Page 1       TOP OF DOC


Tuesday, April 20, 2004
U.S. House of Representatives,
Subcommittee on Domestic and International
Monetary Policy, Trade, and Technology,
Committee on Financial Services,
Washington, D.C.
    The subcommittee met, pursuant to call, at 2:30 p.m., in Room 2128, Rayburn House Office Building, Hon. Judy Biggert [Vice Chair of the subcommittee] Presiding.
    Present: Representatives Biggert, Feeney, Oxley, Maloney, Frank, and Bell.
    Mrs. BIGGERT. [presiding] The Subcommittee on Domestic and International Monetary Policy will come to order. It is my pleasure to have witnesses here today and to welcome all of you to today's hearing on HIPC, or highly indebted poor countries, debt relief. We are here today to hear testimony and encourage discussion of a report released last week by the General Accounting Office concerning the possible cost of the enhanced HIPC program. The Financial Services Committee under the leadership of Chairman Oxley and Ranking Member Frank requested this report so that the members of this committee could have a better sense of the possible costs of the enhanced HIPC initiative.
    I might add that you might have noticed that I am not Chairman Peter King; I am the Vice Chair, Judy Biggert. Mr. King will have an opening statement for the record but he could not be here today.
    [The prepared statement of Hon. Peter T. King can be found on page 39 in the appendix.]
 Page 2       PREV PAGE       TOP OF DOC
    The GAO report presents some very troubling estimates. It indicates that if HIPC countries are to benefit long term from their debt forgiveness, they are likely to need between now and the year 2020 significant continued assistance from the international lending community. In particular, the GAO estimates that an additional $153 billion will be needed in development assistance and another $215 billion will be needed to, and I quote, ''fund export earnings shortfalls.'' This would all be in addition to an expected $8 billion in debt relief likely to be needed when countries reach their completion point and the topping-up portion of the HIPC debt relief program is triggered. The grand total is $375 billion through 2020.
    The GAO also tells us that these are conservative estimates that could easily rise. Of course the estimate is a global number. If the past is any guide, the United States could be called upon to contribute a portion of the estimate, about 12 percent. This may be a small portion, but it represents a large number, $52 billion over the next 18 years. If the GAO numbers are on the mark, this would probably work out to $2.8 billion per year to U.S. taxpayers. I probably am not the only Member of Congress that would question the wisdom of allocating that kind of funding for the next 18 years without further serious discussion and consideration.
    This GAO report will generate serious discussion. There will be questions about its assumptions and methodology. People rightly will point out that there exists no formal commitment from the multilateral lending banks or donor countries to make up for export earnings shortfalls. People rightly will point out the difficulty of accurately estimating development assistance needed by the HIPC countries for the next 18 years, especially if one assumes business as usual with no change in lending practices.
    Finally, people will question whether it is appropriate or correct to assume that export earnings and HIPC country exposure to export and commodity price volatility will remain more or less the same.
    I come from Chicago where commodities markets for years have helped our farmers hedge exposure to the same kind of commodity price volatility that complicates development assistance. I understand that the World Bank is exploring how to make better use of the commodities derivatives markets to help poor countries reduce the exposure their economies and export sectors have to price volatility. I also understand the World Bank is looking at how in the future it might approach lending decisions differently in order to prevent a linear accrual of debt burdens.
 Page 3       PREV PAGE       TOP OF DOC
    And so I welcome this GAO report for the questions it raises. It gives Congress and other policymakers a sense of how expensive it could be if current lending and business practices in the development community do not change. It provides us with a concrete sense of the magnitude of the task at hand. It also provides a good basis for development experts to debate how further development assistance should be conducted in the future. And it raises additional questions that are not limited to the following: Does it make sense to continue lending to poor countries in all circumstances? What limits on lending should occur? What is the appropriate role of grants? Is it fair to refer to new grants as debt relief? How can developed donor countries facilitate policy changes and enhance access to modern financial hedging instruments that can help support countries' development choices? And finally, what can debt relief reasonably be expected to achieve and is it asking too much for debt relief to resolve broader development problems?
    Debt relief under the HIPC program already has begun to improve lives in impoverished countries. I look forward to hearing from our witnesses about what specific progress has been made. I also look forward to a spirited discussion of how to facilitate progress within HIPC countries. We want to learn from the failures of development lending in the past and explore the availability of new approaches that can help countries develop more responsibly in the future. I personally am not convinced that providing billions of dollars to support export shortfalls is a good use of anyone's resources, especially when other alternatives might exist to help countries develop more efficiently functioning markets.
    The GAO report makes clear that a failure to identify a delineation between debt relief, property reduction, and development assistance goals will be costly for U.S. taxpayers and people all over the world.
    With that, I will recognize the Ranking Member, Mrs. Maloney from New York, for an opening statement.
 Page 4       PREV PAGE       TOP OF DOC
    [The prepared statement of Hon. Judy Biggert can be found on page 32 in the appendix.]
    Mrs. MALONEY. I will defer to the ranking leader, Mr. Frank, if you would like to open and I will follow you.
    Mr. FRANK. I thank my colleague. I appreciate the chairman of the full committee's accommodating us by having this hearing. We tend when we have hearings to focus on problems and criticisms in areas where we can do better, which is appropriate, but sometimes the underlying reality gets lost. The underlying reality has been that this has been quite successful.
    I appreciate the fact that two witnesses from the NGO sector, who are both representative of organizations that did a great deal to get us here, recognize this. There are some real concrete improvements for some of the poorest people in the world that came out of the HIPC.
    Secondly, I don't want the HIPC criticized for what it was not intended to do. Particularly the $375 billion figure is a figure well within reason but not to carry out—and the GAO didn't suggest that—the specific goals of the HIPC, of the highly indebted poor countries. The fact is, a very small amount is needed in relative terms for that. The 375 is a very worthy goal, but it is not the case that if we don't get $375 billion—and I think the world could afford it over that 30-year period—that somehow this would be a failure.
    The next point I want to make is—and let's be very clear when we talk about debt relief—we are not talking in any realistic sense about letting people who incur debts in any morally relevant sense out from under. The debtors here are countries, and in almost every case the residents of the countries were the victims of those who incurred the debts. This is not a case of individuals going out and spending recklessly, and now saying I don't want to pay my debts. As a matter of fact, many of us in the West have more responsibility for these debts than the people who are now bearing their burden, because it was in many cases the governments in the West, seeking in some cases to pursue geostrategic goals, who helped these countries incur the debt. That ought to be very clear. This is not one of those cases where we are letting people off a hook that they got themselves onto.
 Page 5       PREV PAGE       TOP OF DOC
    We have some of the poorest people in the world who have been twice victimized by bad governance; one, by the abuses they suffered during the period of those governments being in power, and secondly by the long-lasting burden of the debts those governments incurred from which the people in the countries very often got no benefit.
    We are in the process of trying to reduce that debt. That does not solve all the problems. I am concerned about what seems to be an instinct to be negative far beyond what is required. The Department of Treasury put out a report in October of 2003, comments on proposed modifications to the enhanced heavily indebted poor countries. It responded in part to legislation that has been suggested by some of the organizations, the gentleman from New Jersey (Mr. Smith) and I and others worked on to try and talk about going further. I was particularly disturbed on page 8 to read the following quote from the Treasury's report: As highlighted in the World Bank's operations evaluation department's evaluation of the HIPC program, continued focus on HIPC and debt relief has been a distraction in terms of the greater emphasis needed on well-defined economic growth strategies in these countries. The OED report stressed that HIPC debt relief is not a panacea, and that given institutional capacity constraints in the HIPCs, debt relief is not an efficient way of achieving desired social sector outcomes.
    Those comments are inaccurate, they are damaging, and I do not regard them as having been made in good faith.
    It is true that the OED report stressed that debt relief is not a panacea. I am prepared to ascribe to the general statement that nothing is a panacea. I have never seen a panacea. Maybe they exist somewhere. The role of panaceas is to be a stick with which people can beat things that they are in favor of and can think of nothing substantively bad to say about them.
    Of course it is not a panacea. No one ever said it was. It is helpful, as we will hear again from some of these witnesses.
 Page 6       PREV PAGE       TOP OF DOC
    While there are some points of improvement here, I very much regret the negative spirit in which Treasury writes these comments. When I saw that, I was troubled and went and got the World Bank's report. That simply does not accurately convey what the World Bank's report said, and I would hope that the Treasury would be willing to correct that.
    Just a couple of last points. One debate where I do agree with Treasury and with this administration, we had a year ago—I hope it is over by now, I think the witnesses are on the right side—for some reason when the administration proposed that we substitute grants for loans to poor countries, some of my ideological allies, not used to ever agreeing with this administration, objected. I think the sides got switched there and people got—it is like those old comedy routines where people are saying yes, no, yes, no; and somebody says no and the other guy switches to yes.
    Of course grants are better than loans. Improvident grants aren't good. Improvident loans aren't good. But everything else being equal, grants make more sense than loans when you are trying to keep people from getting into debt. I think we should be moving more in that direction, both with the multilateral institutions and bilateral institutions.
    Finally, I agree, and Mr. Hart makes this point: We ought to be going beyond that with regard to debt relief, and in particular I believe we should be working with the multilateral institutions, particularly the World Bank and the IMF, to get them to give the same degree of debt relief that was given bilaterally. After all, the multilaterals are in fact the sum of the bilaterals. They are not independent entities that make their own money. They get money from elsewhere.
    Particularly with regard to the IMF—and I want to pursue this, and I would ask people to join me—they did some monetization of their gold and were able to pay for some debt relief. They can go further. I don't know if we can get 100 percent. It is harder with the World Bank than the IMF to come up with a funding source, but there is no reason why the IMF should not now be pressed to go back into this process of monetizing some of their gold which is undervalued and use some of those proceeds to give greater debt relief. That is one of the specifics that comes out of this for me.
 Page 7       PREV PAGE       TOP OF DOC
    Madam Chair, I thank you and I thank the Ranking Member of the subcommittee for her recognizing me.
    Mrs. BIGGERT. I thank the gentleman.
    The gentleman from Ohio, the Chairman of the Committee on Financial Services, is recognized for an opening statement.
    Mr. OXLEY. Thank you, Madam Chairwoman. Thank you for chairing this hearing today on an important issue for the global community. Last year, Ranking Member Frank and I requested that the GAO analyze financing issues associated with the initiative led by President Bush, at the Group of Eight level, to enhance debt relief for the most indebted countries in the world. We also asked the GAO to identify options for providing additional relief to help countries achieve debt targets, debt sustainability and lower debt service burdens.
    Providing humanitarian relief to the world's poorest nations is a duty of the United States and developed nations around the globe. The question is not whether to provide humanitarian aid but how to use the taxpayers' money most effectively in our quest to lift these nations from the depths of poverty.
    I look forward to receiving the GAO's testimony this afternoon as well as the reaction to the report from two leading organizations, DATA and the Catholic Conference. The HIPC initiative has already had a positive impact on the lives of real people around the globe. Our witnesses will provide some details on how funds within HIPC countries have been reallocated away from debt service and towards funding education and inoculation programs. I also understand that the process within HIPC countries for identifying how these funds should be allocated is strengthening democracy and civil society participation in government decision-making.
    While there is a long way to go in many of these countries towards full democracy, these are encouraging first steps. However, HIPC debt relief is a limited tool. It seeks merely to decrease debt service burdens for the poorest countries on the planet. It identifies as goals, but not commitments, broader ideals such as reducing poverty and increasing export earnings within these countries.
 Page 8       PREV PAGE       TOP OF DOC
    Today's GAO report is controversial because it attempts to estimate the costs that could be associated with achieving these broader goals. The estimates in this report are sobering. GAO estimates that the cost of achieving both debt relief and economic growth targets in HIPC countries could be at least $375 billion between now and 2020 in present value terms. Even if the U.S. portion of this amount is as small as 20 percent, this is still a serious amount of money that will cause policymakers to consider carefully and strategically development assistance strategies.
    I welcome this report because it will require policymakers and development experts alike to devote renewed attention to distinguishing debt relief from development assistance. It also identifies the possible cost of continuing to do business as usual in the multilateral development banks. By assuming that business practices in the banks do not change and by assuming that export growth in HIPC countries will not be materially enhanced in the future, the GAO report shines a spotlight on the need for donor countries, development banks, and HIPC countries to renew efforts to find new ways of delivering development assistance, so that in the future poor countries do not amass crushing debt burdens.
    I am encouraged that the World Bank is already thinking in these terms. In a February 2004 report on debt sustainability in low-income countries, it explores the possibility of countries using market mechanisms such as derivatives markets to hedge their exposure to commodity market volatility. It is actively considering a new framework for lending to low-income countries that would limit the amount of debt a country could acquire. These are encouraging developments. As we discuss HIPC countries' need to expand and diversify their export sectors, I would also like to underscore the importance of reviving the Doha round of trade talks. Reduced trade barriers will provide all countries with opportunities for growth and development.
    I look forward to today's testimony and continued efforts to enhance the effectiveness of international development assistance. I yield back the balance of my time.
 Page 9       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. The gentleman yields back.
    [The prepared statement of Hon. Michael G. Oxley can be found on page 34 in the appendix.]
    The gentlewoman from New York (Mrs. Maloney) is recognized for 5 minutes for an opening statement.
    Mrs. MALONEY. Thank you very much. In the interest of time, I will request unanimous consent to place my comments in the record and merely state that I am looking forward to the panelists' statements on the new GAO report of the HIPC program.
    We do know that where debt relief has been accomplished, it has been very successful. I have a series of examples in my statement that show where it has truly helped return children to school and helped to vaccinate children in Tanzania, Uganda, Mozambique, and others where debt relief savings were used to really provide essential services and education and health care to some of the world's poorest people.
    I support this program. I look forward to the testimony. I will place my 5-minute statement into the record. Thank you.
    Mrs. BIGGERT. Without objection, all members' opening statements will be made a part of the record. Are there further statements?
    Then we will proceed to the witnesses. Today we have Mr. Tom Melito, Acting Director, International Affairs and Trade, United States General Accounting Office. Welcome.
    Mr. Thomas H. Hart, Director, Government Relations, DATA—Debt, AIDS and Trade for Africa. Thank you for coming.
    And Mr. Gerald Flood, Counselor, Office of International Justice and Peace, United States Conference of Catholic Bishops.
    I am sure that most of you probably know the drill. Without objection, your written statements will be made a part of the record and you will each be recognized for a 5-minute summary of your testimony. Then we will ask questions with a 5-minute limit which we will try and stick to.
 Page 10       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. I will first recognize Mr. Melito for your testimony.
    Mr. MELITO. Madam Chairwoman and members of the subcommittee, thank you for the opportunity to be here today to discuss GAO's assessment of funding challenges related to heavily indebted poor countries, or the HIPC initiative. The HIPC initiative is a joint bilateral and multilateral effort to provide debt relief to poor countries to help them achieve long-term growth and debt sustainability.
    Our recently released report has two main findings. First, the three key multilateral development banks we analyzed, the World Bank, African Development Bank, and Inter-American Development Bank, face a funding shortfall of $7.8 billion in present-value terms under the HIPC initiative. We estimate that the United States could be asked to contribute an additional $1.8 billion to close this financing shortfall.
    Second, we estimate that the 27 countries that have qualified for debt relief may need more than $375 billion from donors to ultimately achieve their economic growth and debt relief targets by the year 2020. The United States may be asked to contribute about $52 billion of this assistance.
    Let me briefly provide some background on the HIPC initiative and then describe in greater detail the results of our work. The World Bank and IMF have classified 42 countries as heavily indebted and poor. Three-quarters of these are in Africa. The current cost for this initiative is about $41 billion in present-value terms. This will be funded almost equally between bilateral and multilateral creditors. A major goal of the HIPC initiative is to provide recipient countries with a permanent exit from unsustainable debt burdens.
 Page 11       PREV PAGE       TOP OF DOC
    I will now turn to our main findings:
    First, regarding the financing issues for the current initiative, the three banks we analyzed face a funding shortfall of $7.8 billion in present-value terms. The World Bank has the largest shortfall at $6 billion. Despite significant assistance from donor governments, the African Development Bank has a financing gap of about $1.2 billion. The World Bank and the AFDB have not determined how they will close their financing gaps. The Inter-American Development Bank is fully funding its HIPC obligation by reducing its future lending by $600 million beginning in the year 2009. We estimate that the United States could be asked to give an additional $1.8 billion to close the $7.8 billion shortfall.
    However, the total estimated funding gap is understated, because the World Bank does not include costs for four countries for which data are considered unreliable. In addition, all three banks do not include estimates for topping up, the additional relief that may be provided due to factors such as a weakening in countries' economic circumstances. The World Bank and IMF project that this additional relief could cost from $877 million to $2.3 billion.
    Let me now turn to our second finding, addressing countries' long-term economic growth and debt sustainability. The 27 countries that have qualified for debt relief may need more than $375 billion in present-value terms to help them achieve their economic growth and debt relief targets by the year 2020. This amount consists of three components: first, $153 billion in expected development assistance; second, $215 billion to cover lower export earnings; and, third, at least $8 billion to reach debt targets.
    The World Bank and IMF project that these countries will need $153 billion in development assistance after HIPC. However, this is an underestimate because it assumes that countries will achieve overly optimistic export growth rates. Under more realistic historical rates, we found that 23 of the 27 countries are likely to experience higher debt burdens and lower export earnings. This will lead to an estimated $215 billion shortfall over 18 years. These shortfalls are due to weather and natural disasters, lack of access to foreign markets, or declining commodity prices, all factors outside these countries' control. If countries are to achieve economic growth rates consistent with their development goals, donors would need to fund the $215 billion. Otherwise, countries would grow more slowly, undermining progress toward poverty reduction.
 Page 12       PREV PAGE       TOP OF DOC
    Finally, we estimate that countries will need at least nearly $8 billion to achieve their debt targets, both those under the existing initiative and those the committee asked us to examine. Based on its historical share of bilateral and multilateral assistance, the United States may be asked to contribute about $52 billion, or 14 percent of the $375 billion in additional assistance.
    Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the subcommittee may have. Thank you.
    Mrs. BIGGERT. Thank you very much.
    [The prepared statement of Thomas Melito can be found on page 79 in the appendix.]
    Mrs. BIGGERT. Next, Mr. Hart, if you will proceed.
    Mr. HART. Thank you, Madam Chairwoman. Mrs. Maloney, Mr. Frank, and other members of the subcommittee, I would like to talk briefly about what has been achieved by the HIPC debt relief program, which has been significant; how it can be improved and how debt relief compares to other forms of assistance, which is a lot of ground to cover in a short amount of time, and I hopefully can react briefly to the GAO report at the end. I will be happy to answer any questions you might have as well.
    First, let me say what a real pleasure it is to address this subcommittee on this critical issue. While DATA, which stands for Debt, AIDS, Trade, Africa, is a relatively new organization, many of the people who helped found DATA started their work during the Jubilee 2000 campaign. The best known of whom, of course, is Bono from U2, who is the co-founder of our organization. But also some of the most influential people in the debt campaign are actually members of the U.S. House Financial Services Committee. I would like to thank Mr. Leach, Mr. Bachus, Mr. Frank, Ms. Waters, as well as many others of this committee, who created the essential authorizing legislation as well as the political momentum to approve the HIPC initiative and get it funded here in the United States, which then had the impact of triggering the international agreement among the other donors.
 Page 13       PREV PAGE       TOP OF DOC
    Over the last 4 years, Congress has provided approximately $860 million to the enhanced HIPC initiative, canceling both U.S. bilateral debt and contributing to writing off multilateral debt. And I am delighted to report that the results of this program have been substantial. Twenty-seven of the poorest countries in the world have now qualified, almost all of which are in sub-Saharan Africa. These countries will see their debt reduced by two-thirds, cutting $52 billion in debt stock.
    Other donors, in addition to the United States, have provided $30 billion to finance this initiative. A new process has emerged in which poor country governments must engage with their civil societies to determine poverty reduction priorities for their country and have increased ownership and transparency within their governments. For development advocates like DATA, very importantly, more than $1 billion annually in debt service is now staying in these 27 countries to fight poverty.
    And just a couple of brief examples: Uganda has used savings from debt relief to more than double school enrollment to 94 percent, which has contributed to that country's remarkable decline in HIV/AIDS rates. Mozambique has vaccinated children against tetanus, whooping cough, and diphtheria as well as built and electrified schools. And Cameroon has used debt savings to launch a national HIV/AIDS plan for prevention, education, testing and mother-to-child transmission.
    So, being the Financial Services Committee, what kind of return on this investment have you got? For an investment of less than $1 billion over the course of several years, the U.S. has leveraged $30 billion of donations from other donors and canceled $50 billion of debt stock, a significant clearing of the books of decades-old debt. It also has freed up $1 billion a year in debt service which is now building schools, clean water wells, and AIDS prevention programs.
    That said, of course, the program could be improved. The debt service relief has been rather uneven among the 27 countries, some receiving 5 percent debt service to revenue, others up to 34 percent. We are hoping that we can even out some of the benefits in the program.
 Page 14       PREV PAGE       TOP OF DOC
    Secondly, 27 countries is wonderful, but not enough. There are many countries who could benefit from debt relief. As we have seen recently in Iraq, any reconstruction and development package should include debt relief as a way of easing financial pressure on a burdened country.
    And thirdly, even though these countries have saved $1 billion annually in debt service, they are still paying $2.5 billion annually, mostly to the World Bank and IMF. These are critically needed resources for putting girls in school and fighting AIDS.
    So it is with some of these improvements in mind that Mr. Frank, along with his colleague Mr. Smith from New Jersey here in the House, and in the Senate, Senator Santorum and Senator Biden, drafted legislation to try to address some of these concerns. Very quickly, it proposed a simple change to the HIPC program. Instead of using 150 percent debt stock to export, which is the measure the current HIPC initiative uses to measure debt, it proposes to change so that no country spends more annually in debt service than 10 percent of its general revenues, or, in the case of a country with a high AIDS burden, 5 percent. That would more closely link debt relief to a country's ability to pay and limit some of the volatility that changing exports have had on debt sustainability. It would increase the amount of money these countries have for poverty reduction by over $430 million, a 50 percent increase in the benefit to these poor countries for only a minimal cost.
    This proposal was actually passed into law last year with the Global AIDS Act, but the Administration has not yet implemented its provisions. I hope one of the outcomes of this hearing will be to encourage the Administration to do so.
    In my last minute of time, I want to relate how debt relief works as part of a development package. Of course debt relief, as Mr. Frank noted, is not a panacea. It never was designed to be. Poor countries need additional aid and much better trade terms with rich countries, something that speaks to the GAO's very large gap in export financing that they have in their report. But debt relief under HIPC does have several features that make it an effective form of assistance.
 Page 15       PREV PAGE       TOP OF DOC
    (1)It coordinates donors. Like any bankruptcy, all the donors have to move together and that eases the burden of paperwork, financing, and accountability that poor countries have to deal with.
    (2)It promotes country ownership. The HIPC initiative, as I mentioned earlier, asks members of civil society to design a poverty reduction plan, creating better consultation by the countries themselves as well as highlighting country priorities rather than donor priorities.
    (3)Debt relief gives untied aid, meaning the countries make their spending decisions themselves.
    (4)And, as noted, debt relief leverages far greater sums because it coordinates the donors together. As noted, every U.S. taxpayer dollar is leveraged 30 times by other donors.
    Very, very briefly on GAO, Tom is an old friend so he will know the spirit in which I say this, but this was GAO's shock-and-awe strategy. Even though this was a report intended to address some of the challenges of debt relief, he ends up bringing in export financing and development assistance as a way of achieving certain growth goals. While DATA firmly supports a robust and comprehensive development financing package for the poorest countries, to somehow imply that the debt relief programs shoulder that burden is simply not going to happen.
    One of the factors that I have pointed out, the largest gap in financing here that the GAO points out is in export financing. I know this will be a controversial suggestion to Congress, particularly during an election year, but instead of actually costing the U.S. taxpayer money, we could in some respects solve this problem by saving taxpayer money. U.S. farm subsidies contribute dramatically to Africa and other poor countries' inability to export their goods to the Western world. We spend billions of dollars subsidizing our farm products, which make them very, very cheap and make it very difficult for poor countries to compete globally. In many instances also those products are actually dumped on markets in poor countries. Therefore, that export gap could be closed by other means other than U.S. taxpayer dollars.
 Page 16       PREV PAGE       TOP OF DOC
    The shortfall in debt relief that is mentioned, the $8 billion, could largely be addressed. It is partially being addressed currently—there is a $650 million shortfall, of which the United States has agreed to provide $150 million, half of which has already been appropriated by Congress. The other half has been requested for 2005. It is a very small amount. The second part of that shortfall is largely to the World Bank. This is because to date, the World Bank has taken its substantial annual profits and transferred some of those profits to the HIPC initiative. It has done that to date and is now proposing to stop doing that. That is the reason why the shortfall exists.
    I hope some of these issues can be considered as the committee moves forward. Thank you very much.
    Mrs. BIGGERT. Thank you very much.
    [The prepared statement of Thomas H. Hart can be found on page 54 in the appendix.]
    Mrs. BIGGERT. Mr. Flood, you are next.
    Mr. FLOOD. Thank you, Madam Chairman. Madam Chairman, members of the subcommittee, on behalf of the United States Conference of Catholic Bishops, I would like to thank the members for the opportunity to testify here today. Debt relief for poor countries has been a high priority for the Bishops Conference and of the relief and development agency, Catholic Relief Services, for many years. In my testimony, I will be focusing on a number of issues at a level of technical detail which the Bishops would not normally address and on which they therefore would not have a position, as I think you can understand. Thus I am offering my testimony primarily as a former development agency official who has worked on debt and related issues with both the World Bank and the Bishops Conference for many years.
 Page 17       PREV PAGE       TOP OF DOC
    First I would like to reiterate what Tom Hart said and just to acknowledge my great appreciation and gratitude for the leadership and the long and faithful support provided by many members of this committee in favor of debt relief for heavily indebted poor countries, particularly Mr. Leach, Mr. Bachus, Ms. Waters and Mr. Frank.
    In my written testimony, I discuss six areas where the HIPC program and related activities seem to be producing good results for the beneficiaries, including, among others, substantial increases in expenditures for poverty reduction, prudence in new borrowing and improved processes for tracking poverty reduction expenditures. Time won't permit me to go into each one of these, but what I would like to do is just highlight one of them and then as is our wont, as suggested by Mr. Frank, to go into some of the deficiencies for the program as I see them, but briefly.
    The first point I want to make on the positive side is that the poverty reduction strategy process, or the PRSP which was introduced as an integral part of the HIPC debt reduction program, has facilitated an active, unprecedented role for civil society groups in monitoring of expenditures for poverty reduction. Catholic Relief Services reports impressive examples of civil society participation in a number of countries including Bolivia, Uganda, Malawi and Zambia. They have formed active and effective debt monitoring organizations which actually examine and track how debt relief expenditures are being spent in their countries. This shows that in many countries the procedures instituted under the HIPC program are helping to strengthen democratic processes in places where historically weak governance has often led to serious neglect of the needs of the large majority of the very poor and vulnerable citizens.
    On the other side of the ledger, although the program is in its fifth year of completion, only 11—and I understand yesterday that number is up to 12—of the 27 beneficiary countries have reached their completion point. This is the point at which they become irrevocably entitled to full debt relief. Zambia is a case in point. My understanding is that the completion point is being held up because pressures to increase salaries led to an overshooting of the wage bill target agreed with the IMF. This is a very complex issue. A recent World Bank report analyzed the wage bill problem. It says that low remuneration in the public sector is a major factor contributing to problems of poor productivity, motivation, recruitment and retention. At the same time, the wage bill in Zambia has remained large relative to overall government expenditures, thereby crowding out operational expenditures.
 Page 18       PREV PAGE       TOP OF DOC
    The World Bank report outlines a broad strategy for addressing the issue. But the challenge is an enormous one: how to make wages sufficiently remunerative to attract and retain qualified staff while at the same time minimizing the cost. In the meantime, Zambia continues to be plagued by a heavy burden of past debt. In fact, the fiscal bind which Zambia finds itself in can be attributed in large measure to its heavy debt service obligations. According to the latest projections, Zambia's debt service will be an extremely high 31 percent of government revenues in 2004. The delay in granting full debt relief is restricting the ability of HIPC countries to create the kind of fiscal space so important for moving ahead to address in a more effective way the human needs of their people.
    The IMF and World Bank should reexamine the conditions for reaching the completion point, particularly those that are unrelated to assuring that the debt relief savings will reach the poor.
    Tom Hart has already covered the next several points and I don't want to waste the committee's time by repeating things which I am in full agreement with. I just want to thank very much Representatives Chris Smith and Barney Frank, and Senators Santorum and Biden for their leadership in introducing the bill which is now the new legislation which Tom Hart discussed.
    So let me talk briefly about the GAO report. This report makes a very important point, which is that even if the HIPC program is fully financed, substantial additional external assistance will be required to enable HIPC countries to achieve growth and poverty reduction targets. Debt relief is not—a well used word—panacea. Even if the existing debt of HIPC countries is reduced to zero tomorrow, it will not end poverty. The problem is too complex and deep seated for that. It must be addressed first and foremost by the countries themselves, with their governments and people working together on a variety of fronts for the common good. But they are too poor to do it alone. They need additional aid and support from the wealthier countries.
 Page 19       PREV PAGE       TOP OF DOC
    There are questions of course that arise with respect to the numbers that are used in GAO's report, but let me make one additional point and that is that the GAO scenario assumes that the export shortfall they project will be made up entirely by aid. This overlooks an important element of the development agenda—external trade, as Tom Hart indicated. Developing countries can achieve important benefits by more open trade provided that it is also fair trade. The World Bank estimates that trade barriers in Europe, the United States, and Japan cost poor nations more than $100 billion a year.
    One final point. The GAO estimates that almost all the 27 HIPC countries could achieve debt sustainability if multilateral creditors converted an average of one-third of their new loans to grants. In fact, in a statement by President Bush in 2001, he said that IDA should convert about half of its loans into grants. The Bishops Conference supported the expansion of IDA's grant authority in IDA 13. But they also emphasized the importance of donors beginning to make contributions very soon to offset the loss of reflows of loan payments to IDA which constitute close to 40 percent of their resources for new lending. Otherwise, the necessary contributions would mount quickly to unfeasible levels and cause IDA to sharply cut back its assistance to the world's poorest countries. This will be an important issue in the negotiations of IDA 14 which have just begun. Thank you.
    Mrs. BIGGERT. Thank you very much.
    [The prepared statement of Gerald Flood can be found on page 45 in the appendix.]
    Mrs. BIGGERT. We will now proceed with the questions. I will recognize myself for 5 minutes.
    Mr. Melito, your report identifies a range of development and export support lending that will be needed between now and 2020 for HIPC countries to meet the targets identified in their PRSP. Do your estimates take into account the impact that programs such as the Millennium Challenge Account, the Global Fund for HIV/AIDS, TB and Malaria, the USAID, and UNCTAD will have in helping to meet some of the development needs you identify in your report?
 Page 20       PREV PAGE       TOP OF DOC
    Mr. MELITO. In our report, we are using World Bank and IMF's 20-year projections which make the assumption, which we follow, that these countries are on a reform program that is supported by the donors, which would include bilaterals such as the United States as well as multilaterals. We hold that assumption constant. So U.N. reforms, World Bank reforms, U.S. reforms, would all be assumed to be followed. This would then result in high GDP growth rates, which we hold constant. So yes.
    Mrs. BIGGERT. So yes?
    Mr. MELITO. We are assuming those sources of financing are there and the reforms that those particular programs are looking for are being followed.
    Mrs. BIGGERT. Have you actually taken into account the monetary amount, or is that just that these reforms will raise the quality of the health, for example, of the people of those countries?
    Mr. MELITO. Once again we have used the World Bank and IMF's breakdown of development assistance, which doesn't go into great detail. It has information on different multilaterals, how much the World Bank will provide, how much the other MDBs will provide. It also has very general numbers on the bilaterals. It doesn't break it down to how much is actually the U.S. share, and certainly not within the U.S. Share how much would come from MCA versus regular development assistance. We abstract from that. We are just taking the total numbers they provide us.
    Mrs. BIGGERT. For example, with the Millennium Challenge Account, what would you say about that?
    Mr. MELITO. That would be one of many possible sources of financing which could be used to help the HIPC countries as well as other HIPC countries as we move forward. But it is not, in the case of financing HIPCs, different from any of the other sources. It is one of many possible options.
 Page 21       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. How about, then, the Global Fund for AIDS? We put so much money into this program. I am trying to just figure out if you would say, well, so much money is going to go to this?
    Mr. MELITO. It is a very difficult thing to project out 20 years. We tried to put a lot of caveats in the report. We are actually, for the most part, piggybacking on the World Bank and IMF's projections, just changing some key assumptions and seeing what the impact of those assumptions are. They are the ones who estimated how much development assistance would come to the countries. We don't actually change that number. We leave that number as it is. So when we say that $153 billion is expected in development assistance, that is the World Bank and IMF's number. That is not our number. That number is about equally distributed between multilateral assistance of about $75 billion and about $78 billion for bilateral assistance. But they don't actually break it down and say how much is coming from the global fund, how much is coming from MCA or anything else. And that is certainly not within the scope of what we did. So we left that as is.
    Mrs. BIGGERT. How do you determine the rate of growth each year, how much of this is going to factor in for the years to reach 2010?
    Mr. MELITO. The DSA has a number of optimistic growth rates. We made a choice to keep the optimistic GDP growth rates constant, because those are the rates which are geared towards poverty reduction, with the notion that these countries will be expected to strictly follow the reform programs which will contribute to their ability to grow, and in exchange for following reform programs, donors would provide them assistance.
    We also, though, looked at the fundamental—we considered—weakness in one of their growth rates which is on the export side. We think it is important to highlight that. While we find that there is a $215 billion export shortfall, we still calculate that these countries are going to raise quite a bit of revenue from exports. It is not that we are wiping out their export revenues. It is just that we bring a more realistic historical perspective and our estimate is about 40 percent of what the World Bank and IMF estimate. But we have reasons to suspect the export levels. We are being hopeful on the GDP side for the value estimated.
 Page 22       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. There has been recent research that has begun to quantify how improvements in public health can drive economic growth. With some of the written testimony and testimony today on how inoculation and other health initiatives have been supported by the HIPC initiative and these other administration priorities, how can one assume that export growth in the future will be consistent with the historical experience?
    Mr. MELITO. The reason we are concerned about the export growth rates is that a lot of the vulnerabilities come from factors outside these countries' control. As we mentioned in our statement, they rely heavily on a few primary commodities, agriculture products like coffee or cocoa, minerals like copper. Over the last 20 years, the prices of these items have actually gone down over that time in real terms. They have wide fluctuations which also hurt these countries. These countries also have large weather extremes, other natural disasters. So on the export side, they really have very little that they can sell, and what they are selling has been going down in price. For them to have good outcomes in exports, they need to diversify their exports and probably moving into manufacturing, which would be an important development goal, but it takes a long time for them to reach that point.
    Mrs. BIGGERT. Thank you. I recognize the gentlewoman from New York.
    Mrs. MALONEY. I would yield to the Ranking Member of the full committee.
    Mr. FRANK. I thank the gentlewoman.
    Mr. Melito, one thing that I think may have caused some confusion, when you talked about the $375 billion, which of course $8 billion of that is for the HIPC—we ought to be clear—the HIPC. To carry out what we started a few years ago cost $8 billion. So the overwhelming majority of that is to get to very, very good outcomes. We might say that $368 billion is the price of a panacea which we claimed we were doing there. But even there I think it may mislead some people unless we are very explicit about something.
 Page 23       PREV PAGE       TOP OF DOC
    As I understand what you are saying, that is not $375 billion more than is currently planned. That includes $153 billion that is assumed foreign aid going forward. So even at that, it is a $215 billion increment, currently planned amount, over this period, is that correct?
    Mr. MELITO. That is so. We are explicit about that in the report.
    Mr. FRANK. I understand that. I don't mean to impugn your pride of authorship. But some people might wait for the movie and not read every word in the report, so I wanted to get that out. So we are talking not about $375 billion additional but $215 billion additional to reach the point where they are all in very good shape. I would love to get there, but I don't want to scare people.
    The only other thing I would ask about were exports. You are right, exports are uneven but not with regard to agricultural commodities but with regard to, you mentioned copper and other things. We are currently in a situation where with sanctions of the Chinese vacuum cleaner, some of those things are going up. Do you assume that is going to end soon? In fact, while export prices for raw materials might have been going down a while ago, currently my reading is that a lot of them are going up because China is putting such upward pressure on them. Do you have any response on that?
    Mr. MELITO. Even over the last 20 years, there have been periods of growth, but the overall trend has been downward. Certainly some of the commodities may be turning around.
    Mr. FRANK. If the Chinese continue this?
    Mr. MELITO. Overall demand worldwide may be going up but they are still vulnerable.
    Mr. FRANK. I agree. In fact, that also leads me to the last point I want to make on this. That is, I have been struck, as we have debated free trade over the years, that some of us who have been concerned about the impact that unrestricted trade without any labor or environmental rights would have on particularly some of the industrial workers who have been accused of being protectionists. In fact, as I think this report makes clear, the greatest negative impact any public policy in America has on our ability to help poor people is America's agriculture policy. It is restrictive, it is subsidized, and I find it odd that people who are strong proponents of our agricultural policy, which I generally vote against, which costs tens of billions of dollars and is quite restrictive, are somehow allowed to call themselves free traders.
 Page 24       PREV PAGE       TOP OF DOC
    I gather with regard to export growth that significantly increasing the amount of agricultural product we allow to come into the United States would be very helpful. Is that correct?
    Mr. MELITO. It is generally outside the scope of this report, but we do highlight that the ability to sell their products will obviously decrease this shortfall.
    Mr. FRANK. Would you say that agricultural products are a large part of what these particular countries would be able to sell?
    Mr. MELITO. Their primary commodities are generally agricultural or metals.
    Mr. FRANK. Thank you. I think that is kind of an illogical point here. The most protectionist, the aspect of American economic policy that falls hardest on these countries is our restriction on agriculture.
    I guess finally I would say this. You don't seem to be too optimistic about the impact of various free trade agreements that the United States might be signing with these countries. Have you taken that into account? Suppose the President and Mr. Zoellick's trade agenda were put through. Would that increase your optimism about their exports?
    Mr. MELITO. Certainly to the extent that markets would open, that would increase their ability to achieve high growth.
    Mr. FRANK. But there is nothing in there. You wouldn't bet on it?
    Let me ask Mr. Flood with whom I generally agree, this one point—and I did want to note that I think some of our liberal friends were just wrong in their resistance to going to more grants, although it does mean that you have to take advantage of the reflows. But one point that was raised by Treasury and some others, and I know I supported this amendment with Mr. Smith but we did, I think, give Treasury an alternative. We said either do this or come up with an alternative. I share your disappointment that Treasury basically just blew us off and sent back a report which I think unfairly denigrates the HIPC and mischaracterizes what the World Bank said. But there is the moral hazard thing. There is the perverse incentive thing. How do we respond to that? I must say I am impressed with that. Namely, that if you tell people that we will make sure that their debt isn't more than a certain percentage of their revenue, to some extent that gives them an incentive to kind of push up their debt and reduce their revenue. Are there ways that we can achieve the goal of reducing the burden of debt and avoid those negative incentives, Mr. Flood?
 Page 25       PREV PAGE       TOP OF DOC
    Mr. FLOOD. I have never really understood that point too well, because we have a situation where a country is paying, let's say, 30 percent of its revenue currently in debt service. Under the legislative proposal that was passed, the country would then go to a situation where it is paying perhaps 5 percent of its revenues in debt service. Therefore, it is in effect in a position where it makes more sense to go out and raise revenues because fewer of its revenues are going to have to be used up in providing funds for debt service.
    Mr. FRANK. What about if they are closer to the margins where an increase might have a negative impact?
    Mr. FLOOD. I think that the other thing is that this is a retrospective program. It is not a prospective program. What we are talking about is getting rid of old debt.
    Mr. FRANK. I know that it has been suggested that one of the things you do is to have these be only as applied to the past but that future either debt or revenue would somehow be excluded from the calculation, Mr. Hart?
    I am sorry. Go ahead, Mr. Flood.
    Mr. FLOOD. I was going to say that I think in going forward, I don't think that the countries can expect to have repeats of HIPC every few years, which it seems to me would create quite a moral hazard, that they wouldn't in effect be responsible for the debt service of future lending because somebody's going to always come around and forgive it. But if you went to a grant system, which I think is really a very good alternative, it will avoid that problem.
    Mr. FRANK. Mr. Hart?
    Mr. HART. I was going to respond to the first part of your question, which is that Treasury has argued that somehow when you have a debt service-to-revenue formula you are somehow depressing—that you are creating an incentive not to collect revenues. And it was in response to that that you and your colleagues who passed the legislation gave Treasury the flexibility to design another mechanism which achieved similar results, including tying it to GDP, which has been an example that Nancy Birdsall from the Center For Global Development has recommended. That option is there for Treasury to pursue.
 Page 26       PREV PAGE       TOP OF DOC
    Mr. FRANK. Let me say to Treasury that I would renew our request that they give us more on this than they have. I think there is a great deal of interest.
    Just a last point on this, if I could, Madam Chair, and I thank you for the indulgence. Unfortunately reflective of—I don't know—a lot of things, we are more sparsely attended today than if we were talking about richer people.
    Mr. FRANK. I can see how we can get the IMF to finance greater debt relief. I think we need to do some more work on how we get the World Bank to do that, because it seems we ought to be going forward on that.
    There was one suggestion that they raise the interest rate on sort of middle-income countries. I do not think that works. I do not think you want to make Mexico pay for Uganda. That is not a good idea.
    But any off-the-top-of-your-head suggestions about what we can do with the World Bank? And that would be my last question.
    Mr. HART. Just briefly, ask the World Bank to do what it has been doing for the last 5 years. As part of the enhanced HIPC framework, the World Bank agreed to take net profits it earns from interest on income—between $1.5 billion and $2 billion a year, in net profits. They then transfer that to their pension plan and to other accounts. One of those accounts that they transfer profits to is the HIPC trust fund.
    They have been giving between $200 million and $300 million a year as their part of contributing to writing off this HIPC debt. They have agreed to do that until 2005.
    Between 2006 and 2020, they have not agreed to do so, thus creating that massive shortfall in funding that GAO referred to.
    Mr. FRANK. So they just agree to continue this forward if they could do that, and it would not cause shortfalls in the other accounts?
    Mr. HART. It would at least substantially reduce that shortfall.
 Page 27       PREV PAGE       TOP OF DOC
    Mr. FRANK. Mr. Flood?
    Mr. FLOOD. No, I just wanted to say that even when they are contributing $240 million to the HIPC trust fund out of their revenues, they are still able to increase their general reserves by $2.4 billion. I mean they have a lot of leeway in there.
    Even with the continuation of the current level of contributions to the HIPC, there will be still a gap, and I think that really the $240 which they are currently doing has to be considered the minimum as to what they can contribute going forward.
    Mr. FRANK. So that would not get us to further debt? That is just to finish up on HIPC?
    Mr. FLOOD. That is right.
    Mr. FRANK. We have to work on that.
    Mrs. BIGGERT. Thank you.
    It appears that the gentleman from Massachusetts would be in favor of another hearing at some point.
    Mr. FRANK. Yes, I would be.
    Mrs. BIGGERT. To include Treasury and perhaps the World Bank.
    Mr. FRANK. Yes, although, we did not ask Treasury. I do not mean to be critical of Treasury, because they have been cooperative. We had not asked them to come here.
    But yes, I think because the World Bank will not testify, but they could sit and listen, and maybe they are already doing that.
    Yes, I thank the vice chair. If we could get Treasury to come back, or to come—it is not their fault today, we did not ask them—but if they were to come and address this, that would be helpful. And maybe the American ED, the American executive director of the Bank, could accompany Treasury.
 Page 28       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. The gentleman from Florida is recognized for 5 minutes.
    Mr. FEENEY. Thank you very much, Madam Chairman.
    I happen to be a new Member of Congress and, of course, a new Member of the Committee. And this is my first experience with HIPC, so I hope you will give me the grade 1 through 5 and not the advanced level.
    I want to ask first, Mr. Melito from the GAO, with respect to your study, you named the donor nations that are eligible for HIPC. You also I think we probably admit, as some of the folks on the other side tried to point out earlier, that there are huge variables when you start estimating the burdens that these countries are going to have, all sorts of things, not just gross domestic product increases but the value of specific resources, whether it be oil or gold or commodities or products, all sorts of political decisions that are made, not just by that Nation, but by the world community. I think we very much understand that.
    One of the things I would be interested in knowing is, historically, how some of these poor debtor nations got into the condition they are in the first place. One of the things that I would be specifically interested in, since it is something we have an impact on, is what their history has been over the last 3, 4, 5 decades in terms of receiving foreign aid. What have we done with our foreign aid dollars to actually help these folks acquire the types of governments and policies that will lead them to economic prosperity?
    I note that one of the key goals of HIPC is not just to relieve debt. I mean, that is the symptom that we are attacking, but it is to eliminate or reduce poverty and promote economic growth. And I guess sort of the tongue-in-cheek proposal from somebody who has been very disappointed in a 50-year history of financial aid from America and other nations and how little it has actually impacted the quality of life of people there, I guess sort of the tongue-in-cheek proposal is, have we thought about translating the Wealth of Nations by Adam Smith into all of the different languages available and providing it to the finance ministers and advisers and economic professors in each of these countries?
 Page 29       PREV PAGE       TOP OF DOC
    Because my view of this is pretty simple. Our policies are not designed to promote not just free trade but low taxation, low regulation, the rule of law, property rights, both for real and intellectual, that no amount of aid is going to be enough to keep these countries out of deep trouble. So if I could—and I will end early, Mr. Melito, because then I would like to have the other panelists if I could, who are advocates for aid—I would sort of like you to address your response to my monologue here, to how we know when we are succeeding.
    We really are trying to remodel what I have described as a massive failure of foreign aid from America for the last 4 or 5 decades. By the way, the only exception is maybe some short- or even long-term intelligence or military with strategic advantages. If we are going to buy or bribe countries to be our friends for a while, that would be a different discussion.
    But to the extent our goal is economic growth and reduction of poverty, I have been totally disappointed in the results that foreign countries have gotten from our aid and that our taxpayers have gotten as well.
    Some of the things, Mr. Hart, that you point out that are huge successes—and I do not mean to diminish the importance of any of these—but I would like you to tie the ultimate goals of HIPC programs, eliminating and reducing poverty and promoting economic growth. You have twice as many people in schools in Uganda. Are they teaching the right things to twice as many students? You are measuring inputs there, and I am more concerned if we are measuring outputs.
    I think that, finally, and then I will end, if you can tell me how you are measuring—and by the way, you talked about disease control and AIDS. Africa is three-quarters of the nations involved here. Famines come and go in Africa in a tragic way, not every decade, but every year. Even when the famine is eliminated, poverty is not, and economic prosperity never, ever results on the African continent. And that is a sad fact of life.
    Finally, Mr. Flood, you have suggested that Malawai and Zambia are examples of where HIPC may be making a difference, but this is more of a suggestion on your part. Do you have any empirical evidence that you can give us to that effect?
 Page 30       PREV PAGE       TOP OF DOC
    So with that, thank you very much.
    Mr. MELITO. I will just briefly talk a little bit about history and let my colleagues deal with the effectiveness.
    The causes for these countries getting these debt problems is actually an ongoing issue of overly optimistic export growth rates. Back in the 1970s, these countries received a lot of commercial debt or debt from governments, including the United States, at commercial rates, on the notion that they would be growing rapidly. Well, they did not, and in the 1980s, they ended up having very high levels of debt which they could not pay.
    That debt got slowly converted over time from bilateral to multilateral debt, as they went to the concessional windows. But this problem has been existing for a couple of decades, and failure to reach high export growth rates would be one of the main causes of this debt, going back since the 1970s.
    Mr. HART. Thank you, Congressman.
    There is a lot of, many parts to your question, and I am not sure I will do justice to all of them. Let my try.
    First of all, I do not think it would be correct to say that the last 40 years of development aid have been a categorical failure. Life expectancy rates in the developing world from World War II to the 1990s was actually increasing, which is a real output, to use your word, of direct assistance. Then HIV/AIDS began to take its toll, particularly in Africa, and we have seen life expectancy decline.
    That is not to say that I disagree with everything you are saying. I do actually agree. I think we could do a lot better with our development assistance. I think, actually beginning with debt relief 5 years ago, began a trend toward several things that have improved U.S. assistance and indeed the global fight against poverty. One is that donors are acting better in concert with one another. That does, in fact, have a real impact on these countries.
 Page 31       PREV PAGE       TOP OF DOC
    I think also the ability of countries to leverage money from one another increases the impact of assistance.
    I think in no small measure the success, political success, of debt relief and the results that we have begun to see, at least the input that we have begun to see in these countries with debt relief, have helped lay the groundwork for the substantial increase in assistance for HIV/AIDS. Beginning with Mr. Helms in the Senate who was a long-time critic of U.S. aid, his support for debt relief and then HIV/AIDS helped begin to turn the corner.
    And I think that also has led to the Millennium Challenge Account, which, in my view, is an historic rethinking of the way we do development assistance—focusing large amounts of resources on well-governed countries, countries fighting corruption and promoting democracy. And we are firm supporters of that program and look forward greatly to the Administration implementing this program with haste, because we do think that we will begin to really see the results that we are all hoping for, as well as revealing the credibility of aid with the American public and with policymakers.
    Mr. FLOOD. In terms of aid effectiveness, I think that, for one thing, we do not often really appreciate some of the smaller improvements that are actually happening on the ground at the micro level that do not get built up and put into the global statistics. Because I remember when I was working for the World Bank in Nigeria, I visited a rural community. What was going on there is amazing, even though it will never appear in any statistics anywhere, in terms of what was happening with a group of maybe 500 people, something like that.
    They had, through technical assistance, introduced new varieties of cassava, a basic commodity for them, and they had doubled the output of the cassava in a few years time. They had new water supply systems, and these were, of course, wells, simple, just wells in the middle of a town. Before, the mothers would have to travel for miles to get water out of a river which was usually polluted. And now, they did not have to travel so far. They could spend their time on more productive ventures, and the water that they had was pure. It did not cause them to get sick all the time.
 Page 32       PREV PAGE       TOP OF DOC
    These sorts of things do not always show up in the statistics. They take a long time to filter up and to spread, and maybe impact on, the global economy of that particular country.
    Malawai and Zambia—I have not been there, so I cannot give you a very precise answer. But what I can tell you is that one of the problems with aid deliveries in the past has been the question of ownership. Too often the countries did not really feel that they owned the activities that were being financed by the external donors because too much of the time they were the donors' preferences and priorities and not the local people's preferences.
    I think an important thing about the Malawai and Zambia experience is that civil society is having a major role which they did not so much have in the past. They are really influencing the shape of the programs, and more than that, they are able to monitor what happens.
    Now, even in the HIPC program, it is too early to have any solid measures of outputs. You are really stuck, for the time being anyway, mostly with input measures, but the input measures are good. I mean, the fact that so many more school children are attending primary school in Uganda, I think that is a major accomplishment. All the donors that I am aware of, they have programs for teacher training, for improving the curriculum.
    In Nigeria, we financed 1 million textbooks, which were geared to the local environment, for example, to primary school children. So the input side, I think, is important, and I am confident that we are going to see some good output measures, output coming out of all of this.
    Now, again, I think the development agencies also are improving their techniques for measuring outputs, and I think that is a positive sign.
    Mrs. BIGGERT. The gentlewoman from New York, Mrs. Maloney, is recognized for 5 minutes.
    Mrs. MALONEY. I have a question for Tom Hart on the ability to pay.
 Page 33       PREV PAGE       TOP OF DOC
    Last year, in the Global Aids Act of 2003, the United States committed to seek deeper multilateral debt relief. The current enhanced Heavily Indebted Poor Countries Initiative sets 150 percent debt-to-export ratio as the index of debt sustainability.
    Secondly, the Administration has yet to implement the 10 percent of fiscal revenue measure of ability to pay. So Mr. Hart, and GAO, Mr. Flood, if you would like to comment, can you elaborate on these two measures of ability to pay and, more broadly, in your opinion, has the Administration, the Government, complied with the mandate in the Global Aids Act to seek deeper debt relief?
    Mr. Hart?
    Mr. HART. Thank you. I can answer the last question fairly quickly, which is, not yet. And again, this hearing, I hope, will spur the Administration to consider the recommendation the Congress gave them in the AIDS law, building upon the enhanced HIPC framework, in beginning to seek deeper relief for these qualified countries.
    The primary motivation of this legislation is to change, as you said, from 150 debt stock-to-export ratio, which is really in the weeds, and I apologize. Very quickly, the reason for that is, I mean, it is an arbitrary level. All of these numbers are fairly arbitrary. But one assumes that you would need exports, hard currency, in order to pay off international debt. So the notion was, great, we need to earn money from exports and that will be somehow related to our ability to write off international debts.
    The problem with that measure, of course, is not only is it too high, but exports, as GAO has mentioned, are incredibly susceptible to shocks and commodity prices change. Uganda, which was our star performer under the enhanced HIPC framework, for a time actually became unsustainable under their debt portfolio because coffee prices went through the cellar. So no matter how well you are doing, your debt sustainability is overly affected by this.
    So the notion in the legislation was to more directly apply debt relief or to relate debt relief to a country's ability to pay. These countries were spending 25, 30, 40 percent of their government budgets on interest on their debts. We were saying, no, that is a silly investment of this poor country's money. They should be spending it on putting their girls in school and digging clean water wells. So that is what this legislation tries to do.
 Page 34       PREV PAGE       TOP OF DOC
    As I mentioned earlier to Mr. Frank's point, the legislation actually does give the Treasury the flexibility to design another similar type mechanism if that one is flawed in some way.
    Mr. MELITO. I would just like to add that, how to measure the sustainability has been a challenge since the initiative was created. There are weaknesses in every measure they have suggested, but the World Bank and IMF are actually looking at trying to address all of these concerns. Whether or not something will emerge remains to be seen, but they do recognize that there is no perfect measure.
    Mr. FLOOD. I was just only going to add the fact that there is a real concern about the countries particularly that are suffering from HIV/AIDS. They really need to maximize the amount of their domestic resources they can use to fight that terrible scourge. That is part of the motivation behind the new legislation.
    Mrs. MALONEY. I would like to ask a question about Iraqi debt, and even though they are not a HIPC country, there is a lot of effort and focus on Iraq. And I really applaud the Administration's efforts in Iraq for debt relief.
    But I am concerned that by gaining only partial debt relief, and I have legislation in with Congressman Leach that would really erase all of these debts, with IMF and the World Bank taking the leadership role in that by reducing and erasing their debt first. But I am concerned that by gaining only partial debt relief, the value of outstanding debt may actually increase as the chance that countries might be paid for some of their debt increases. And I am concerned because I do not believe the Iraqi people should be saddled with Saddam's debts, particularly when they were odious debts spent for arms and palaces.
    And certainly, I do not think that the American people should be sending aid for reconstruction to Iraq that may end up paying for debts that were incurred by the former regime.
 Page 35       PREV PAGE       TOP OF DOC
    Can you, Mr. Hart, address whether you believe the value of Iraqi debt outstanding may increase as partial debt relief is accomplished? And again, GAO, Mr. Flood, if you would like to comment?
    Mr. HART. Well, let me handicap myself by saying I am not intimately familiar with the Iraqi debt case. But of course, you are describing a scenario which seems plausible, which is that as the Iraqi debt is lowered—and this is true for HIPC countries as well—what remains becomes more payable. Therefore, the discount value of that debt shrinks. You are more likely to have to end up paying off the face value than you were before.
    Now, I do think the Iraqi debt case presents an interesting example, of course, and lessons to be learned as we look at other debt relief for other countries, which is that, indeed, when Saddam took on all of these debts and now he is gone from power, the country is left burdened with the debt. And that is, in fact, the case with many of these African countries, many of these HIPCs. Dictators long ago have been replaced in some cases, and in many cases, surprisingly, by multi-party democracies, but being sovereign nations, they absorb the history left behind by corrupt dictators.
    One of the notions of Jubilee 2000 and this enhanced HIPC initiative was the idea of providing a clean slate, giving them a fresh start, indeed for some of the very reasons that you cited.
    Mrs. MALONEY. Just very briefly, I would like to ask GAO, why in the world did you intertwine the two issues? The HIPC program is directly focused on poverty alleviation. Helping countries to get a level of sustained economic growth is a larger, far more complex question. Why did you combine the two when that really is not what the HIPC program is, and the amount, as Mr. Frank mentioned, is astronomically larger when you put the two together? So I am just curious about your thinking on that.
 Page 36       PREV PAGE       TOP OF DOC
    Mr. MELITO. Sure. If you agree with the assumption that the export growth rates are overly optimistic—and most people do, and even the World Bank itself is agreeing that their growth rates are too optimistic—you then have to come up with an alternative set of rates. And we chose to use historical, and maybe something a little higher would be what someone else would use. But if you use lower rates, you suddenly find very large gaps emerge in the amount of resources these countries have available. Some of it is exports; some of it is debt.
    If we were myopic about the issue and just reported how much their debt component was, we would be missing most of the story. And we were concerned about how to present the story, and I think we were very careful in how we wrote the report in making those different components clearly distinct of each other.
    But if we just reported the $8 billion without reporting the export shortfall, I think we would be susceptible in a legitimate sense of missing the whole story or missing a big part of the story, so we had to report them both.
    Mrs. MALONEY. Thank you very much.
    I ask unanimous consent to place in the record the opening statement of Barbara Lee.
    [The following information can be found on page 41 in the appendix.]
    Mrs. BIGGERT. Without objection, so ordered.
    Now, the gentleman from Texas, Mr. Bell.
    Mr. BELL. Thank you, Madam Chair.
    I would like to thank the panel for your testimony here today. I just have a couple of questions. First, for Mr. Melito, and it is really a follow-up to something you were discussing with Congressman Frank regarding the situation involving China. You pointed out that all of these projections are somewhat difficult. But looking at China and realizing that its bubble could burst at some point and its demand for developing world exports could be greatly diminished, is there any way for you to tell us here today how that might impact some of the projections in your report?
 Page 37       PREV PAGE       TOP OF DOC
    Mr. MELITO. I want to be quite clear that we actually do not look at that level of detail, although those are one of a number of factors which create the vulnerability which these countries face in export growth. There are many reasons, including potentially a particular market that was open to them now closing. China right now has been increasing its demand for certain commodities, and we do not know if that will sustain overtime.
    Mr. BELL. So it would be fair to say, any situation like that would impact and could impact your numbers?
    Mr. MELITO. When we used 20 years of historical rates, we wanted to basically cover good years and bad years. If you look at the history of these countries, there are a number of years for many of these countries, 3, 4 years in a row where they had very rapid growth. If you just cut off the story there, you might say the problem is solved. But often those periods of rapid growth are followed by periods of large declines that persisted.
    There are always circumstances. You point to a market that opened up to them or something, but then something else changed. We considered 20 years forward, which is what we did, and the most representative is to go 20 years back.
    Mr. BELL. I see.
    Mr. Hart, in your report that you gave us, you point out, on page 7, after talking about the debt legislation, despite debt legislation being law for nearly a year, the Administration does not pursue negotiations with international partners to implement its provisions. I am sure you find that a little bit alarming, and probably, the best folks to address this question to would be representatives of the Administration, but we do not have that opportunity today.
    So I am just curious if you have been able to receive any information on that particular topic as to why the Administration has not pursued any negotiations.
    Mr. HART. There are reasons, and yes, we have spoken with them about this. And their reasons are varied, including a general sense, that at the boards of the Bank and the Fund, there is not support for going further. Actually, DATA is an organization that works not only here in the United States but in London and other capitals around the world. And the sense to improve the HIPC initiative actually is fairly strong, from our perspective.
 Page 38       PREV PAGE       TOP OF DOC
    Fundamental to their critique is, as I mentioned earlier, a feeling that tying debt relief to revenues is a disincentive to collect taxes. If you have smaller revenues, then you owe less debt.
    Our response to that has been, as Mr. Flood indicated, there is actually no evidence to suggest that that is what has happened, that that sort of reverse incentive would take place. But in response, the legislation described actually does try to address that and say, come up with another measure that would avoid that disincentive to collect revenues.
    Third, and I think most importantly, and it is cited both in Treasury's report and in GAO's testimony, is the funding gap of the current initiative. They are hesitant to try to increase the relief of the current initiative until it has been fully paid for. And that is an understandable position. However, I believe the way that both GAO and the Administration have presented the shortfall case overstates the problem, and I do not mean that lightly. I mean that the Administration, with the donor community has already taken strides to meet that gap and, as I testified earlier, the World Bank, if the World Bank will continue to do what it has already been doing, that gap will be substantially reduced.
    I think, as a final point, I would just like to advocate for the legislation. It was quite expensive to get rid of a lot of the debt stock that was not being serviced. We got rid of this huge amount of debt stock at a cost $30 billion, to which the United States contributed $1 billion.
    And we have just begun to get at some of the debt that was being serviced, thus relieving resources on the ground for building schools and wells. Every dollar that we put in from now on, because these countries are actually paying this debt back, actually generates benefits on the ground. So the return for the countries now is amplified if we take it an incremental step further.
    Mr. BELL. I just have one last question, and I will begin with Mr. Flood. And I guess this is really one of the major questions that needs to be resolved and is somewhat of a follow-up to what Mr. Feeney was saying.
 Page 39       PREV PAGE       TOP OF DOC
    I certainly understand the need for this debt relief and am fully supportive of it. But I think we all fear becoming a precedent or an example and that countries will look on future borrowing as somewhat artificial borrowing, that at some point, there will be enough political pressure brought to bear in the United States and across the globe to forget the debt, and it just becomes a recurring situation.
    I am just curious what recommendations you all have to keep that from happening and keep that from becoming the situation.
    Mr. FLOOD. Well, there are many, many aspects to that. I think one is that the countries have to continue to try to address better their development problems. I think that we see evidence through this HIPC program of some advances in that direction. I mean the basic challenge is for the countries themselves to strengthen their economies in a way in which they can develop their creditworthiness to continue to be able to borrow.
    On the moral hazard issue, I think that there are several ways to address that, but I think that the best one for these very, very poor countries is to consider a larger percentage of grant financing. I think they are going to have to have that. It would be nice if we could say, it should all be grants, but I do not think the donors are that generous, that the entire amount that they need would be able to be provided through the grant process.
    One thing that is encouraging, again in the HIPC program, is that the expected levels of post-HIPC borrowing by these countries has been quite modest. I mean, any kind of reckless borrowing has not occurred since the HIPC program. As a matter of fact, the Bank did the funding projections as to what they anticipate a prudent level of borrowing for these countries would be, and the numbers show that they are borrowing actually less than that right now.
    So there is more prudence. I think there ought to be a larger percentage of grant financing in what they receive. The poorest countries are going to, obviously, need more, relatively speaking, than the more—well, they are not wealthy, that is not the right word—but higher-income poor countries, if we can call it that, would require.
 Page 40       PREV PAGE       TOP OF DOC
    Mr. HART. Just briefly, to amplify that I completely agree. It is not DATA's nor would I assume the Catholic Bishop's intention to be here again in Jubilee 2050, to keep coming back because we have gotten ourselves into this problem again.
    I have to say that the Administration ought to be applauded for their initiative in trying to convert some of these loans to grants. It makes absolute sense, and we have supported it. And it is trying, in fact, to address that prospective problem, trying to avoid getting back into it.
    What we have not sufficiently dealt with are the problems of the past. We are still cleaning up some of that mess and have some work to do. They are complementary ideas meant to keep the poorest countries from being burdened by an unsustainable debt level.
    Mr. MELITO. As we discuss in our report, the mix of the optimum level of grants for each country results in basically the loans they do take being ones that they should be able to repay. So it does provide an open and honest bookkeeping process, so they get grants in those areas where they cannot pay and loans for the resources they can repay.
    Mr. BELL. Mr. Hart, I think it is completely fair to say that it is not Mr. Flood's intent to be here in 2050 discussing this same subject.
    Mr. FLOOD. Oh, but I beg to differ.
    Mrs. BIGGERT. Thank you very much.
    We will have another round, I guess.
    Let me ask again, Mr. Melito, recent World Bank research suggests that debt thresholds are dynamic, and specifically, they indicate that countries that advance and improve their policies and institutions will be able to sustain higher levels of debt.
    Do you agree with this analysis? And is this concept included in the report's projections, or do the GAO projections assume that all countries' official sector debt is equal?
 Page 41       PREV PAGE       TOP OF DOC
    Mr. MELITO. The report uses the agreed-upon measure for HIPC, which is the 150 percent debt-to-export ratio, which my colleagues discussed previously.
    But as I mentioned earlier, there are other possible measures, and the World Bank and IMF are exploring those measures, but they are not policy yet. If they actually ever change the initiative, we would probably in future work integrate that, but it is not the policy yet.
    Mrs. BIGGERT. Okay. Then the World Bank this year published research providing a substantially different assessment of projected debt-to-export ratios through 2023. I am sorry we do not all have a graph that shows the difference between the historical and the baseline that they use, and it really does show what Mr. Flood was just talking about, where it goes down while the historic goes way up by 2023.
    So that methodology that they show rejects the reliance on historical data alone being appropriate to project the future debt service burdens. Are you aware of this methodology?
    Mr. MELITO. Sure. They have, in recent years, the last couple of years especially, been doing sensitivity analyses where they have been trying to look at alternative rates lower than optimistic levels, and I am familiar with that. We could debate, and it is reasonable to debate what would be a reasonable proxy for the future.
    We have done our own analysis on the previous 10 years. Well, if you use the previous 10 years, the average would be 4.5 percent compared to 3.5 percent for 20 years, still substantially below what they project. They project over 7.5 percent, about 7.7 percent.
    If you use the most recent 10 years, you would reduce the burden to around $150 billion instead of $215 billion, and that would be a nice, substantial change.
    But the point is, their reliance on overly optimistic data creates the impression there is no problem. They provide debt relief at the completion point. They then show us these 20-year projections, and countries look like they have no problems moving forward.
 Page 42       PREV PAGE       TOP OF DOC
    Well, we think it would be much more realistic if they actually used lower growth rates and showed that HIPC, while it is very important and it has done a lot of good work, it is probably not going to provide a permanent exit from debt problems.
    Mrs. BIGGERT. Well, would you say that methodology might provide the Treasury with more flexibility?
    Mr. MELITO. This should be something that the Treasury and the donors debate. I mean, it seems arcane on the surface what growth rates should be used, but there are policy implications. And it would probably be useful if the boards of the Fund and the Bank actually put this on their agenda to decide for future projections for HIPC countries. We should adopt some standard or maybe report two or three, a low estimate and a medium estimate and a high estimate. But their official projections only use what I consider a very high estimate.
    Mrs. BIGGERT. If I might, I would submit the question for the record and perhaps you could give the GAO views on the merits of using the historical projections to assess HIPC needs relative to the World Bank methodology.
    [The following information can be found on page 98 in the appendix.]
    Mr. MELITO. Sure.
    Mrs. BIGGERT. Then my next question is that I understand that the World Bank is exploring innovative use of financial instruments and other methods for helping HIPC countries hedge their exposure to the commodity price risk and thus stabilize their export sector.
    What are your views on using the hedging instruments to decrease exposure to commodity price volatility?
    Mr. MELITO. That is not something that we looked at, and I really would like to look very closely at it before I could comment on that.
    It does seem like it would be difficult limiting it to poor countries because you would normally want to involve the private sector, and I do not know exactly how they would involve the private sector in these transactions. But if they have a paper about this, we could review it and potentially make comments.
 Page 43       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. And assuming that these instruments could be used for hedging, I would suppose then that estimates in the GAO report would need to be adjusted?
    Mr. MELITO. Well, again, the paper would be theoretical. I would like to see their plan and then ascertain whether it is feasible to implement such a plan.
    Mrs. BIGGERT. Okay. Thank you. I see everybody has left me.
    Would you like to comment on that Mr. Hart or Mr. Flood?
    Mr. HART. I do not think I have a specific reaction to your questions. They are largely theoretical and ones that I do not have a good answer to.
    But I would like to just comment briefly again on GAO's report. Actually, I have very little argument with the assumptions that they have made about growth rates. The World Bank and IMF, as stated earlier, agree that those are optimistic.
    I guess what I would challenge is the way that it is presented to the Committee, as though $375 billion is needed to make debt relief successful. That is not the question; that is neither the purpose of the HIPC debt initiative, nor do I think that necessarily helps the Congress or this Committee grapple with the issues of HIPC that are before it.
    It also, I would just reiterate, counts money we are already spending. It also is an 18-year figure and global figure, not just the U.S. share.
    In my written testimony, I went through the calculation—and I believe you said in your opening statement—that could roughly translate into $2.8 billion for the United States.
    Well, if you look at the global AIDS initiative, the Millennium Challenge Account, existing bilateral development and multilateral development assistance that we give, as well as export financing to poor countries, we give a lot more than $2.8 billion already. So what this analysis does not, nor could it, provide is an assessment of what actions Congress might take and really the state of health of the HIPC initiative moving forward.
 Page 44       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. Thank you. That really goes back to my first question, which was, were these other factors really accounted for in this report? And the answer I guess was, yes, and yet I cannot figure out how that figures in, looking at that number.
    Mr. HART. Well, I do not want to answer on behalf of GAO, but my understanding of their analysis is they took the World Bank estimate that the global community would provide. Fair enough. That seems logical. It does not assess what the United States actually has given or plans to give in development assistance moving forward.
    Mrs. BIGGERT. All right. Thank you.
    Mr. Flood, do you have any comments?
    Mr. FLOOD. No. It is just that I think as I recall—and this may have changed, I have not been in the Bank for quite a few years—but what they used to do is to estimate a reasonable growth rate for these countries. In some respects it would have a certain optimism in it so that one could know that we were talking about countries that were on an upward path, moving towards a higher level of development. And then they would determine what are the financial implications of that in order to achieve that particular growth rate. And then they would fill the amount in, and that is where you get your numbers.
    It comes out of starting with a growth rate which you think is realistic based on various parameters, and then you fill in the financing plan that is required to get there.
    I am not at all an expert in this area, but I would say that I am pleased to see that the World Bank, in response to this GAO report, admits that their export projections have been too optimistic in the past. I think that is an important point, that they recognize that fact.
    I think that perhaps just extrapolating from the past is too pessimistic. I remain more optimistic that the countries will be able to move forward to a situation where, through export diversification and other measures, plus some support from the outside on trade measures, that they will be able to reduce their export volatility more than is implied by just the historical rate of growth of exports.
 Page 45       PREV PAGE       TOP OF DOC
    Mrs. BIGGERT. Okay. In the past then, the Department of Treasury underscored the importance of distinguishing between debt relief, which would be defined as to include only decreased debt service burdens and broader development goals. Would such a distinction imply that the majority of the estimated costs presented in the GAO report would not be appropriate when considering debt relief?
    Mr. FLOOD. Well, I think that what I got out of it all is that one has to say that debt relief is only one part of the total picture, and it is important, but far from sufficient.
    You have to look at a lot of other types of assistance, changes in policies as a whole, a large number of different issues which must be taken into account in order to project out what the total package is that is required. But clearly, there are different types of instruments, different items on the agenda which have different financial implications that go well beyond what you can ever expect from a debt relief program.
    Mrs. BIGGERT. Thank you.
    Well, seeing that no other questions or questioners—I will note that some Members may have additional questions for this panel which they may wish to submit in writing.
    Without objection, the hearing will remain open for 30 days for Members to submit written questions to these witnesses and place their responses in the record.
    Mrs. BIGGERT. I thank you all for being here, your time and your expertise and being part of this panel.
    With that, this hearing is adjourned.
    [Whereupon, at 4:10 p.m., the subcommittee was adjourned.]