps that is the difference. From a financial point of view, if you have got a bad loan, it is all bad. It is not bad 10 percent. If it is a 10-year loan, it is not bad 10 percent this year and 10 percent next year, and 10 percent, and so forth, every year until you get through 10 years. It is no good today, and it is not ever going to be any good. That is what we are talking about.

    I think the difference is a difference between an idea, which I frankly never heard of before, of amortizing a bad debt rather then recognizing it as all bad at once. It is a new concept to me, I must say.

    Chairman OXLEY. The gentlelady's time has expired.

    The gentleman from Florida, Dr. Weldon.

    Dr. WELDON. Thank you, Mr. Chairman.

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    Just to follow up on the lady's question, were you implying that you think it would be appropriate if the IMF and World Bank are going to write off these loans, that the Congress appropriate the money to make the loans good, that that is necessary?

    Mr. O'NEILL. Well, in this world where we are probably in all stages of loan maturation, what I was basically saying is that while we don't often think of ourselves as having a balance sheet, we have, in effect, said to the American people, we participated in a process where we used your taxpayers' money to create a loan fund or to guarantee a loan fund, and the money was then given to these countries, and by all accounts many of these loans are not serviceable, they are not ever going to be paid back, the principal is not going to be paid back, the interest is not going to be paid back.

    So probably I should grant you the point that we wouldn't in most of these cases have to actually appropriate the money, but it is an appropriation of the American people's money. But if we basically say we have an asset we don't have, and we write it off to the tune of $43 billion, at least as a private citizen, I would be pretty interested if my Government held out to me they have an asset that they have decided they really don't have. I would like to know what the balance sheet looks like, as well as the income statement.

    Dr. WELDON. Sure, and I certainly support you on that. I have read your statement, and I support particularly focusing these organizations more appropriately in areas where I think they have really been more effective in terms of promoting international financial stability and stable currencies. But I just wanted you to clarify that for me. You are not necessarily suggesting that for the IMF and World Bank to properly write these off, we would have to make an appropriation. They can do that, but we would have to be notified that the balance sheet has contracted substantially.
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    Mr. O'NEILL. There is a secondary consequence. If you believe, as I do, that these institutions should stay in business, and we suddenly decide to write off all of these loans and the prospective interest payments, it very much changes the loan position of these institutions.

    Dr. WELDON. Absolutely. I understand that.

    Mr. O'NEILL. In fact, one would have to begin appropriating very substantial amounts of money over time in order for these institutions to even maintain their current level of activity. So I think even the way we keep, frankly, kind of funny books in this country, we would eventually be in a position where we would have to tell the American people we are going to have to appropriate substantial amounts of new money in order for the institutions to maintain their level of activity.

    Dr. WELDON. Thank you for clarifying that for me.

    I wanted to just quickly get back to an issue that you alluded to in your response to Mr. Oxley's question. You were referring to tax policy, international tax policy, OECD.

    Mr. O'NEILL. Right.

    Dr. WELDON. I assumed you were alluding to in parts of your response to the Clinton Administration rule regarding U.S. institutions reporting the names and other identifying information on non-resident aliens.
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    I was curious, has the Treasury—I know we are still in the comment period on that. I have had some concerns about that rule being broadly applied in terms of precipitating capital flight. As I understand it, it is estimated—and I realize it is hard to get a gauge on something like this, but it is estimated it could be as much as $1 trillion of foreign investment in U.S. financial institutions.

    Have you at the Treasury looked at the implications of capital flight, in other words, money going elsewhere, should that rule be fully implemented?

    Mr. O'NEILL. We are looking at it. As you say, it is in process, and we are sensitive to the issue of not creating a disadvantage for investors who choose to be in the United States. But I think we also feel a keen responsibility to enforce the law, to enforce the tax law and other laws of the United States. So it is a constant process of examining how one can accomplish multiple purposes without running into oneself. It is not always so easy.

    Dr. WELDON. I read your guest editorial in the Washington Times that dealt with this issue. You referred to the American investor who goes to the Cayman Islands to escape U.S. capital gains tax. Would you agree that a preferable approach to that is to lower the U.S. capital gains tax as opposed to pursuing these people through administrative and legal actions?

    Mr. O'NEILL. Well, you know, I am on the record as saying I would like to get rid of a whole lot of attributes of our current tax system. Hopefully, as soon as we are done enacting the tax bill that is in front of the Congress now and make good on the President's pledge that we are finally going to fix Social Security, we can turn our attention to a simplification that goes far beyond the question of capital gains and straightening out a tax system.
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    One thing I have found—it is something in a way even when I was outside the Government I have been working on, because I am interested in and long have been interested in issues of public policy—you can be sure if you go to almost any audience I have ever appeared before in the last 20 years and suggest to them you know some way and you have some intent of reducing the 9,500 pages of our Tax Code to, say, 95 pages, people will get up on their chairs and stomp their feet. I have yet to find anyone who likes the Tax Code the way it is, and not just for the question of perverse implications of the way capital gains are applied, but for all of the reasons that offend people and make it more difficult for them to relate to their Government, which we keep piling on.

    So I would love to see us make major changes to our tax code.

    Chairman OXLEY. The gentleman's time has expired.

    The gentleman from New York, Mr. Meeks.

    Mr. MEEKS. Thank you, Mr. Chairman.

    Just in brief, in response to some of the questions I heard Congresswoman Waters and Congressman Sanders indicate, we talk about debt relief with reference to Africa, but it is a known fact that when we gave much of that money to dictatorships and to other rogue governments, to me it is similar to what we have in some of our urban cities today, something called predatory lending, where you lend money out to folks that are not able to pay it back, you know, but for other reasons, and then they have to pay it back, so then you take back their house and they put everything in it. So that should be considered when we are looking at the question of debt relief, debt forgiveness, as far as to many of the nations in Africa.
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    But let me go to my question. I just wanted to put that out. In last year's foreign operations conference report, there was language to eliminate the World Bank and IMF-promoted user fees. I am sure you are aware the language requires the U.S. to oppose any World Bank, IMF or regional development bank loan or debt relief agreement that includes user fees or other charges for primary education or primary health care.

    In the Administration's fiscal year 2002 budget, they support striking that language. I want to know, what is your position? Are you in favor of removing this language?

    Mr. O'NEILL. We are trying to simplify the language. We are certainly in full accord with the idea that these restrictions and the intent of the words is appropriate. We are just trying to do some simplification.

    If I may comment on your earlier question, because it has indeed come up a few times before about this issue of lending to so-called dictatorships, you know, there is a fact case that I think is analogous, and it is an engagement I have had with the Russian Finance Minister in the 4 months I have been here now.

    When I first met him in Palermo, the media was reporting that the Russians were thinking about defaulting on their so-called Paris Club debt. The reason they were going to, at least what he said to me in Palermo, was, well, you know, we would like to pay it, but our Duma, that is to say their legislature, wouldn't appropriate the money. It caused me to say to him, you know, it is really an interesting thing. When you make a contractual relationship with a sovereign state, at least one would like to believe that you have made a real contractual relationship in the way that we think about enforceable contracts. So I frankly don't give a damn about some part of your government that doesn't want to pay their fair owings to the rest of the world. That is your problem. Otherwise, if we can't have an understanding of what the rule of law is, I don't know how we can deal—I don't know how any institution, the IMF or the World Bank, can proceed on a basis that if they make a loan and the people who were there who made the agreement turn out to be rogues, we forgive the whole country because the rogues took it all.
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    It is awfully hard for me to understand how to extend this principal that if the top guys are bad, we forgive the whole country. It is a very difficult doctrine to me. Not to say I am not sympathetic to actually wanting to prosecute the devil out of people who absconded with the resources of the people they were charged to lead; I have lots of sympathy with that. But I worry about the extension of a doctrine that says, well, the people got ripped off by their leaders; we will keep sending money, because maybe the new leaders will be better than the old ones.

    Mr. MEEKS. Except until some of those situations, some of those leaders we put there to practice our doctrine, we knew they were bad, we gave them the money so they could do what they were doing for the protection at that time against the Russians in the cold war. So we knew they were bad, we knew they were raping the country, but we didn't care, because we had a different goal or different reason for giving the money. Now that it is over and we are talking about democracy, and the cold war has ended and we are talking about promoting democracy elsewhere, and now we have countries where they have legitimate leaders and elections and a democratized system, but they can't go anyplace because of the debt that was placed on them in the past, they can't educate their people, they can't provide primary health care, so therefore they are not able to go, so they are smothered. But there is some responsibility, I think, on us and the IMF and the World Bank to recognize those factors so we can help promote democracy, as we say.

    Chairman OXLEY. The gentleman's time has expired.

    The gentleman from California, Mr. Ose.
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    Mr. OSE. Thank you, Mr. Chairman.

    Mr. Secretary, I want to thank you. Having read your statement here, I thought you did a remarkable job. I would like to actually cite it as a case example for saying a whole bunch with a few words.

    Mr. O'NEILL. Thank you.

    Mr. OSE. I wanted to say I appreciated your respect for my time, and I will try not to waste yours.

    Mr. O'NEILL. Thank you.

    Mr. OSE. In your remarks as written, you made a couple of points here which you have reiterated with Congressman Meeks about the certainty of the judicial systems in the countries into which the IMF lends money and the ability to recover; the fact that the multinational development banks ought to spend their resources in areas where they have expertise, which I thought was a remarkable breath of fresh air; and using results-based performance indicators to actually measure what it is we are getting for our money.

    I want to strike specifically at that last point. I know where you come from in private business, and I have not been near as successful as you, but I do aspire. In a typical lender-borrower situation, the lender has the control of releasing any money under a loan. In other words, you can't get it until you have satisfied that lender. The purpose of that is to ensure the borrower's performance to the terms and conditions of the loan.
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    In many cases, unfortunately, it is apparent that, as it relates to IMF or World Bank or maybe some of the international development banks, after the fact that the loan funds that had been extended were not used as they were originally agreed upon. In other words, the conditions and terms were violated, and that those funds were then diverted to other uses. The thing I keep coming back to is how do you prevent the diversion?

    My question is, are you satisfied by the controls that the IMF presently uses to ensure that loan funds are used for the intended purposes, and, if not, do you have any specific suggestions that could be implemented to improve the accountability over how those loan funds are used?

    Mr. O'NEILL. I think this is an area where we can expect, maybe even demand, improvement. If you use as an example the case of what happened in the money that went to Russia, it is almost as though there were not even the simplest of conventions, for example, second signature requirement, as you suggest, to release funds.

    But, of course, I am sure you understand from the line of your question these are complex matters, and it is not as easy as having a second signature, say, in the example where maybe an individual is buying a house and you can go and look and see if the structure is being actually built. Oftentimes these monies are going into a world of fungible money where it is difficult to tell what is happening to the overall resources of a country in the financial system, where, say, you are dumping $5 billion, because there are many, many tens of billions of dollars in question that are flowing in and out every day.

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    But it is possible, I think, to establish certain ratios and levels, maintenance of levels of balances that one could then be quite certain that monies flowing from the IMF and the World Bank didn't simply disappear into the world of fungible money, where the money from the people of the world got taken away by badly inclined leaders or people who know how to manipulate financial things.

    So, yes, I think it is possible to do better, and as we work with the IMF and the World Bank, this is an area that we will develop in more detail with them.

    Mr. OSE. Mr. Chairman, I don't recall, are you going to allow questions subsequent to the closing of the hearing? Are you going to leave the record open?

    Chairman OXLEY. Yes.

    Mr. OSE. If I might, I would be happy to submit it in writing, and then you can have the appropriate person make specific recommendations.

    Mr. O'NEILL. Great. We will do that.

    Mr. OSE. Thank you, Mr. Chairman.

    Chairman OXLEY. The gentlelady from Ohio.

    Mrs. JONES. Thank you, Mr. Chairman.

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    Good afternoon, Mr. Secretary. I guess I am the last one. But I want to go back over a few questions that you answered for some of my colleagues.

    In response to Congressman Gregory Meeks' inquiry with regard to some of the Sub-Saharan countries and debt relief, I don't want to paraphrase what you said, but, anyway, you remember what your response was about—strike that. Let me start over and say, do you recognize that in many of the African countries where we entered into agreements with them, that none of the leadership or anyone in any logical descending order—like our Congress goes from the 105th to the 106th, 107th, that kind of setup doesn't exist in those countries? You recognize that, don't you?

    Mr. O'NEILL. I do.

    Mrs. JONES. So, therefore, it is my opinion, one lowly Member of a 435-Member body, that that is something that ought to be taken into consideration when you consider whether those loans ought to be forgiven or not. Specifically we do it in our country all the time, bankruptcy, people are out from under the debt. Somebody pays it off, and that group goes and creates another business, and maybe that business is successful. In many of these countries, there is the opportunity—for example, many of them are a diamond in the rough, and they are real diamonds. For us to not take that into consideration with regard to forgiveness of debt, in my opinion, is illogical. I don't want to say it is irresponsible, but illogical.

    Would you agree with me on that?

    Mr. O'NEILL. I think we need to look at these individual country situations one at a time, and I really do think it would be valuable to the Congress to roll up the implications of debt forgiveness across—both principal and interest forgiveness—across all of these arrangements that have existed sometimes for 50 years with 18 or 25 different intervention programs, and also look at the experience we are having with the 22 countries that are now running through the established process to begin getting debt forgiveness, and then bring these facts together and talk about what the policy of our country ought to be not just with regard to the IMF or the World Bank, but with regard to bilateral loan arrangements.
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    Mrs. JONES. Maybe multilateral as well.

    Mr. O'NEILL. And the multilateral development banks. For sure I think we should open the scope of this question and bring some more facts to the table and see how we should proceed.

    I think you should have no doubt that I think what we have begun to do with the HIPC initiative is well-advised and directionally correct. It is really a matter of how fast we should move and what the scope of our activity should be.

    Then I want to say again, because I think this is really an important point, we need to stop thinking about these countries from the point of view of individual program interventions. The idea of saying to a sovereign country that, because the IMF has forgiven or the World Bank has forgiven principal and interest on a loan, that that should then give us the automatic right to force them into yet more borrowing—even in the private sector—because we have these wonderful intentions about improving their education system or their health system. This is a bridge too far in terms of our understanding of what it means to run a country, as distinguished from sending grants or loans to a country.

    Mrs. JONES. I just want to extend it to say, then, so if you don't want us to determine what the country should do with the dollars, are you saying, then, that the countries ought to have the ability to say this is what I would like to do and then receive the dollars? Or are you saying just leave them out there floating somewhere?

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    Mr. O'NEILL. No, no, no. I am saying, as I said earlier, that I think we should have much more limited understanding of what we mean by conditionality, and as we do conditionality, because indeed it will come from individual institutions and streams of money, that we need to do conditionality in the context of a complete country, not as though a program carried with it the right of establishing ever-larger notions of conditionality, which I think are sometimes inconsistent with each other and unenforceable in any event.

    Mrs. JONES. I would like to echo my colleagues' concern about the AIDS issue and the dollars being allocated to assist these countries, because it may come to a situation where there is a grandmother raising 55 children, which makes no sense when we could come in and help out the countries.

    Chairman OXLEY. The gentleman from Texas has been very patient, and I recognize the gentleman for 5 minutes. Then we will close down.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Fascinating testimony, Mr. Secretary. Just a couple of points.

    First, I do want to go back a little bit to the question of conditionality with respect to IMF loans or bailouts or whatever we might call them. I would recommend that you go back and look at the South Korea package, because I was in South Korea as that was going through, and I remember sitting—I was with the prior Chairman, and we sat down with Kim Dae-Jung right before he was sworn into office, and he was having to face the fact that for the first time the Koreans were going to have to pass legislation to allow layoffs by private corporations and look at the idea of establishing an unemployment compensation program, and the markets were looking at how they could engage in more transparency, all things that we thought were good for them as a form of conditionality, and I still believe that today.
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    So I think you can draw a lot of comparisons to Turkey and what you are doing there.

    I guess the point I would make is that I am not sure that things were done all that poorly, given the situation at the time; that we did what we had to do, given what the impact might be. I think you are on the right track, quite frankly, with Turkey, but I don't think there is a lot of difference.

    I want to go to the conditionality with respect to HIPC, because this is sort of what I was getting at, and I think the GAO report, which I am sure your staff has looked at, is quite telling.

    When we first started the HIPC legislation a couple of years ago, I was one of the ones that raised the idea we ought to treat this almost like a bankruptcy and ought to write down the debt, and we also ought to say that countries that participate in this stay away from the window, even if it is the soft loan window, for a period of time.

    Now, that is going to require a policy on our part, as well as our partners through the Fund and the Bank, to be willing to step up to the plate, because obviously these countries can't survive without some capital infusion.

    What you are saying is appealing, although I hope that the Administration—and I realize you all are just getting in and you are trying to figure this out, that this is the direction that you want to go in, because I do think it is a mistake, and it really is just a short-term bridge that we are giving them to say, we are going to wipe your debt off, but you are going to have to come back and borrow again, and we are going to be in the same problem 5 years from now, because it is highly unlikely that any of these countries or any country is going to achieve that level of real growth over that period of time to get out of there, particularly a lesser developed country. So I hope that is the case.
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    Finally, I am curious what the Administration's viewpoint is with respect to packages like with Turkey and others. If you go back, there was a lot of criticism of Mexico, a lot of criticism of South Korea, of Thailand and other Asian countries that conditions included contractionary economic policies in the fiscal area. But I am curious what the viewpoint of the Administration is as to how you would otherwise build confidence for currency when your goal is to try and stabilize the currency and exchange rates.

    Mr. O'NEILL. Well, first of all, you know, my own experience with this and observation of what we have done in the last 50 years with the very best of intentions is if we don't have, we ought to have a lot of humility about how much we actually know and understand about the straight path to improving the standard of living in the world and reducing the level of poverty that exists in the world, because we have spent, I suppose—around the world we have probably spent, not just in the U.S., but with everyone—$1 trillion, and I would say we have precious little to show for it.

    When you look at where we have taken some fairly strong interventions, I think even with the best of intentions, to help to accelerate the standard of living and economic growth in countries, the results have been pretty pale tea. So I think we are well advised to be pretty humble about what we know and how well we are able to deploy it.

    I remember reading, I think, in maybe 1959 or 1961 Walt Rostow's ''Five Stages of Economic Growth,'' and it wasn't very revealing, it wasn't very helpful, and there is still nothing much better than what Walt Rostow wrote more than 40 years ago. So I think we have a long way to go to actually understand how to do all of this.
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    Having said that, I do think that we can improve the likely outcomes by insisting on the things that we know are necessary. This is repetitive, but I don't think you can find a place where good growth and reduction in poverty and improvement in the standard of living exists where there are not a rule of law and enforceable contracts and at least directionally a reduction in the level of corruption. Those things we know are necessary.

    Someone said earlier, and I would stipulate this point, that without education there is probably no hope at all. In that regard, you know, I said when I was at the Asian Development Bank meeting a couple of weeks ago, I think what the President has said about ''no child left behind'' ought to be the mantra for all of us when it also comes to questions of our position on international advancement.

    Education needs to be a primary focus. But, again, I think it is really critical that we not look at nation-states, even from the most genuine, sincere concern about absence of education, and act as though the rest of the country didn't exist, because it does. If they are ever going to have hope of financial success, there are some things they need to do. I think it is really quite telling that Russia had tax rates that were very high, expropriation-level tax rates, and they were collecting almost no money. When they reduced their tax to a 14 percent straightforward flat tax, they tripled their revenue.

    So there are some things that we do know that are therapeutic in moving a nation toward a more governable position. Again, we need to balance our humility and insist on the fundamentals that we are pretty sure about.

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    Chairman OXLEY. The gentleman's time has expired.

    Mr. Secretary, thank you again for your testimony. I share the opinion of the gentleman from Texas, it is most fascinating.

    Without objection, the record for this hearing will remain open for 30 days to permit Members to submit questions in writing to the Secretary and have his responses placed in the record.

    The hearing is now adjourned.

    [Whereupon, at 4:40 p.m., the hearing was adjourned.]