SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC47638 CC
FINANCIAL CRISIS IN ASIA
ASIA AND THE PACIFIC AND
INTERNATIONAL ECONOMIC POLICY AND TRADE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FEBRUARY 4, 1998
Printed for the use of the Committee on International Relations
Page 2 PREV PAGE TOP OF DOC
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM GOODLING, Pennsylvania
JAMES A. LEACH, Iowa
HENRY J. HYDE, Illinois
DOUG BEREUTER, Nebraska
CHRISTOPHER SMITH, New Jersey
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
DONALD A. MANZULLO, Illinois
EDWARD R. ROYCE, California
PETER T. KING, New York
JAY KIM, California
STEVEN J. CHABOT, Ohio
MARSHALL ''MARK'' SANFORD, South Carolina
MATT SALMON, Arizona
AMO HOUGHTON, New York
TOM CAMPBELL, California
JON FOX, Pennsylvania
LINDSEY O. GRAHAM, South Carolina
JOHN McHUGH, New York
Page 3 PREV PAGE TOP OF DOCROY BLUNT, Missouri
KEVIN BRADY, Texas
LEE HAMILTON, Indiana
SAM GEJDENSON, Connecticut
TOM LANTOS, California
HOWARD BERMAN, California
GARY ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
MATTHEW G. MARTINEZ, California
DONALD M. PAYNE, New Jersey
ROBERT ANDREWS, New Jersey
ROBERT MENENDEZ, New Jersey
SHERROD BROWN, Ohio
CYNTHIA A. McKINNEY, Georgia
ALCEE L. HASTINGS, Florida
PAT DANNER, Missouri
EARL HILLIARD, Alabama
BRAD SHERMAN, California
ROBERT WEXLER, Florida
STEVE ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
JIM DAVIS, Florida
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
Page 4 PREV PAGE TOP OF DOCSubcommittee on Asia and the Pacific
DOUG BEREUTER, Nebraska, Chairman
JAMES A. LEACH, Iowa
DANA ROHRABACHER, California
PETER T. KING, New York
JAY KIM, California
MATT SALMON, Arizona
JON FOX, Pennsylvania
JOHN M. McHUGH, New York
DONALD A. MANZULLO, Illinois
EDWARD R. ROYCE, California
HOWARD L. BERMAN, California
ENI F.H. FALEOMAVAEGA, American Samoa
ROBERT E. ANDREWS, New Jersey
SHERROD BROWN, Ohio
MATTHEW G. MARTINEZ, California
ALCEE L. HASTINGS, Florida
ROBERT WEXLER, Florida
MIKE ENNIS, Subcommittee Staff Director
RICHARD KESSLER, Democratic Professional Staff Member
DAN MARTZ, Counsel
HEIDI L. HENNIG, Staff Associate
Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairperson
Page 5 PREV PAGE TOP OF DOCDONALD A. MANZULLO, Illinois
STEVEN J. CHABOT, Ohio
TOM CAMPBELL, California
LINDSEY O. GRAHAM, South Carolina
ROY BLUNT, Missouri
JERRY MORAN, Kansas
KEVIN BRADY, Texas
DOUG BEREUTER, Nebraska
DANA ROHRABACHER, California
SAM GEJDENSON, Connecticut
PAT DANNER, Missouri
EARL F. HILLIARD, Alabama
BRAD SHERMAN, California
STEVEN R. ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
TOM LANTOS, California
BILL LUTHER, Minnesota
MAURICIO TAMARGO, Chief of Staff
YLEEM D.S. POBLETE, Professional Staff Member
AMOS HOCHSTEIN, Democratic Professional Staff Member
JOSE A. FUENTES, Staff Associate
C O N T E N T S
Page 6 PREV PAGE TOP OF DOC
The Honorable Lawrence H. Summers, Deputy Secretary, U.S. Department of State
The Honorable Stuart Eizenstat, Under Secretary for Economic, Business, and Agricultural Affairs, U.S. Department of State
Professor Stephan Haggard, Acting Director, Institute of Global Conflict and Cooperation
Mr. David L. Sokol, Chairman and CEO, CalEnergy Company Incorporated
Mr. Marcus Noland, Senior Research Fellow, Institute for International Economics
The Honorable Lawrence H. Summers
The Honorable Stuart Eizenstat
Professor Stephan Haggard
Mr. David L. Sokol
Mr. Marcus Noland
The Honorable Ileana Ros-Lehtinen, a Representative in Congress from Florida
The Honorable Edward R. Royce, a Representative in Congress from California
Additional material submitted for the record:
Paper by Ms. Lisa M. Grobar submitted by Representative Edward R. Royce
Testimony of Donald A. Hilger submitted by The Honorable Doug Bereuter, a Representative in Congress from Nebraska
Letter from Agriculture Coalition for Fast-Track submitted by The Honorable Doug Bereuter
FINANCIAL CRISIS IN ASIA
Page 7 PREV PAGE TOP OF DOC
WEDNESDAY, FEBRUARY 4, 1998
House of Representatives,
Subcommittee on Asia and the Pacific and Subcommittee on International Economic Policy and Trade,
Committee on International Relations,
The Subcommittees met, pursuant to notice, at 2 p.m., in room 2171, Rayburn House Office Building, Hon. Doug Bereuter [chairman of the Subcommittee on Asia and the Pacific] and Hon. Ileana Ros-Lehtinen, [chairwoman of the Subcommittee on International Economic Policy and Trade] presiding.
Mr. BEREUTER. [presiding] The joint hearing of the Subcommittee on Asia and the Pacific and the International Economic Policy and Trade will come to order. Today's topic of course is the financial crisis in Asia, involving East Asia and southeast Asian countries. I'm pleased to chair with Chairman Lehtinen.
I have a brief opening statement, relatively brief at least. And we have four activities of some controversy underway at the moment. We'll do the best we can to expedite the hearing, but also have the kind of dialog that we need.
Yesterday the Indonesian currency closed down 75 percent from July 1 of 1997. The Korean won was down 44 percent. The Thai currency was down 47 percent since the same date. Not long ago, only foreign exchange traders followed these three currencies on a daily basis. Now pension fund managers, individual investors, and yes, even policymakers in the Nation's Capital know the latest on what's happening in these Asian countries, or at least they think they do or they act like they do.
As the political leaders in Korea, Thailand, and Indonesia now realize, foreign exchange traders can punish countries for imprudent acts of their private banks and companies. Trading over $1 trillion a day in foreign currencies, these foreign exchange traders analyze whether the Chaebol in South Korea are overextended in short-term debt, and they predict the export outgrowth for Japanese subsidiaries in Thailand. Acting like foreign governments, foreign exchange traders determine whether President Suharto is leaning toward a Vice Presidential candidate that will reject cronyism or embrace financial sector reform. Depending on their conclusions, these traders will run favorably with leveraged checkbooks, and they can expose flawed governmental policies overnight.
Page 8 PREV PAGE TOP OF DOC The reason we're examining the Asian financial crisis today is because a significant depreciation of Indonesian, Korean, and Thai currencies have serious consequences for foreign governments and for the United States. There are security concerns, like the potential for riots and discrimination against ethnic Chinese in Indonesia, and China's response to such acts.
And there are economic concerns as well. For example, a major U.S. bank predicted yesterday that Korea's trade deficit of $8 billion in 1997 will turn into a $10-billion surplus this year for reasons that aren't positive. Nobody doubts that the U.S. consumers will be primarily responsible for that dramatic turnaround, or at least affected by it.
While foreign policymakers in Congress are grappling with all of these important issues, the Administration is asking us to authorize and appropriate a total of $18 billion in additional funds for a new IMF ''increase,'' and the new arrangements to borrow.
In his State of the Union message, President Clinton urged us to approve the money, while warning that we should not ignore the distant thunder. Before Congress pledges $18 billion in collateral for the International Monetary Fund (IMF), there are important questions I think that must be answered. For example, Members of Congress are right to ask whether this expenditure, or authorization at least, is creating a moral hazard for international investors and creditors by causing them to discount the risk of their decisions; and we must ask whether the IMF is prescribing the right medicine for the ailing economies of the region.
It's unfortunate that a great deal of attention concerning the Asian financial crisis has been focused lately on whether Congress will quickly approve the President's request for additional IMF funding. Although this debate is interesting for the pundits inside the Beltway, the only important audience is the foreign exchange traders.
For example, if they believe the IMF has enough resources to manage the crisis, then neither prompt congressional action or delay will affect their analysis of the crisis. Most importantly, we should not lose perspective, and forget that the foreign exchange traders will focus most of their attention, not on the U.S. Congress and its reactions to the Administration's request, but appropriately on the policies of the Indonesian, Korean, and Thai Governments.
Page 9 PREV PAGE TOP OF DOC Today we're delighted to have two administrative policymakers on the first panel to help answer these difficult questions and others: the Honorable Lawrence Summers, Deputy Secretary for International Affairs, Department of the Treasury; and the Honorable Stuart Eizenstat, Under Secretary for Economic, Business, and Agricultural Affairs, Department of State.
Deputy Secretary Summers and Under Secretary Eizenstat have both been logging thousands of miles in the air recently, handling these and other crises. Mr. Eizenstat seems to get some of the thorniest and most difficult foreign policy jobs in the Administration, so we take your presence here today, as well as Deputy Secretary Summers' presence, here today as a signal of importance of this issue.
Gentlemen, thank you for taking time out of your extremely busy schedules to testify before us today.
After our first panel, we look forward to hearing from three distinguished private witnesses: Dr. Stephan Haggard, Professor at the University of California, San Diego, Graduate School of International Relations and Pacific Studies. Dr. Haggard recently authored an op-ed piece on the financial crisis entitled ''U.S. Stake and Asia's Financial Crisis''; Mr. David Sokol, chairman and chief executive officer of CalEnergy Company, headquartered in my home State. Mr. Sokol has guided CalEnergy to become one of the largest independent energy producers in the world; extensive geothermal projects in Indonesia, and other energy-related projects throughout the Asian region; and Mr. Marcus Noland, senior research fellow, Institute for International Economics, Mr. Noland has done some very interesting and important economic modeling work, estimating the effect that this crisis will have on the U.S. economy.
Before we begin to hear from the witnesses, I'd like to call upon the distinguished chairperson of the International Economic Policy and Trade Subcommittee, Ms. Ros-Lehtinen, for her comments, and thank her for joining me in launching this hearing today. Thank you.
Page 10 PREV PAGE TOP OF DOC Ms. ROS-LEHTINEN. Thank you so much. I'd like to thank you, Congressman Bereuter, for holding this hearing as a joint session, to enable more Members to become better informed about the current situation in Asia, and the solutions being proposed by the U.S. and international financial institutions.
Whether developments in Asia amount to a crisis with future dangerous consequences is still being debated. Many would argue that this is a period of punctuated equilibrium, a natural event in an evolving global market; a necessary shock wave, forcing today's players to abandon their entrenched ways, and adopt new rules for a new international, economic gain.
Either way, the issue facing the Members of this body is whether to support the IMF bailout plans; whether the United States should provide the proposed second line of supplemental financing; and whether to approve the new arrangements to borrow. This in turn raises a number of other issues related to the IMF, which Congress must take into account, while evaluating the current weakness of the Asian countries.
Again, supporters of the bailout plans will give a dismal assessment, and argue that if left unchecked, the situation in Asia will plunge these countries into a deep crisis, causing its currency to fall further, and result in a significant loss for U.S. and other foreign banks. They contend that the IMF plans will help promote stability, balance expansion of trade, and overall growth. But the questions that this raises are, where was the IMF before the first round of problems began in early July 1997? Why were the IMF and the World Bank unable to prevent the second round of currency problems in October 1997? Where was IMF's surveillance over the economic policies of these countries? How did IMF technical assistance help strengthen the operations of the Asian financial markets to prevent the current problems?
Many would respond by saying that Congress should not approve of the use of taxpayer funds to bail out these countries unable to manage their own finances; that Congress should not support the IMF when this institution was ineffective in preventing or anticipating Asia's currency problems. How long is the United States going to continue following a reactionary policy? How are we to solve problems by bailing out countries financially, without addressing the apparent systemic problems?
Page 11 PREV PAGE TOP OF DOC The safety net these IMF bailouts provide undermines the discipline of the market, and promotes the kind of economic failure it is supposed to correct. The Asian currency situation clearly supports this argument, as it reveals that crises of this nature have increased in scale in recent times. Furthermore, IMF plans to follow a cookie-cutter method, where they apply the same outdated solutions to all problems, regardless of their nature.
In the end, the IMF programs, such as the austerity measures, tend to compound, rather than alleviate the problems. The United States must also be careful not to support IMF programs which run contrary to U.S. national interest and to our policy objectives. Already, the $3-billion U.S. contribution to Indonesia's $20-billion bailout fund has gone to support a corrupt authoritarian regime with severe human rights problems.
Last, if the Asian situation is indeed a crisis, and if it is determined that it is necessary for us in the United States to contribute to the bailout, what is the United States going to receive in return? First and above all, the risk to American taxpayers must be limited. Second, the benefits to the United States must be tangible and must be substantial. We should not be bailing out these countries just to keep things from getting worse; if we bail them out, we should for example ask for a greater opening of Asian markets to American products, and work to diminish our trade deficit with some of these countries.
In the end, this is a complicated matter which will require careful congressional evaluation and our oversight. I appreciate Congressman Bereuter's joint hearing, and I especially am thankful for the witnesses that we have before us, who are going to share their insight and knowledge on this complicated process.
I look forward to hearing their testimony, and thank you again, Doug, for letting us participate.
[The prepared statement of Ms. Ros-Lehtinen appears in the appendix.]
Mr. BEREUTER. Thank you, Madam Chairman. It looks like the first panel will have their work cut out for them, but I'd like to turn first to the Ranking Member of the Asia Pacific Subcommittee, the distinguished gentleman from California, Mr. Berman, for any comments he might like to make.
Page 12 PREV PAGE TOP OF DOC Mr. BERMAN. Well, thank you very much, Mr. Chairman. I think this hearing provides an excellent opportunity for the Administration to make its case on why Congress should support its supplemental request for funding the IMF.
There are a number of different questions that have been raised. The gentlelady from Florida, Ranking Member of the Trade Subcommittee, has just raised some of those issues. In addition, questions that I hear are, at a time when many of these regimens that go along with IMF support are going to involve a lot of hardship for a lot of people, to what extent are investors and lenders sharing this pain? Second, are there ways and methods to try in the future to take the steps that would give greater warning of the dangers of this kind of crisis recurring? And some, particularly in my caucus, are wondering whether or not this is not an opportunity, and perhaps a more appropriate opportunity, to promote and to push through the IMF, through the U.S. Government, issues relating to environmental protection, workers' rights, human rights observances, and in the context of the leverage that's afforded to the IMF at this particular time.
Many people make a case that we should be staying out of this crisis; we should let the market work. It tends to be their mantra. Others make a persuasive case that we need to bolster the confidence of international capital markets at this time through IMF intervention, while utilizing the opportunity to press for financial reforms in the developing countries.
As one official said, ''This is about urging capital market competition in order to make crony capitalism impossible in the future.'' And I guess the bottom line question is, what happens to the economies of these countries, to our economy, to the world economy, if we don't hear the plea of the Administration at this time to appropriate these supplemental requests?
I give back the balance of my time, Mr. Chairman.
Mr. BEREUTER. I thank the gentleman. I understand that there are other Members who wish to make a statement, and that they would live with the 1-minute limit, but their entire statements will be made a part of the record.
Page 13 PREV PAGE TOP OF DOC Are there other Members that would like at least a 1-minute statement?
Mr. ROYCE. Mr. Chairman.
Mr. BEREUTER. I'll turn first then to Mr. Royce in order of seniority.
Mr. ROYCE. I want to thank you for holding this timely hearing. We're all struggling with Asia's financial crisis, and it will be one of the more important issues we deal with in this session of Congress.
There are different views on what the U.S. response should be, if any, and today is part of that debate. But we all agree the stakes are high. The economies of Asia matter to the American economy in a big way, and this is particularly so for Southern California, which I represent. So I'd ask the Chairman if I could submit for the record a paper by Dr. Lisa Grobar of California State University, Long Beach, which demonstrates how valuable our exports to Asia are to southern California in terms of jobs.
So, without objection, Mr. Chairman?
Mr. BEREUTER. Without objection.
Mr. ROYCE.. Thank you, Mr. Chairman.
Mr. BEREUTER. Thank you.
[The prepared statement of Mr. Royce and paper of Ms. Grobar appear in the appendix.]
Mr. BEREUTER. The gentleman from Tennessee, Mr. Clement, is recognized.
Mr. CLEMENT. Thank you, Mr. Chairman. Good to have both of you here today, and the other panels as well. I don't think very many people in this country knew what IMF stood for, or anything about it, but they sure know a lot about it today.
I'm sure looking forward to hearing what you have to say. I had the opportunity to hear Secretary Rubin this morning, and that I'd like to hear more about what you have to say. I'm one of those Members of Congress, very open-minded, want to learn more. How does it affect America? How can we help other countries help themselves? Are we exposing ourselves too much? How can we help the most? Are they bringing about reform? And are we doing what we ought to be doing in terms of our national interest.
Page 14 PREV PAGE TOP OF DOC So, I think there are a lot of questions out there, and I'm sure there are a lot of good answers. But I do think that a lot of Members of Congress want to know more, before they make a final decision whether to sign on or not. Thank you.
Mr. BEREUTER. Thank you very much, Mr. Clement.
I missed the gentleman from California, Mr. Rohrabacher, who wanted to be recognized, I understand.
Mr. ROHRABACHER. Thank you very much.
I would recommend to everyone a column by George Schultz in The Wall Street Journal yesterday, and I'd be very interested in our witnesses' reaction to that piece by the former Treasury secretary and of course, former Secretary of State.
Apparently, according to George Schultz and to what I've been reading, the IMF have been making all the wrong decisions, and in fact have been encouraging people in the Pacific to make economic decisions which headed in exactly the wrong direction. Instead of at a time of crisis, when businessmen make decisions about liquidating loans, and making the best of a situation, and making business-like decisions to cut one's losses, and as such, what we have instead with the IMF, is an Uncle Sugar Daddy USA, waiting in the wings to bail people out, so they didn't make the right decision, and it made a bad situation even worse.
So with my only 1 minute, I'll just close by saying, I don't know how the President's going to use all this surplus money to help the seniors, if we're going to give away billions of dollars to crooks and nincompoops on the Pacific rim, and it'll be a cold day on the Pacific when this Congressman votes to give away $14 billion, after we've been struggling to bring down the budget deficit, and finally have had some success in the United States. Thank you very much.
Mr. BEREUTER. Thank you, Mr. Rohrabacher. We'll list you as a challenge.
Page 15 PREV PAGE TOP OF DOC The gentleman from California, Mr. Kim.
Mr. KIM. Thank you, Mr. Chairman. I'd just like to make one brief comment on today's paper. It says the Dow Jones jumped by 201.28 points, which is roughly 2.5 percent. The S&P 500 Index jumped as well, climbing above 1,000 for the first time, closing at 1001.27. Why? Because there's an optimism concerning the financial crisis in Asia.
I'm totally convinced that whatever happened in Asia does affect us, and we are not immune from that. Therefore I feel that this is an important issue. I'd like to find out from the distinguished guests this afternoon where we're heading. Thank you, Mr. Chairman.
Mr. BEREUTER. Thank you, Mr. Kim.
Gentlemen, we have two Under Secretaries before us, equal rank.
Mr. EIZENSTAT. He's a Deputy Secretary.
Mr. BEREUTER. Mr. Eizenstat is recognized first, but you have the primary responsibility for the IMF authorization. And I gather Mr. Eizenstat is passing the honors to you, Mr. Summers, to testify first.
Mr. EIZENSTAT. He's also a Deputy Secretary.
Mr. BEREUTER. Gentlemen, your entire statements were made a part of the record. They're lengthy. You may get more attention if you can summarize if it's possible. So, please proceed as you wish, and your entire statements will be made a part of the record
STATEMENT OF LAWRENCE H. SUMMERS, DEPUTY SECRETARY, U.S. DEPARTMENT OF TREASURY
Mr. SUMMERS. Thank you very much, Mr. Chairman, and we are grateful to you for hosting this hearing, what we regard as a critically important topic to the national interest.
Page 16 PREV PAGE TOP OF DOC I don't think there's any question that America has an enormous stake in what happens economically in Asia. Asia is our major trading partner, they are major consumers of our products, and when their markets go down, their ability to purchase our products goes down. When their currencies go down, the price of their exports goes down, placing more severe competition on American producers and American workers.
Congressman Kim's comments suggested financial markets are increasingly interlinked, and developments in Asian financial markets have direct and immediate effects on our own financial markets and on the savings of American workers. And as Under Secretary Eizenstat will detail, we have tremendous securities stakes in developments in Asia.
I would suggest to the Committee the costs of inaction far exceed the costs of acting to prevent this crisis from becoming more serious.
The approach the United States has taken rests on four pillars. First, the dominant responsibility for addressing these problems must rest with the countries themselves and the actions they are prepared to take. As was suggested in some of the earlier statements, problems that have arisen in Asia are very different from the kind of problem that we've traditionally confronted in other countries; a problem of stabilization following excess demand, excess budget deficits, and excess money printing.
This is a problem of capital market confidence. It has as its roots, not so much microeconomic problems as structural problems; weak banking systems, excessive government guarantees, too much crony capitalism, encouragement of the flow of capital into the wrong kinds of projects, government-directed capital allocation. And it is these issues that have to be corrected if confidence is to be returned. That's why the conditionality in the IMF programs emphasizes factors like strengthening the domestic financial system, financial restructuring, the reform of financial regulation, the ending of policy lending, the breaking up of excessive interrelationships between government and business, the opening of capital markets so that competition can sweep some of the forces of corruption away. That's why the programs include crucial structural reforms to break up import monopolies and to reduce trade barriers. And that's why the focus of the macroeconomic policies in the program is on the necessary concomitance of restoring stability in the face of a rapidly declining currency. These programs have so far had some beneficial effects in a number of countries.
Page 17 PREV PAGE TOP OF DOC I would suggest that they have also very substantial benefits for the American economy, beyond the direct benefit of improving the performance of the affected economies.
Indeed, I think it's fair to say that the liberalization that has been accomplished in the context of these programs is often the equivalent of what we've been able to do in some years of negotiation over trade liberalization. A step, by the way, welcomed by the new Korean President-elect to end policy-based lending in Korea and stop the flow of subsidized credits into key industries to compete with American producers, has been a long sought policy goal for the United States.
The second pillar of our approach is international assistance. It is the provision of financial assistance that makes possible the application of conditionality. It is the provision of financial assistance that makes possible a return of confidence. The dynamics in these countries once they've gotten in trouble is in many ways like the dynamics of a bank run. Everyone expects the bank to fail; the bank will indeed fail if no one wants to be the last one out. If on the other hand there's an expectation of confidence, the maturities will be stretched out, there's the possibility of a much more encouraging outcome. And that is the objective of the financial support that has been provided.
While to date, the financial support has been provided wholly from the IMF and the World Bank, and no U.S. funds have directly been disbursed, we have indicated a willingness as a second line of defense to provide up to $5-billion of support in Korea, and up to $3-billion of support in Indonesia. But I emphasize that none of that support has been provided as yet.
I also emphasize, with respect to both the IMF support and any possible second line of support, it will impose no cost on the U.S. economy. The money will be secure, based on the reserves of the countries to which loans are extended. There has not been a major default on an IMF program in 50 years. There has not been default to the United States in the history of the Exchange Stabilization Fund. Indeed, at U.S. encouragement, the loans, in the case of these large programs, will be provided at premium interest rates; that is, interest rates in excess of borrowing costs, as a way of assuring that risks are covered, and more importantly, as a way of assuring that countries are encouraged to return to the private capital markets as rapidly as possible.
Page 18 PREV PAGE TOP OF DOC The third pillar of our approach to addressing this crisis is action by industrialized economies. The United States is doing its part. Two hundred billion dollars a year that used to flow into the sterile asset of government papers is now available to flow into the world capital market, leading to reductions in interest rates and increases in asset prices.
It is essential also that Japan take the steps to which it has committed to stimulate domestic demand and to assure the stability of its financial system. And in this context we have also welcomed Chinese Vice Premier Zhu Rongji's recent reaffirmation of China's commitment to a stable exchange rate, and to dealing effectively with the economic challenge that it faces.
The fourth pillar, Mr. Chairman, and one I think was emphasized by a number of Members of this Committee in their statements, is the need to carry through on an agenda to, as Secretary Rubin has put it, ''create an international financial architecture as modern as the markets''. This has been an ongoing task since President Clinton began it 4 years ago at the G7 meeting in Naples.
Crucial elements of this agenda include: promoting measures to make global markets function more effectively, for example, to increase surveillance and enhance national supervision and regulation; increasing transparency and disclosure, for example, with respect to encumbrances on international reserves; strengthening credential standards, both globally and in individual economies; improving domestic policy management, including ways of exploring possible ways to prevent these kinds of crises; strengthening the role of the international financial institutions in financial crises; and ensuring appropriate burden-sharing by the private sector in the resolution of these crises.
We have taken important steps in this regard already. To promote transparency as a condition for disbursements of financial support in Thailand, Indonesia, and Korea, we strongly and successfully urge that governments publish the letter of intent, outlining the reform measures agreed with the IMF.
Page 19 PREV PAGE TOP OF DOC With the United States again taking the lead, we assured that the most recent programs have rested on a concept of supplemental reserve financing at a premium interest rate, to encourage a return to the market as rapidly as possible. By involving creditor banks in the resolution of the Korean crisis, we have supported an appropriate recognition of the private sector's role, and helped to catalyze a major private sector effort on behalf of restoring stability. And we have pressed for major financial sector strength, including adjustments of deposit insurance and financial regulation in the context of these problems in Asia.
There is, to be sure, much more to do on these items. In particular, development of an improved institutional framework for addressing the problem of creditor responsibility when these crises arise, will be critical. But this is a very delicate issue, because on the one hand one desires increased creditor responsibility; on the other hand it is very important not to, at a moment of very great sensitivity, encourage capital flight from emerging markets generally.
I would suggest, Mr. Chairman, that what is crucial in maintaining our capacity to have the best possible prospect of containing these events so that they do not have profound effects on the American economy or American citizens, is support for the IMF. Support for the IMF, as I've suggested, does not cost taxpayers one cent: because it has $65 billion in loans outstanding, never with a major default, and $40 billion in reserves against those loans; because it imposes strong conditions.
There is room for discussion about many of the issues involved in IMF programs. Some worry that they have too much austerity; others feel it necessary to hold, to maintain currency values and to prevent the cycle of competitive devaluation as a first priority. I think all agree that the focus of these programs is as it should be on structural measures.
Some are concerned about the moral hazard question of encouraging private creditors, but here we have seen substantial burdens born by private creditors. The Financial Times reported on Monday that it was estimated that European banks would lose some $20 billion on their operations in Asia. A number of major American banks have reported significant losses as a result of activities in Asia. And with our strong support, tremendous controls exist on the use of IMF funds to ensure that in no case are they used to bail out private companies, but only to meet public obligations.
Page 20 PREV PAGE TOP OF DOC There is the very real concern, and it will be a continuing concern, to ensure that prosperity and the return of prosperity works to benefit all of the citizens of these countries. This has been an area of work in the past, but much more needs to be done. We have, for example, secured a major World Bank effort to fight against forced and exploitative child labor, and have increasingly brought the International Labor Organization into contact and in work with the international financial institutions.
And yet, we have to recognize that at this time of crisis, there are limits to what we are going to be able to achieve. To be effective, these programs have to focus on the immediate source of the problem; the loss of financial market confidence.
Mr. Chairman, there are these issues, and there are many other issues that have been raised with respect to what has happened and what the role of the IMF would be. I can only suggest, with the many problems that there are, without the prospect of providing IMF support, the consequences for our own economy, the burdens we would have to bear without burden-sharing, might well be very substantially greater. Thank you very much.
[The prepared statement of Mr. Summers appears in the appendix.]
Mr. BEREUTER. Thank you very much, Secretary Summers. We also look forward to the testimony, of course, of Secretary Eizenstat, especially as you focus on the foreign policy implications of the Asian financial problems, and our response to those problems.
You may proceed as you wish. Your entire statement will be made a part of the record.
STATEMENT OF STUART EIZENSTAT, UNDER SECRETARY FOR ECONOMIC, BUSINESS, AND AGRICULTURAL AFFAIRS, U.S. DEPARTMENT OF STATE
Mr. EIZENSTAT. Thank you, Mr. Chairman.
My testimony will deal with three major points. First, our security interest in the countries involved, and the importance of U.S. leadership. Second, the critical role these countries play in our own prosperity and our trade interests. And third, the importance this issue brings with respect to U.S. credibility and U.S. values. And with respect to each of these three areas, the IMF programs are absolutely essential and completely support our own interests.
Page 21 PREV PAGE TOP OF DOC First is in the security area. The role here is not a test only of our international economic leadership, as important as that is, but of our political leadership as well. Our engagement at this time in the financial problems of our friends and allies will speak volumes about our capacity to mobilize their support in the future for a whole range of issues important to us in our security. If we shrink from our leadership responsibilities, other forces will fill that vacuum.
Our own security is closely linked to peace and stability in East Asia. We have fought three costly wars there in a little over 50 years. Since World War II our security policy in the western Pacific has stressed stability and the deterrence of conflict. Nearly half of the earth's people live in countries bordering this region, and four of the world's major powers rub shoulders in Northeast Asia, while some of the most important sea lanes on the globe pass through the confined waters of Southeast Asia. And this map is designed to show the degree to which our ships pass through these waters, for example, to go to the Persian Gulf.
We are as much a Pacific as we are an Atlantic nation, and what happens in the Asia-Pacific region affects us in a profound way. We have 100,000 troops in the Asia-Pacific area; 37,000 in South Korea, 40,000 in Japan, and another 30,000 at sea.
The economic progress which has occurred over the last several decades, has reinforced the stability and peace of this area. A part of the world once known for authoritarian governments, internal strife, and international tension is now characterized by viable and exciting democracies, in Taiwan and in the Philippines, in Thailand and in South Korea. The current economic difficulties, if not halted, could threaten the stability and much of the progress made over a generation.
The countries hardest hit are among our closest and most vital friends and allies. Let's take South Korea, where we have 37,000 troops. South Korea, weakened by economic distress, would raise the risk of miscalculation by North Korea and conflict on the volatile Korean peninsula. It would make more difficult our vitally important effort through the agreed framework of 1994 and the Korean Energy Development Organization, to dismantle the dangerous North Korean nuclear program, where a large contribution to light water reactors from South Korea is an essential ingredient to take the burden off our shoulders. It could well complicate the delicate efforts now underway through the four-party talks, to secure a permanent peace, and formally bring the Korean war to an end.
Page 22 PREV PAGE TOP OF DOC South Korea is our fifth largest export market. Over the past 3 years we have had a $26-billion trade surplus with South Korea, and we have very close and intimate military-to-military cooperation.
Thailand is another country, Mr. Chairman and Members of the Committee, in distress. It's one of our oldest friends in the region. It's been a close and supportive ally for decades, from the Korean War through the Indo-China conflict. We have a treaty relationship with Thailand dating back to 1954. We closely cooperate with Thailand on a broad range of issues, including counternarcotics, environmental protection, and improving intellectual property rights.
We have access to Thailand's air bases, which were used during the Gulf War. We have overflight clearance, also critical at that time. One of the largest military cooperation programs anywhere in the world under IMET is with Thailand. Thailand is a major purchaser of our military equipment.
Indonesia, yet another country in this region in distress, is the fourth most populous country in the world. It plays an increasingly influential and constructive role in the region. It's one of the founders of the ASEAN Group, and most recently a driving force within APEC in favor of trade liberalization. It's a moderate Muslim State. Indeed, it is the world's largest Muslim State, with more Muslims there than in all the Middle East combined.
We want to help Indonesia overcome its social problems, which could exacerbate social and ethnic tensions. Indonesia spans important sea lanes and airways. It has played a constructive role in Cambodia and in the Spratly Island dispute in the South China seas.
It has contributed to the Bosnia and Angola peacekeeping. It supported the comprehensive Test Ban Treaty. And very important to our warships, it is a ship repair facility, available to our war ships, and therefore, an important part of our forward-deployment strategy in the Asia-Pacific.
ASEAN itself, Mr. Chairman, and Members of the Committee, has played a very constructive role in our security. Go back to the mid1960's where there were insurrections, shooting wars, and communal killings, and one can see that ASEAN has provided an astounding amount of stability, and added to the economic dimensions of this area.
Page 23 PREV PAGE TOP OF DOC It is important that there be confidence in U.S. leadership. A peaceful and stable Asia-Pacific is a region that will remain open to American influence, American ideas, and American trade. But if we don't show U.S. leadership, if we remain or appear to be unengaged or disinterested, we will cede to others political and diplomatic influence, and the economic opportunities that go with it. And that's again, a reason why the IMF vote is important.
Second is our prosperity. The economic health of East Asia is an essential ingredient in our workers' prosperity. Nearly 20 percent of our exports go to East Asia's emerging markets and 30 percent to Asia. We sell more in exports to Asia than to Europe. A large portion of the exports from our west coast States go to East Asia: almost 60 percent from Washington State; 57 percent from Oregon; 51 percent from California; $76 billion from California alone.
Even more remarkable are the high numbers in other parts of the country. Mr. Chairman, 45 percent of Nebraska's exports go to East Asia: 42 percent from Utah; 37 percent from Louisiana.
Continued deterioration of Asian economies and the further depreciation of their currencies would mean lower U.S. exports, fewer contracts for U.S.-supplied services, and ultimately job loss here at home. There will be more pressure on our balance of payments, and we will see an even more noticeable increase in our trade and current account deficits if we do not act.
The IMF program fully implemented offers the best chance for these countries to resume their impressive growth. There are no guarantees, but certainly this is the best assurance. For this reasonit's not solely for economic reasons, but for political as wellthe IMF package in its entirety should be supported.
As Secretary Summers said, this would mean no increase in the deficit, no cost to the American taxpayer. This is not foreign aid, it is an investment. If we appear to turn our back on the very institution we 50 years ago led in creating, at the very time it is playing an essential role in the recovery of these countries, we will be sending a negative signal to the markets, and a devastating message about U.S. political leadership and engagement in the post-cold war era.
Page 24 PREV PAGE TOP OF DOC For years we've argued about open trade and more open economies. Well, in the space of just a few months the IMF has accomplished more than we have been able to do bilaterally over years.
If I may quote Andrew Card, the president and CEO of the American Automobile Manufacturers Association, who noted, ''The IMF-led negotiations are unleashing with a speed and scope that would have been unimaginable just a few short months ago; a wave of much needed and long overdue reform of many economic, industrial, and financial policies in these countries.''
This includes, Mr. Chairman, and Members of the Committee, the elimination of trade-related subsidies, harmonizing import certification procedures, binding liberalization of financial services, increasing opportunities for foreign investment, and eliminating import monopolies, as well as reducing tariff levels and directed bank lending, all of which have acted to our disadvantage, and these changes will act to our advantage.
Last and equally crucial is the third point on U.S. values. We have seen a growth in democracy which is very inspiring in Thailand, South Korea, the Philippines. The downturn in these countries will have its greatest impact on the emerging middle class, which has been the backbone of supporting human rights, the backbone of supporting democracy.
The course of development that we preferopen, more democratic societies coupled with open and competitive economiesis jeopardized by the present turmoil. With respect to environment, labor standards and human rights, we work on those in many different fora. IMF-led programs commit governments to increase transparency and good government and a wider sharing of power and citizen participation. But to overburden IMF programs with goals in other areas during a crisis would complicate and delay the process, and reduce our chances of success. It is sustaining these middle classes that are our best chance to promote human rights and democracy.
Page 25 PREV PAGE TOP OF DOC In conclusion, leadership is not divisible. We can't lead on critical security issues or on opening markets, while at the same time thinking we can abdicate our lead in maintaining the international financial system. To turn from the task at hand would not only risk stability abroad, but threaten our prosperity at home. It would breed resentment toward what would be seen as our indifference to the plight of our friends and our treaty allies. It would hurt our ability to push needed reforms, and affect our broader political interests as well as security in the region. Thank you, Mr. Chairman.
[The prepared statement of Mr. Eizenstat appears in the appendix.]
Mr. BEREUTER. Thank you very much, Mr. Secretary. As you probably heard, we have a vote on the floor, the Davis Amendment, but Chairperson Ros-Lehtinen went over; she'll be back. We may be able to keep this hearing running continuously or almost continuously. And that will be our objective. We will proceed under the 5-minute rule for questions.
Secretary Summers, you mentioned the desirability and the necessity to create international financial architecture to cope with the world we live in today. And I think most of us understand that certainly is appropriate.
I wish that you would address that issue with respect to the role that Congress has at the moment. There are many concerns that you've heard in the past, you've heard some here today, about the kind of reforms and changes that ought to be made in these countries, but also in the IMF itself. Questions about whether or not their prescriptions are really appropriate for the case.
You addressed yourself the question about austerity, at least in passing. One of the areas of most common criticism is that austerity programs are being imposed upon governments that did not have fiscal problems, and questions are being raised, even before this happened, whether or not the IMF's prescriptions are appropriate.
Page 26 PREV PAGE TOP OF DOC Would you indicate to us your thought about how rapidly we might move as a country to push the IMF in concert with other countries to change the international architecture, or look beyond the IMF, or to look for something supplemental to the IMF? And then if you can, address the question about whether you think that the current prescriptions being levied in Thailand, Republic of Korea, and in Indonesia are inappropriately oriented toward austerity.
Mr. SUMMERS. Mr. Chairman, there are a range of concerns on this. I've tried to indicate in my testimony many of the kinds of concerns: about creditor responsibility, about transparency. We have been working on an ongoing basis, and expect to continue to work on an ongoing basis. And I expect in a fairly short time it will be possible to see further progress on publication of data from countries. We've seen an important step forward on transparency with the publication of IMF letters of intent in connection with the programs in Korea, Indonesia, and Thailand.
I think it's helpful through, if you like this process of case law, we can gradually institutionalize a set of changes for transparency for more openness with respect to data. We are making progress on the task of supporting very substantial improvements in the quality of banking regulation, and we're generating increased focus of the IMF on questions relating to financial stability, the maturity of debts, and so forth. I think those are ongoing efforts which have borne fruit and will continue to bear fruit in the not-too-distant future.
There are larger questions about the whole architecture of the system, and about the role of creditors, which I think are enormously complex, and would take some substantial time to address. And probably if addressed, would take some substantial time to build consensus in support of any approach.
This is something we're pursuing as energetically as we can, but I would caution, Mr. Chairman, that at this point in time when the crisis seems to us to be a potentially very serious one, where there is inevitably some fragility, it would be very, very unfortunate if we were not able to rely on the IMF as an insurance policy, and if we were to allow a year or two to go by while the architecture was discussed, during which we were in a sense uninsured, I think that would be taking a risk. It might well be that nothing would happen, but it might be that something would happen, and that would be taking a risk with which, I think at least we in the Administration and the Federal Reserve, would not be comfortable.
Page 27 PREV PAGE TOP OF DOC Mr. BEREUTER. Mr. Summers, before the light turns red there, could you briefly address the austerity issue before we turn to Mr. Clement.
Mr. SUMMERS. I'm very sorry.
The primary focus, as I suggested in my testimony, Mr. Chairman, has to be on the structural changes. There is a need for macroeconomic policies in these countries. You've seen currencies falling very rapidly. You've seen these countries have a great deal of difficulty in placing debt. Those things call for some monetary and fiscal adjustments. There's a balance that has to be struck between the problem of the rapidly falling currency, and the problem of getting the economies going again. That's a judgment that has to be made on a case-by-case basis, and that's the judgment that they try to make in these IMF programs, and you can argue about whether it's precisely appropriate in each case.
What I think is clear is, that the problem of a rapidly declining currency is a problem that has to be addressed. I think it's also clear in a number of these countries that there has come to be some recognition of the need for substantial macroeconomic policy adjustments, and those steps have been willingly undertaken, rather than undertaken at the insistence of the IMF. But clearly, there are also very serious consequences, and we're going to have to think through the best and most effective ways of providing safety nets for assuring the continued availability of trade credits and the like.
These are things we're going to have to be watching very carefully, and monitoring as it goes forward, because I don't think there's any easy answer, and we'll be continuing to review what the IMF does.
Mr. BEREUTER. Thank you, Mr. Secretary.
The chair will recognize the gentlemen from Tennessee, Mr. Clement.
Mr. CLEMENT. What restrictions are expected to be attached to any IMF loans offered to bail out the Asian economy, and will these restrictions promote responsible financial policies? And is it true that many of the restrictions merely speed up the reforms that the United States has been calling for, for many years?
Page 28 PREV PAGE TOP OF DOC Mr. SUMMERS. Many of the restrictions go in the direction of things we've been calling for for many years. For example, the end to policy-based lending in Korea, the elimination of import monopolies in Indonesia.
There are both substantial restrictions on how money can be used in these programs, and also very substantial conditions on national economic policy that are embodied in these programs. Most of those restrictions are directed at the goals of allowing competitive market forces to operate, particularly in the financial sector because that's so important for increasing confidence.
I think these programs are very much in the direction of what the United States has been pushing for in these countries for some years, and as Mr. Eizenstat's testimony suggested, I think that some of the commitments that have been won in the last few months, in the context of the IMF programs, look rather large, compared to what we've been able to achieve in our bilateral negotiations.
Mr. EIZENSTAT. May I supplement that just to give you two additional points?
Mr. CLEMENT. OK, yes.
Mr. EIZENSTAT. The import monopoly in Indonesia, the Bulog, will be phased out on virtually every agricultural product. We have been trying for many years to deal with the national car program and local content requirements in Indonesia. These will be phased out about 2000. Subsidies for a variety of programs in Indonesia that we've been working on will also be eliminated.
With respect to Korea, we have been concerned with over-capacity because of directed bank lending (in effect, subsidies) in semiconductors, in steel, as well as in autos, through this so-called Chaebol network in South Korea. These will begin to be phased out as we end directed lending.
Page 29 PREV PAGE TOP OF DOC So the IMF has had a very real impact in terms of the kind of market access and opening that we've been seeking for many years.
Mr. CLEMENT. Thank you.
Ms. ROS-LEHTINEN. [presiding] Thank you. May I ask my questions now? I hate to barge in. Thank you so much. I thank you, panelists, for your excellent testimony of this morning.
I wanted to ask the Secretaries here the position on tying elimination of investment barriers and market access goals to our willingness to help these countries weather this crisis. There's been a lot of discussion before about trade and human rights, whether there should be some linkage. Should there be some linkage in market access goals to investment barriers, et cetera, to us being willing to help them out?
Mr. SUMMERS. Madam Chairman, the programs that have been negotiated for Indonesia, Thailand, and Korea, do contain measures that are substantial with respect to market access.
Ms. ROS-LEHTINEN. Verifiable?
Mr. SUMMERS. Verifiable based on conditionality with periodic payments and with the cutting off of payments in the event that the conditions are not met. They cover, for example, agricultural tariffs in Indonesia, import diversification in Korea, a number of specific products, acceleration, WTO commitments in some cases.
What I think is appropriate is that these programs do contain measures to allow market forces to operate more fully and more effectively because that is an important element in the resumption of confidence. What I think would be difficult in the context of an international program would be the addressing of specific commercial disputes, rather than the kind of systemic changes that I think experience suggests are ultimately more important for promoting the goal of market opening that we share.
Page 30 PREV PAGE TOP OF DOC This is not a new thing, by the way. I should say, that if one looks, for example, at the program the IMF and World Bank negotiated with India in the summer of 1991, at a time when India had a serious financial problem, it provided for much greater reductions in tariffs and quotas than anything we've been able to achieve bilaterally.
If one looks, for example, at the case of Mexico. Tariffs came down from about 30 percent average to about 10 percent, before and after, in the context of a World Bank structural adjustment loan.
So I think this use of international financial institutions to bring down trade barriers and promote reform is a very important element of our economic strategy, and it's certainly one that they've been able to pursue very aggressively in the context of the recent Asian problems.
Ms. ROS-LEHTINEN. Stu, I don't know if you wanted to add anything to that.
Mr. EIZENSTAT. Well, I fully agree, and I gave some examples in Indonesia. For example, the phasing out of the local content requirement for motor vehicles, which gives preferential tariff rates to vehicle manufacturers using a high percentage of local Indonesian parts. That is being phased out. That is one of the reasons why Andrew Card, president of the American Automobile Association, has taken such a very strong position in favor of these IMF programs.
So, what has happened, Madam Chair, is that the IMF, through its own conditionality, has been able to accomplish the kind of market access for our products that we have spent years trying to achieve bilaterally, as a condition of their funding. So it fully supports the kind of market access in agriculture, in autos, steel, and the like, that we have been trying to do bilaterally.
Ms. ROS-LEHTINEN. We have heard reports that Taiwanese businessmen are capitalizing on the crisis by buying up cheap assets in Thailand and South Korea. If that is true, we'd like to know. And are U.S. businesses unfortunately doing the same, and what is the effect of this investment to U.S. interest, and is the greater economic China getting even more powerful in this region during this time?
Page 31 PREV PAGE TOP OF DOC Mr. SUMMERS. It's a very important issue that you raise. Clearly, there's been a very substantial adjustment in prices in these countries, and assets are now selling for half or less of what they were selling for even a short time ago, and that is attracting foreign investment. That's a good thing. That is the market mechanism at work.
Foreign investment from many places, including the United States, including Europe, including Taiwan, appears to be coming back into some of these countries. But I think that is a benign development because it is a reflection of the fact that they are able to attract capital, and attract capital on market-based terms.
Clearly, in all the ways that we scrutinize investments, we would have to look carefully at any investment that posed a security challenge to us. What I would want to stress is that the process of direct investment, particularly the process of direct equity investment, is very much a desirable thing, because of the long-term nature of those equity investments. And I think we are seeing some capital infusions in that forum into these countries.
Ms. ROS-LEHTINEN. You had mentioned Mexicothat was going to be my last question, but I was just thinking, this present crisis in Asia, is it more or less of a threat to U.S. interests and to the international financial system than compared to the Mexico peso crisis, or the Latin America debt crisis, which occurred in the early 1980's? How would you rate this one?
Mr. SUMMERS. I think it depends upon how it plays out. This is a more pervasive crisis, I think, by a fairly wide margin at this point than what took place in Mexico in 1995. That may in part have been because we were able to act fairly promptly to contain the Mexican crisis, and the Mexican policy authorities responded strongly. But I think at this point this is a broader and more pervasive problem than that one.
The 1982 crisis really led to a very substantial slowdown across an entire continent for almost a decade, and it would certainly be my hope that with prompt management and bold action, that this crisis could be contained, and so it did not have those kinds of far-reaching effects. But I think if we are not able to respond vigorously, and countries do not respond vigorously, the seriousness of the Latin American debt crisis in the 1980's does point up what the possible stakes here are. And of course in Asia, the Asian economy is much larger, relative to the global economy now than the Latin American economy was at that time.
Page 32 PREV PAGE TOP OF DOC Ms. ROS-LEHTINEN. Thank you so much, gentlemen.
Ambassador Eizenstat, I hope you're able to join us next week in our WTO hearing too. We'll keep you busy up here.
Mr. Faleomavaega. Thank you.
Mr. FALEOMAVAEGA. Thank you, Madam Chairman.
There was a recent New York Times article. I believe it was written by Mr. Ogled, and I'm trying to figure was it a Washington Post or a New York Times article.
The article was basically saying that Asian countries are not to be totally blamed for the financial crisis that we're involved in right now in Asia. Basically the position taken by this writer is that the major western investors or lenders did not just blindly make these investments with these Asian countries; they were aware of the cronyism that existed; they were aware of the corruption; they were aware of the nepotism. And also there was a 1994 report by the World Bank, painting just a glowing picture of the Asian miracle. Come and invest in Asia; there's no problem. You'll get your money and your investment will be worth your while.
So what happens, a lot of these western lenders never bother looking into the real portfolios of these banks or these institutions in Asia. So what happens, their governments could no longer subsidize these bad loans, and we have a current crisis.
And the problem I want to share with both of you gentlemen, and maybe you could respond to this, is that there is no international mechanism, or some kind of an institutionalized system, where if I were to lend money to another country, I better know what the financial standing of that institution is.
So what I'm suggesting here, gentlemen, is that we do not have that kind of mechanism in place, and correct me if I'm wrong. Is this possibly one of the reasons, Secretary Summers that we're in this fix that we're in now? I mean, the lenders didn't just go in there saying, hey, we've got some problems with the Chaebol system in Korea; we've got some problem with Keiretsu in Japan. These just didn't exist blindly. Our lenders knew what they were doing.
Page 33 PREV PAGE TOP OF DOC Mr. SUMMERS. I think people will write Ph.D. theses for decades trying to dissect this crisis, and I think it'll be found that there's blame enough to go around. On the one hand, there are problems in the countries; on the other, there are lenders who lend who should have known better. On the other hand, there are those who are watching, who perhaps didn't give adequate warning. The rating agencies, for example, had upgraded some of these countries within the last few months, and in some cases they were evaluated by the rating agencies as extremely high-quality credits.
And I think clearly one of the priorities that these events point up, is the importance of getting more satisfactory information out. Let me give you two examples.
Traditionally and in response to the international community, central banks have come to publish the magnitude of their reserves, but publishing only reserves without publishing forward positions, or encumbrances of those reserves, is like looking at the assets on a balance sheet without looking at the liabilities. That kind of information flow is not really satisfactory.
Similarly, there's been a tendency to focus on the question of how much debt a country has, but not to focus on the question of how much of that debt is coming due within the next 6 months, which can often be part of what produces a run. And so what we see as important in terms of preventing these crises, is getting this kind of information out, so that it can be dissected and analyzed by the whole market. And that is likely to produce the best kinds of responses.
It's always tempting at a moment like this to say that there should be some kind of global policeman who can blow the whistle, and can stop this kind of thing. In principle, that would be very desirable; in practice, as Chairman Greenspan has said, that may be beyond the capacity of man, to accurately predict when these kinds of things are going to, as the chairwoman suggested, have a punctuated equilibrium, where there is a dramatic fall-off into crisis.
Page 34 PREV PAGE TOP OF DOC So I think our best prospects are to maximize the information flow, so as to reduce the prospect of surprise; to encourage everybody not to live near the edge to reduce the prospect of crisis; and to improve our mechanisms for responding when crisis comes.
Mr. FALEOMAVAEGA. I've been trying to read as much as I could from a layman's point of view. How much does the IMF front out to these countries? What's the total bag that they hold?
Mr. SUMMERS. There are many ways of answering that, and the IMF accounting is enormously complex. But the total loans outstanding from the IMF at this moment are about $65 billion.
Mr. FALEOMAVAEGA. Sixty-five billion. What percentage of that comes from Uncle Sam?
Mr. SUMMERS. Eighteen.
Mr. FALEOMAVAEGA. Eighteen billion.
Mr. SUMMERS. Eighteen percent.
Mr. FALEOMAVAEGA. OK. And the next, Japan. Is Japan the next?
Mr. SUMMERS. I think Germany is the next. The share of all the European countries together is about 29 percent, and Japan has a share that's somewhere in the 6-percent range.
Mr. FALEOMAVAEGA. I know, gentlemen, both of you are distinguished economists. I am not an economist. But here's a layman's point of view that I am a little confused about.
If I go make a bad loan, I either go to jail, or I have to figure out some way to pay that bill back. Now, basically, institutionally, we're going to be bailing out these countries who have made bad financial loans, basically right back to the person who owns the bank, and the people who invest in these banks. Are they going to be exempted from the force of the law, if they've got caught stealing the money, or however they've taken it? Are we in a similar S&L crisis here, or is it a different situation?
Page 35 PREV PAGE TOP OF DOC Mr. SUMMERS. I think there's a very important distinction. In the S&L crisis taxpayer money went to the banks to pay off the depositors, and nothing came back to taxpayers. Nobody here is talking about giving away one penny of taxpayer's money, either directly or through the IMF. All that's under discussion here is to lend money with adequate security, based on a long history of assured repayment, at a premium interest rate, so that the maturities can be stretched out and can be handled.
I think it's a very important distinction to recognize. When we think about the S&L crisis, we gave money to people. We gave money to depositors, who had deposited money in unhealthy institutions. Nobody is talking about spending one penny here. What's under discussion is providing loans that are a source of temporary liquidity to enable the crisis to be worked through, and charging a high interest rate on those loans. The U.S. support program for Mexico produced a profit for American taxpayers of approximately $560 million.
Mr. EIZENSTAT. May I add just a point here?
Mr. FALEOMAVAEGA. Please, Mr. Secretary.
Mr. EIZENSTAT. In the workout that was done by private sector banks with South Korea, with their borrowers, that was essentially done without IMF money. This was a workout they did themselves.
In Indonesia there is an effort for creditors and debtors to get together to renegotiate private sector debt. That is not something that IMF money is injected into. To the extent that there are private sector problems, as there are in some of these countries, the IMF is not in that case even lending its money.
Ms. ROS-LEHTINEN. Thank you. Thank you, Mr. Faleomavaega.
Mr. FALEOMAVAEGA. Thank you, Madam Chairman.
Ms. ROS-LEHTINEN. Mr. Berman.
Mr. BERMAN. Thank you very much, Madam Chairman. And just a followup for 1 second.
Page 36 PREV PAGE TOP OF DOC When you talk about loans, not grants, good interest rates, and securitized, the latter one is what confuses me. What is the security in the transfers to these currencies? It can't be their foreign reserves, because in some cases you'rewell
What did you mean by securitized here?
Mr. SUMMERS. Perhaps I spoke imprecisely. The loans are secure in the sense that IMF has historically had a special role in the international financial system. It made countries make an absolute priority of paying it back. So for example, all through the Latin American debt crisis there were no defaults to the IMF.
Second, the IMF imposes a very tight conditionality to assure that it's possible to pay the IMF back. And one important element of that conditionality is monitoring the country's reserve position, to assure that the country has financial reserves that are sufficient to, when the obligations come due, pay
Mr. BERMAN. Financial reserves or foreign reserves?
Mr. SUMMERS. Reserves of foreign currency.
Mr. BERMAN. You're asking Congress for a total of about $18 billion in these two different programs; the replenishment and this new borrowing, authority to borrow for this special fund.
You've already mentioned that the second line of defense, which applies to two of the three countries that have received these recent assistance packages, hasn't even been touched yet. I gather there are still $40 or $50 billion in IMF funds that have not yet been lent.
Some skeptic is going to say, why now? Why so quick? What's the problemwe have a second line of defense. There are still more resources left with the IMF. What's the big rush?
Mr. SUMMERS. Congressman, the IMF funds are not to carry through on the programs that have already been committed, but they are an insurance policy against the further spread of these problems. Even after the request that's been granted, the IMF would still be considerably smaller, relative to the world economy than it was 10 years ago, or 20 years ago.
Page 37 PREV PAGE TOP OF DOC I think we would probably all agree that it is better for the IMF to be taking on this kind of financial responsibility than for us to directly impart on grounds burden-sharing. So one would want to minimize, not maximize, reliance on the second line of defense.
The $45-billion figure for the IMF's capacity to lend going forward is a measure of the IMF's remaining assets, but a somewhat misleading measure, because the IMF also has an obligation to its major members, including the United States, to maintain a reserve so that countries can encash their contribution to the IMF, and get it back on immediate notice. That's something that, for example, is integral to the budget treatment to the United States.
So once one takes account of those obligations of the IMF, the available lending capacity is very substantially less.
Mr. BERMAN. That's why it's not scored as outlays or something.
Mr. SUMMERS. Correct, because we can always get itbecause it's an exchange of assets. We lend them money; they give us a security. But that depends on our being able to get our security cashed.
Mr. BERMAN. I think it's important, the point that this replenishment and this new authority to borrow, is not about the next wave of transfers to these countries; it's about ensuring and perhaps helping to prevent the contagion from spreading to the Brazils, and the Russias, and other places. The irony of ''let the marketplace work'' as an argument is, given our own experience with the Depression, and what happened to banks, and some of the things in the early part of the New Deal to restore confidenceI mean, let the market work was tried once, and there was some very long-term and disastrous consequences.
My final question is about this future architecture. First of all, it's not a unilateral architecture, so you can't tie it to the supplemental request. Second, there have been a number of different things discussed. This international insurance fund. There's been talk about a kind of tax on short-term flows of capital. There have been things, sort of international bankruptcy law to encourage workout agreements in some fashion.
Page 38 PREV PAGE TOP OF DOC What's your timeframe for movement on all of that? What are you thinking about, and do you have any particular favorites at this moment?
Mr. SUMMERS. Congressman, we don't have any particular favorites. As Secretary Rubin has said, these are matters of enormous complexity and sensitivity, in that we both have to manage our way through these problems, and then worry about the framework to prevent problems again. If you like, put out the current fire, before you reorganize the fire department.
I don't have a timeframe to specify. I think that there are some measures on which I'd expect to see the international community move forward very quickly, some of the things I was mentioning earlier in terms of transparency, in terms of data, on short-term capital, and the like.
I think these larger architectural changes will take some significant period of time, both to figure out what it is that we believe would be helpful, and then to create some kind of international consensus. And I would be very apprehensive if we were in a situation where we delayed having the insurance policy that IMF funding provides until that kind of exercise could be completed, but I can assure you it is an exercise that Secretary Rubin, Chairman Greenspan and I take very, very seriously, and on which we are very much focused.
Mr. BERMAN. Thank you, Madam Chairman.
Ms. ROS-LEHTINEN. Thank you so much.
Gentlemen, although I would be ready to turn you loose, Mr. Bereuter, through his staff director, has informed me that we're going to have our final vote on this bill on the floor in the next 5 minutes, and he does have some questions that he would like to ask both of you. So, if it's OK with you, we'd like to call this hearing to recess, and then come back right after the vote.
Page 39 PREV PAGE TOP OF DOC Mr. BERMAN. If it's just free play, can I ask one more
Ms. ROS-LEHTINEN. Thank you, go ahead. Yes, no problem. Free play.
Mr. BERMAN. Don't have the votes yet.
Ms. ROS-LEHTINEN. OK, go ahead, Howard.
Mr. SUMMERS. You have a funny idea of a good time, Congressman.
Mr. BERMAN. For us.
No, in fact I've changed my mind.
Ms. ROS-LEHTINEN. Mr. Berman, there will be enough time for you to come back and ask that question, if you'd like, once we come back from recess.
So this Subcommittee is now in recess. Thank you, gentlemen. Thank you very much.
Mr. BEREUTER. [presiding] The hearing will come to order. The Committee will come back together, and then I think I have 5 minutes' worth of questions, and then we'll dismiss the first panel, and I thank them for their patience.
Secretary Summers, I think it's true that the Indonesian Government has canceled projects involving U.S. investors, or appears to be in that direction. That would trigger some sovereign guarantees given from that country to the Overseas Private Investment Corporation (OPIC). Tell me what Treasury's position is on the Indonesian's Government cancellation of those projects, if you would, please.
Mr. SUMMERS. Congressman, this is a very important issue and one that people at Treasury and in the IMF have devoted a good deal of time to. Our position is that any decisions of that kind that are made by the Indonesians need to be made in straightforward, clear ways; that it is not our place to be involved in choosing projects, or the IMF's place to be involved in encouraging the cancellation of particular projects; and that it is important the Indonesians be as clear and transparent about their approach with respect to particular projects as they possibly can be.
Page 40 PREV PAGE TOP OF DOC Mr. BEREUTER. Transparency is all-important because of their allegations, of course, that projects are being treated differentially, based upon cronyism or family ties, and so on. And some projects have no governmental financial involvement and therefore may be miscategorized.
Do you think that's a possibility, or have you seen any evidence that's a possibility? And to what extent are we getting the transparency that's necessary to make a reasonable decision about whether the Indonesian Government is acting in good faith with respect to the IMF directions?
Mr. SUMMERS. I think some progress has been made, but I don't think that we have all the information that we would like to have, or I know that some of the affected companies would like to have about the situation. And we have pressed, both through the IMF and directly, for clarification.
But I should stress that these are decisions of the Indonesian Government with respect to contracts that they have entered into. Certainly, we have not sought to encourage the cancellation of particular projects, nor has the IMF sought to encourage the cancellation of particular projects.
But changing economic realities in Indonesia have apparently led the Indonesians to take certain decisions with respect to projects and may cause them to take decisions with projects in the future. And that's not something we can prevent.
Mr. BEREUTER. Secretary Summers, do you think it's possible that the Indonesian Government misunderstands their freedom to objectively look at projects and see where they do fit? Or do you think that they might be using the excuse that they have no options in that respect from the IMF or from the U.S. Treasury? Do you think either is a possibility? Or do you see evidence of it or do you
Mr. SUMMERS. I would not want to be in the position of ruling out possibilities. What I can assure you is that, to my knowledge, the Indonesian Government has certainly not received instructions with respect to any particular projects from the Treasury, nor to my knowledge, from the IMF.
Page 41 PREV PAGE TOP OF DOC There has been encouragement, very strong encouragement from the IMFindeed conditionsand from the Treasury for the cancellation of certain specific projects in which there is a very active question of propriety and economic efficiency. And those projects have been canceled.
The projects that I know have aroused considerable concern here are not among those projects and have not received encouragement for their cancellation from the Treasury or the IMF.
Mr. BEREUTER. Thank you. We will have testimony upcoming in the next panel from CalEnergy that is affected by decisions that are apparently being made that are subject to OPIC guarantees.
I think Secretary Eizenstat wanted to make a comment on this.
Mr. EIZENSTAT. Just to supplement what Larry said, I agree fully with everything he said. But on the CalEnergy issue, I wanted to assure you that along with Treasury, the Department of State and our embassy in Jakarta have been in frequent communication with CalEnergy.
Our embassy in Jakarta has also contacted other U.S. energy companies that have or plan investments in Indonesia, and we are seeking clarification from the government about the status of CalEnergy, as well as other infrastructure projects, and we will take appropriate action. As Secretary Summers indicated, transparency is really critical here.
I would note also that our Department of Commerce, through its advocacy center, has also been in touch with the embassy, even though they have received no advocacy questionnairealthough they have requested it on several occasionsfrom CalEnergy.
Mr. BEREUTER. Thanks to both of you. I hope you'll look at the CalEnergy testimony today that was presented to me yesterday along with the other advance copies of testimony, and see if there's anything new in that to which you could give us responses.
Page 42 PREV PAGE TOP OF DOC My final question will go to you, Secretary Eizenstat, and it is not on this subject. You mentioned in your final list of actions, urging the Japanese to take broader responsibilities as the main engine of growth in the region. That seems to be a universal recommendation with a lot of specificity, but the history there is not encouraging.
Do you think there is anything that Congress can do that might have an impact on the Japanese Government to take some of the steps that need to be taken to stimulate their economy to open it up to help these nations that are in trouble, as well as to eliminating some of the inequitable treatment that we have faced for so long?
Given the fact that so often the Japanese have seemed to take the tough steps only when the U.S. Government pushes them very hard to do thatwhat they used to call the big tree, small tree. They continue to think of themselves as a small tree and in our shadow.
Would you think about whether or not there's anything that we could do in the way of a resolution, which would express the sense of Congress in a very dramatic fashion on this issue?
Mr. EIZENSTAT. May I respond to that? Secretary Summers and I were both at the Davos Conference, and I think both of us heard almost universally from East Asian countries, from the European Union and from others, the importance of Japan playing its role as the engine of growth in Asia and the second largest economy in the world.
There really are three facets of that, one of which Secretary Summers is a particular expert on, although he is on all of them. First, bank stabilitythe Japanese are, in fact, within the next 2 weeks submitting a budget which will try to provide more stability for the banks, and they are making other reforms which Secretary Summers may wish to comment on.
Second is deregulation, which you properly indicate has long been promised, but which is very short on outcome. We have an enhanced dialog under the leadership of Ambassador Barshefsky to deal with that, and we hope that this particular crisis will encourage them to do what they have not adequately done in the past in terms of opening their economy and deregulating.
Page 43 PREV PAGE TOP OF DOC It is to their own advantage because they have been in a growth recession for 7 years. But it is also essential for them to play their role in helping with this Asia crisis so it is not all on our shoulders.
And third is stimulating domestic demand. It is urgent that they not try to export their way out of their own growth recession, and that they stimulate domestic demand to a greater degree than they have done thus far to help absorb some of the Asian exports which will also be coming to us.
I think that that is an important message that we need to give them. We will certainly look at whether Congress might have some role here, but I frankly think they have gotten that message.
And indeed Prime Minister Hashimoto has recently said that Japan does not want to be responsible for an international global melt-down. And we take that to mean that he understands the seriousness of the problem and the important role that Japan has to play.
Mr. BEREUTER. Thank you. I just urge you to remember that apparently people take seriously what we do up here, for better or for worse, and maybe we could do one for the better.
Gentlemen, thank you very much. I express my appreciation to you on behalf of both Subcommittees for your testimony, for your time, and your responses to questions. I am sorry about the disjointed nature of it due to the votes, but your testimony was helpful to us and it helps establish a public record to inform the citizens. Thank you very much.
Mr. EIZENSTAT. Thank you.
Mr. BEREUTER. We have one more vote remaining after 5 minutes, and therefore I am going to declare a recess. We will reconvene in approximately 12 to 15 minutes. Thank you.
Page 44 PREV PAGE TOP OF DOC Mr. BEREUTER. [presiding] The Subcommittees will come to order. Ms. Ros-Lehtinen will join us shortly. Mr. Berman is immediately outside here within hearing. And I have introduced the members of the second panel previously; I won't reiterate that.
Gentlemen, thank you so much for your patience. We now have an opportunity to hear from you, perhaps some different views than we just heard, and I urge you, to the extent you heard things that you disagree with or would like to elaborate on or take exception togiven the previous panel's statements, I would encourage you to do thatthat makes it very helpful to us.
And the first person listed on the agenda is Professor Stephan Haggard, acting director of the Institute on Global Conflict and Cooperation. Your statement and all three of you gentlemen's statements will be made a part of the record. You may proceed, summarize, as you wish to proceed.
STATEMENT OF STEPHAN HAGGARD, ACTING DIRECTOR OF THE INSTITUTE ON GLOBAL CONFLICT AND COOPERATION
Mr. HAGGARD. Thank you very much, Mr. Chairman. It's an honor for me to testify before you today on this important question. I am going to offer a summary of my testimony.
I don't think before these committees it's necessary for me to spend much time on U.S. strategic political and economic stakes in this region. I'd just like to emphasize the fact that a number of the economies experiencing distress currently are new democracies, and the United States has a strong interest in promoting the stability of those democracies and also in promoting peaceful political change in Indonesia.
Just to add some local flavor to some of the statistics that have been put forward already; in my State of California, 51 percent of all merchandise exports go to Asian countries. And that's not just agricultural products, of course, but computers, electronics, machine tools, chemicals, high-tech industries that pay high wages and are going to be adversely affected over coming months.
Page 45 PREV PAGE TOP OF DOC Even my industry, higher education, has felt the effects of the crisis. The University of California has attracted thousands of high-quality Asian students who are now struggling to meet tuition and other costs that have risen quite substantially in Asian currency terms.
In the remainder of my remarks, I'd like to make four quick points for your consideration.
The first is that the current crisis is not just a balance of payments crisis or a debt crisis or a currency crisis. It's a much more profound financial crisis of these economies.
In this regard it's different than the Latin American debt crisis of the 1980's, where lending went primarily to cover fiscal deficits and investment in State-owned enterprises. In the recent period, much of the surge of foreign lending and investment went through financial institutions that were poorly equipped and regulated to handle those flows.
And this suggests that the agenda of reform is not just a short-term one, but a much more long-term institutional one of strengthening central banks and prudential regulation, increasing the transparency of corporate governance, encouraging the development of capital markets, cleaning up weak banks and rooting out corruption.
All of these actions, I would argue, are very much in the interests of American companies, both financial and non-financial, that operate in the region.
The second point I'd like to make is that financial crises have implications not only for weak investments or weak banks, but also for perfectly sound ones. The contagion effect is operating very strongly in the region. The crises in the financial sector have adverse implications for the production of real goods and services and perfectly well-managed economies like Singapore are feeling the effects of living in what might be called a bad neighborhood.
Page 46 PREV PAGE TOP OF DOC To mitigate these types of problems, all financial systemsand I emphasize all financial systemsrequire a lender of last resort, and it's that function which the IMF has been playing in this most recent crisis.
We ourselves in this country learned in the early 1930's the importance of having this function performed when we discovered that runs on commercial banks contributed to the Depression, and ultimately led to innovations like the FDIC.
Now, as you and other Members of the Committee have noted, Mr. Chairman, this can lead to moral hazard problems. And I think this does have to be faced honestly and squarely. But Mr. Simon, Mr. Shultz and Mr. Riston have gone too far in arguing that the IMF should be abolished as a result of these moral hazard problems.
As you know, the problem of moral hazard is the idea that by bailing out investors you encourage them to engage in risky behavior in the future. I think this problem has been substantially exaggerated in the recent crisis. Portfolio investorsand they account for some portion of the capital flows to the regionhave already taken substantial losses. Asian investors have fared much worse. Stock markets have dropped by half over the last year. And before the end of the crisis, I predict that we'll see write downs of bad debt, that commercial lenders will be forced to deal with the problem of bad debt, particularly in the non-financial sector.
The IMF has supported governments' ''bailing out'' their own financial sectors, in the sense of insuring depositors.
But the IMF does not support subsidies or bail-outs of non-financial institutions. And of course, bankruptcies in the region in the coming months are going to increase quite dramatically.
Looking forward, I don't have the sense that investors are going to celebrate the crisis of 1997 as an opportunity to engage in more risky lending. Rather, they're going to be tightening risk assessment. Governments who have allowed financial sectors to undertake risky loans will be tightening their prudential regulation quite substantially. And that's part of what the IMF is going to assist those countries in doing.
Page 47 PREV PAGE TOP OF DOC The third point I'd like to make is that, overall, the IMF has performed the function of lender of last resort efficiently and cheaply in a context where its resources have actually shrunk very dramatically when compared to the increase in total international capital flows. If you think of the IMF's resources as scaled to total financial transactions, its resources have really shrunk over the last decade, as those capital flows have increased.
If the IMF were not in place, the United States, Japan, and Europe would even be more involved because of the high strategic and political costs of standing aside during crises such as these. In these circumstances, the American Government would have to manage conditionality directly with all the political problems that would imply.
The delegation to an international organization like the IMF is a perfectly appropriate thing for us to do in these circumstances.
Moreover, as others have already testified, the price is right, since our contributions to the IMF involve no budgetary outlays. Countries have excellent repayment records to the IMF, precisely because the IMF is so important in restoring private sector confidence.
My fourth and final point, Mr. Chairman, has to do with the question of conditions. What should the IMF and the United States be asking in return for their support? The IMF is not a charitable institution. It is perfectly justified in imposing conditions and guaranteeing that it and its members are repaid.
The IMF's record in the recent crisis doesn't look good. In Indonesia, Korea and Taiwan, conditions initially worsened after programs were announced and are still not fully stabilized, particularly in Indonesia.
This was in part because the programs were initially too austere, given the financial sector problems. Austerity in the context of financial crisis has to be handled very delicately so as not to make problems worse. But in crises it's also important to underline that there are no good policy options. And we're now seeing some flexibility in both Korea and Thailand on the budgetary and monetary fronts that I think is salutary.
Page 48 PREV PAGE TOP OF DOC To claim that the IMF is a main cause of austerity in the region is highly misleading. Without their support, the conditions would have been substantially worse, and that includes for the workers which are being displaced as a result of this process.
I've already mentioned the importance of financial reform in the countries in question. What about additional conditions, such as environmental protection and workers' rights? These are issues which are and should be part of American foreign policy. But adding them to crisis management can lead to overload and the perception that we're exploiting the weaknesses of the country and the region.
Moreover, I'm concerned that the IMF is poorly equipped even to handle the financial-sector reforms that are going to be required. They are even more poorly equipped to monitor standards in these areas, in which even democracies disagree. It's again important to underline that many of the countries in distress are new democracies, including the Philippines, Korea, Thailand and Taiwan.
I see three areas where Congress might raise its voice with respect to future IMF action.
The first is in urging that fiscal adjustments are undertaken in a way that guarantee the social safety net is either maintained or developed. The IMF is overseeing fiscal adjustments, and it's legitimate for them to ask that key core services in the health area, for example, be maintained and not cut.
Second, the IMF has recently announced a new initiative to look into issues of corruption, and this initiative should be supported. Corruption has played an important role in this crisis in certain countries.
Finally, it's appropriate for the IMF to consider the longer term issue of debt restructuring that's going to come out of this crisis. So far, we haven't seen that element of the crisis develop, but if we look backwards at the Latin American crisis, it ended in part because bondholders and commercial bankers ultimately faced the reality of bad debt and began to write those debts down.
Page 49 PREV PAGE TOP OF DOC Finally, I'd like to close by saying I'm sympathetic with the criticism of the IMF that it can be more open in outlining the precise content of its proposals so they can be subject to scrutiny and debate, both in the United States and in the countries in question. Ultimately, these proposals have to be ratified by democratic legislatures in the countries in question. It's important and valuable that the IMF publish exactly what it's trying to do and make sure that the citizens of the countries in question have that information available to them, as we do here in this country when we undertake such important policy debate.
Thank you, Mr. Chairman, very much for your consideration.
[The prepared statement of Mr. Haggard appears in the appendix.]
Mr. BEREUTER. Mr. Haggard, thank you very much for your testimony.
Our next witness is Mr. David L. Sokol, Chairman and CEO of CalEnergy Company, Inc.
Mr. Sokol, I've been particularly anxious to have your testimony because I think few people in the business sector have had more direct experience in recent weeks with the difficulties it's created for your business in the United States. And I'm talking specifically about what's happened in Indonesia and to some extent, Korea.
And I want to say also that I appreciate not only that you come at it with a business perspective, but your interest in what the impact will be on the American taxpayer. So you may proceed, as you wish, and thank you for your testimony.
STATEMENT OF DAVID SOKOL, CHAIRMAN AND CEO OF CALENERGY COMPANY INCORPORATED
Mr. SOKOL. Thank you, Mr. Chairman, Members of the Subcommittee.
I'm here today to speak not as an economist or a policymaker, but as a businessman whose company has been deeply involved in Indonesia for 4 years and is now caught in the cross fire among the competing goals of the IMF, the Treasury, OPIC and the U.S. taxpayer.
Page 50 PREV PAGE TOP OF DOC Our company, CalEnergy, which is a New York Stock Exchange-listed company, builds, owns and operates geothermal power and other environmentally responsible power plants around the world. We have annual revenues in excess of $2 billion and over 4,000 employees.
Less than a week ago, our company was forced to take a charge of a little over $87 million from our fourth-quarter earnings due to developments in Indonesia. We've witnessed firsthand the rapid deterioration of Indonesia's economy, and I hope our observations about our lessons and experiences in Indonesia can be beneficial to you as you help forge U.S. policy toward the IMF.
Thailand, Indonesia and Korea, together with other Asian countries, are in the words of Secretary Rubin, our customers, our competitors and our security partners. And we would agree that we cannot sit back and just be observers to the wrenching shakeup occurring in these countries.
My company is fully aware of the implications of the financial crisis in Indonesia and the need for the IMF and the Department of Treasury to deal with the macroeconomic big picture. At the same time, as we've tried to tell these institutions, the big picture is made up of many smaller pictures.
Our picture consists of $550 million dollars of invested capital to date in three geothermal power projects which will sell their entire output of renewable electricity to the government of Indonesia under 30-year contracts.
Let me emphasize that if these were investments that involved no role by the U.S. Government, I would not be here before you today. However, two of these projects, called Patuha and Dieng, carry $265 million of insurance coverage against expropriation and contract abrogation from OPIC, which is owned by the U.S. Government. We paid many millions of dollars for these policies. If our situation is not resolved soon, our lenders will declare default on our loans and will force us to make a claim under those OPIC policies.
Page 51 PREV PAGE TOP OF DOC Other key points of these projects include the following: The projects involve no relationship with President Suharto or any of his family members. Our contracts were signed publicly in Jakarta in November 1994 in not only the presence of, but with the full support of late Commerce Secretary, Ron Brown. Indeed, President Clinton congratulated myself and CalEnergy at the time in Jakarta for winning this business for a U.S. company.
These investments do not constitute what Chairman Greenspan has called a moral hazard, because we fully assessed the economic and political risks in Indonesia and we took every precaution available. We structured our contracts to be denominated in U.S. dollars and guaranteed by the government of Indonesia. And we insured our investments through OPIC.
With full disclosure of these facts, the projects were financed by 12 international banks based upon credit ratings established by Moody's and Standard & Poor's with their obvious reliance upon the guarantee of the government of Indonesia, the same guarantee Secretary Summers is now saying will back U.S. involvement through the IMF.
All of our contracts with Indonesian Government agencies are in place, and all necessary consents and permits have been received. We spent over $550 million to date to build these power plants. One of these facilities is already complete and will begin operation in March, and the other two have been in construction for over a year.
All development and construction costs have been borne by our company at no cost to the Indonesian Government. The only time the government of Indonesia must expend funds is when the power plants are operational, at which point it will purchase and then resell the power.
Production of electricity from these indigenous, geothermal resources, which cannot be exported, will actually ease currency pressures by allowing Indonesia to export coal, gas, and oil in exchange for hard currency. These renewable energy projects provide significant environmental benefits also by displacing the emissions of significant amounts of greenhouse gases that are produced by burning fossil fuels.
Page 52 PREV PAGE TOP OF DOC Our primary concern for these projects was triggered by a January 15, 1998 statement by the IMF managing director, Michael Camdessus, on the IMF program with Indonesia, which states that in order to limit government expenditures, and I quote, ''development spending will be curtailed, including canceling immediately the 12 infrastructure projects that were recently postponed or placed under review.''
The statement raised an obvious and critical question for our company. Was our project one of these 12 canceled, or one that would presumably go forward? Hundreds of millions of dollars are riding on the answer to this question, and we sought to learn the answer immediately upon seeing the IMF statement. Amazingly, after dozens of conversations, no one in the IMF, the World Bank, the U.S. Treasury Department, the State Department, OPIC, the U.S. Embassy in Jakarta or anyone else we could find in the U.S. Government was able to answer this question.
It appeared that no one in the IMF had seen the list of 12 ''canceled projects,'' much less knew if, in fact, they were canceled. Indeed, the U.S. executive director for the IMF asked us, CalEnergy, if we had a copy of the list and if we could share it with her.
Other officials insisted that the words ''immediately canceled'' did not really mean that. One IMF official said our project was canceled, while others, in this same organization, said it was not. Worse yet, it seemed no one really cared.
We are entitled to the facts, and with the potential claim of $265 million of taxpayers' money at risk, I would have thought that the Treasury Department would want those facts. Yes, it's their job to worry about the big picture, but they can, and they must, deal with all the little pictures that make up that big picture.
Let me emphasize that abrogation of these contracts will trigger a liability by OPIC, and they've acknowledged such. This, in turn, would require reimbursement from the government of Indonesia to the U.S. Government, thus, ironically, increasing Indonesia's U.S. dollar obligations in a manner directly contrary to the IMF goals.
Page 53 PREV PAGE TOP OF DOC With a global economic system that relies on the sanctity of contracts, it seems unconscionable that the IMF and the Treasury would be parties to the abrogation of valid commercial contracts which are backed by sovereign guarantees.
IMF officials refer to macroeconomic issues and the big picture. They insist that they cannot assess individual projects and assure us that they had nothing to do with the projects referred to in their own public statement. Their message to us is clear, and I quote, ''You won't find our fingerprints on this.''
We've received assurances and lip service from the Treasury and the IMF, but they have yet to show that they truly understand or care about the implications of the potential $265 million OPIC liability. The refrain seems to be, and I quote a Treasury official, ''$265 million doesn't make our radar screen.''
What is frustrating for us is that everyone agrees that, if our facts are correct, we and the American taxpayer should not suffer this problem. It is inconceivable to us that the IMF, with the Treasury Department's approval, could negotiate and endorse a plan that called for the cancellation of projects without specific knowledge of the merits of the projects involved.
This, in effect, puts the IMF and Treasury Department in the position, either deliberately or through ignorance, of endorsing the abrogation of valid contracts with U.S. companies. Ironically, this action would decrease, if not eliminate, the fragile investor confidence in Indonesia that the IMF purports to be saving.
To call this failure sloppy would be polite. Indeed, it may well be symptomatic of what appears to be a poorly thought out and back-of-the-envelope bailout by the IMF and Treasury and may well explain some of the criticism the IMF has received for its actions to date.
This is but one story of what I call the little pictures that make up the big picture capturing the headlines. What are the problems and what are the solutions? Let me offer the following.
Page 54 PREV PAGE TOP OF DOC First, the IMF and Treasury should not be permitted to encourage or facilitate the abrogation of existing contracts that are insured against abrogation by the U.S. Government. This should be a condition of IMF and U.S. Treasury funding of bailout packages in any country.
Put another way, the Treasury Department, which is the lead U.S. agency that deals with the IMF, should support U.S. company-owned commercial projects in Indonesia and other countries, when to do so does not undermine U.S. and IMF goals.
Second, because the Treasury Department is largely footing the bill, it should take a more active role to oversee the activities of the IMF and the World Bank and coordinate with these institutions to protect the interests of the U.S. taxpayer in OPIC-insured projects.
Third, I believe that a more structured IMF support package should begin with borrower initiatives designed to increase the transparency in commercial transactions by imposing standard accounting and disclosure principles to ensure greater market discipline.
If greater banking reserve requirements and more stringent disclosure regulations had been in place several years ago, fewer investment dollars would be at risk today. In our view, imposing stringent international lending standards for countries now lacking those transparency requirements would do more to get to the heart of the problem than a prescription of financial orthodoxy, belt-tightening and higher interest rates.
Fourth, I would recommend that Congress support the Administration's request to increase the financial resources of the IMF, if the IMF and the U.S. Treasury Department publicly commit to ensuring that borrower countries uphold the sanctity of government-guaranteed contracts entered into by their sovereign government. Such contracts are the underpinnings without which international commerce is impossible.
Finally, I strongly encourage Congress to demand accountability of the IMF and Treasury. This accountability could be implemented in such a way as to allow the current support for South Korea, Thailand and Indonesia to go forward immediately. However, if certain congressional mandated changes to the IMF's transparency and secrecy are not made within 12 or 24 months, then the U.S. share of IMF funding would be immediately reduced.
Page 55 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
[The prepared statement of Mr. Sokol appears in the appendix.]
Mr. BEREUTER. Thank you very much, Mr. Sokol. It's a disturbing situation.
Next we'd like to hear from Mr. Marcus Noland, senior research fellow at the Institute for International Economics. And we see your chart up there and that will take some explaining. But welcome, we're glad to have your testimony.
STATEMENT OF MARCUS NOLAND, SENIOR RESEARCH FELLOW AT THE INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. NOLAND. Thank you, Mr. Chairman. It's an honor to testify before the joint meeting of these Subcommittees.
As you indicated in your remarks, I have submitted a written comment for the record, and so I will avail myself to your invitation to comment on points that have been raised by other people, in addition to the points raised in my written testimony.
My written testimony is organized into three parts. The origin of the financial crisis, what it means for the U.S. economy, and some ideas for the future architecture of the international financial system. I make four basic points.
The first is that events in Asia will slow the growth of the U.S. economy over the next couple years, and could increase the U.S. trade deficit by about $50 billion in the medium term, with much of this increase coming from trade with South Korea and Japan.
The effects will be experienced unevenly across the economy, however, with some sectors such as light manufacturing experiencing reductions in output, while other sectors in the non-traded goods parts of the economy, such as construction and real estate, are actually growing.
In this sense, it is similar to the experience of the United States in the mid1980's when you had a Rust Belt and a Sun Belt, except this time the effects will be smaller, maybe one-third to one-half as large.
Page 56 PREV PAGE TOP OF DOC Second, growing trade deficits with our trade partners will increase trade tensions, and this will pose serious challenges to U.S. policy, and I will invoke my visual aid later in my testimony.
Third, in the short run, we have little alternative but to deal with the existing international institutions, and that means bolstering the IMF, flawed though it may be.
However, in the long run, I think one can argue that the existing institutions are not optimal for dealing with today's world. The creation of a new insurance-based system of dealing with international lending, a more market-based system, would be advisable, while merging the existing World Bank and IMF, refocusing them, and probably downsizing them, would be desirable, as well.
I don't want to spend a lot of time on the first topic that I mentioned, the origins of the crisis. Basically, without going back to Genesis, I think you can trace the origin of this crisis to 1985, when a rapid appreciation of the Japanese yen started.
That set in motion enormous capital movements through Asia. The problem was that the financial systems that these big capital movements were flowing into were very rickety. We've heard extensive testimony already this afternoon on the state of the banking system in these economies, and I won't go into that in any further detail.
The trigger of the crisis last year was a slowdown in export growth, which was caused by precipitous fall in the price for some key export commodities. In particular, computer chips, automobiles, and ships which are very important to the exports of these countries, all experienced big falls in prices. This set in motion a series of market reactions that Professor Haggard mentioned, including falls in the stock market, followed by attempts by people to move their money offshore, which put pressure on the exchange rate pegs, and so on. These events bring us into the fall.
One thing that you mentioned in your opening remarks, and has been raised a couple times by other people, is the issue of moral hazard. The logic of the moral hazard argument is unassailable, and in fact, I will come back to it later in my remarks. I would argue, however, that the facts don't support an interpretation that suggests that moral hazard was a major cause of the current crisis.
Page 57 PREV PAGE TOP OF DOC Equity investors in Asia, a group which apparently includes myself as well as Professor Haggard, have taken an enormous hit. There's no question of bailing them out. We've already lost our money.
So when it comes to bailouts, you're essentially talking about bank lenders. If one looks at the volume of lending and the spreads on the loans that went to Asia over the course of 1996 and 1997, the spreads on those loans did not narrow immediately or even gradually after the Mexican bailout, as one would expect if it was essentially a moral hazard situation.
Instead, they narrowed early in 1997. Indeed, I think it was Secretary Summers who mentioned in his testimony, the private rating agencies, people like Moody's and Standard & Poor's, were actually increasing their ratings for Asia during this period.
The true cause here is not moral hazard. The true cause is simply lack of transparency and the fact the markets got it wrong. The markets fundamentally misevaluated the financial stability of these economies.
What does this mean for the United States? It means that we will probably experience an increase in our trade deficit on the order of $50 billion for the next couple of years. Much of this will be with Japan and South Korea.
The effects will be felt differently in different parts of the economy, and it will not simply be increases in imports, but there will also be falls in exports, as I think somebody mentioned earlier. We estimate, for example, that in the transportation equipment industry, there could be a reduction in exports on the order of 12 to 13 percent, and a fall in production here in the United States in that sector on the order of 3 to 4 percent.
At the same time, there are other sectors of the economy which don't trade internationally, and which tend to be interest-sensitive, such as construction, which will actually benefit from this crisis. So the effects will be felt differently across the economy.
Page 58 PREV PAGE TOP OF DOC Now, there is considerable research that suggests that as our trade deficit expands with individual countries, the United States tends to have trade frictions with those countries. This is where the Kindleberger spiral comes in. It is very, very important that as we deal with the ramifications of the financial crisis, the United States not close its market.
Trade and finance are related, and it is likely that because of the enormous change in relative prices that will occur because of the big devaluations in Asia, these countries will export more goods to the United States. It is very important that we do not close our market to those goods.
With this in mind, I attached in my testimony and brought with me this visual aid which is called a Kindleberger spiral. It's named after a retired professor at MIT named Charles Kindleberger, an economic historian.
You start at the very extreme edge of the diagram and it's January 1929. The diagram moves through 12 months of the year, like the 12 points on a clock. The volume of world trade is measured by the distance from the center. What that diagram shows is starting in January 1929, the volume of world trade absolutely imploded. In other words, that spiral spirals inward toward the origin. In a period of 4 years, between 1929 and 1933, the volume of world trade fell by two-thirds. That was due to competitive devaluations and by increases in trade protection, including increases in trade protection here in the United States.
I'm not arguing that 1998 is 1929. There are enormous differences. The point is simply that there are linkages between what you do on the financial side and what occurs on the trade side, and what you do as policymakers has enormous importance to the world economy and the U.S. economy.
What does this mean for the architecture of the international financial system? I'm going to criticize the Bretton Woods institutions. But before doing so, I think we need to step back for a moment and think about the world of the Kindleberger spiral. That was a very different world than exists today. In 1945, when the IMF and the World Bank were established, the world was characterized by enormous impediments to the flows of both trade and money. Today we have virtual universal current account convertability. That means that anybody in this room can take U.S. dollars, convert them into South Korean won or Japanese yen or Indonesian rupiah, go to those countries, purchase goods or services and bring them back to the United States.
Page 59 PREV PAGE TOP OF DOC In 1945, that wasn't the case. And the accomplishments of these institutions in creating an open, liberal world economic order should not be underestimated. At the same time, it is fair to ask are these institutions optimal for today's world, and I think the answer is surely ''no.''
The IMF has become essentially irrelevant from the standpoint of industrialized countries. It basically only now deals with developing countries and so-called economies in transition. And the crises that currently grip Asia, as Secretary Summers mentioned, are ones of structure, not macroeconomic imbalance. These are issues about which there is no particular reason to believe that the IMF has any unique expertise.
Likewise, the IMF's sister institution, the World Bank, was established for reconstruction of economics devastated by World War II. Over time, it has moved away from that role of reconstructing what were already essentially developed economies to promoting development in economies that have never been developed, and now in the Asian financial crisis, in the case of Korea, to providing short-run balance of payment support to an OECD-member country.
That is to say, in 1998, the division of labor between the IMF and the World Bank has become blurred beyond recognition.
Stephan Haggard argued that we need the IMF because we need it as a lender of last resort. Having a lender of last resort in a world where the prudential regulatory standards of financial systems elsewhere in the world are nowhere near those we have in the United States, is very dangerous.
This is where I think the moral hazard argument actually does have some force. So rather than extending the lender of last resort operation, we should create more market-based solutions.
In particular, what we want to do is have insurance-oriented solutions. If people want to lend, let them purchase insurance on their loans. From the standpoint of the borrowing countries, this will give them an economic incentive to provide transparency in the operation of their economic system, because by providing transparency and qualifying for insurance, they can borrow money at better terms.
Page 60 PREV PAGE TOP OF DOC At the same time, importantly from the standpoint of governments in lender countries like the United States, the existence of a public, transparent, insurance mechanism would make it much easier for you to say ''no''. If an institution in the United States wants to lend money in a foreign country, they can choose to pay a fee and have that loan insured. If they do so and the loan turns bad, they get paid off out of the insurance pool.
If they choose not to avail themselves of the insurance and the loan turns bad, then the U.S. Government is in a much better position to say that you have taken a commercial risk, you didn't avail yourself of the existing insurance mechanism, and that's the end of the storyno bailout.
That's in the long run. However, in the short run, we have to deal with the institutions as they exist. And in looking at the current situation, the IMF brings two things to the table when it negotiates with borrowing countries. It brings money, and it brings prestige.
With respect to money, as we have heard this afternoon, if the IMF had to do major programs with large borrowers, and the countries that are usually invoked are Russia and Brazil, it is possible that the IMF actually would become liquidity-constrained.
The other thing the IMF brings to the table is a certain degree of expertise and a certain amount of prestige. The U.S. Government not supporting the IMF at this point would be regarded symbolically as a significant blow to the IMF and could well hamper its ability to deal with borrowing governments.
In the end we have two problems, we have a long-run problem and a short-run problem. In the short run, I don't think we have much alternative but to support the existing institutions. In the long run, however, it is obvious that these institutions are not optimal for today's world and that we need to do a serious reassessment of how we want to proceed in the future.
Page 61 PREV PAGE TOP OF DOC [The prepared statement of Mr. Noland appears in the appendix.]
Mr. ROHRABACHER. [presiding] Well, thank you all very much.
As you can see, the Chairman had to step out for a few moments, and now I have the gavel, so I'm in charge. I'm sorry I missed some segments of the earlier hearing. I was trying to get back. We had some business on the floor.
I will ask a few questions and ask Howard if he'd like to ask a question as well, and Chairman Bereuter will be returning momentarily.
Is it Sokol?
Mr. SOKOL. Yes, sir.
Mr. ROHRABACHER. I couldn't help but think that when you were describing your situation in Indonesia, it sounded very similar to the S&L bailout that we had to go through here, in that it was just people were making across-the-board decisions. And decisions that were worth millions, tens of millions of dollars, were being made on a formula basis without really the direct scrutiny that perhaps would have saved the taxpayers billions of dollars in that particular bailout operation. I don't know if you know anything about the S&L bailout, but would you compare those two?
Mr. SOKOL. Just what I read.
Well, I think the issue is that, as in the S&L issue, you know, the baby often was thrown out with the bath water. And that is exactly the case here. There is not a single person familiar with our situation that we have spoken to, either in the U.S. Government or IMF or on the Indonesian side who does not agree that our project ended up in the wrong category and should be dealt with.
But there is just an absolute lack of willingness of those responsible through the IMF and the U.S. Treasury to take the time and deal with the situation. We've been dealing with this issue for now going on, well, 4 weeks. We've had dozens of meetings. I've been involved in literally tens of dozens of phone conversations with Treasury officials, all the way up to Secretary Rubin.
Page 62 PREV PAGE TOP OF DOC If Treasury would take one person somewhere in that massive staff, send them to Jakarta and say, ''Please sit down with IMF and with the Indonesians. If what this company has said is true, get this resolved.'' It would have been done weeks ago. The last conversation we had with Treasury was 10 days ago where they told us their most recent information is we are one of those canceled projects.
Within 12 hours of that conversation, we confirmed that was just absolutely not the case.
Mr. ROHRABACHER. Unfortunately, you are assuming that government is operating efficiently and with care, and that all these people really are concerned about the details. And what you really find in the higher levels of government is chaos and confusion, just like everywhere else.
And just to note that you had OPIC insurance, but shouldn't people who invest overseas or get involved with economic things over there, shouldn't they take their own risk in some way? Why should the taxpayers in some way be involved with your company's risk, when if your company was making an investment, let's say, in developing the energy resources in Californiawe have some geothermal resources
Mr. SOKOL. We're your largest supplier of geothermal energy in California.
Mr. ROHRABACHER. OK. Well, we're not guaranteeing you there.
Mr. SOKOL. And I can tell you, we would not have invested in Indonesia if we'd not been able to obtain OPIC insurance, because the transparency issues were absolutely clear to us.
Mr. ROHRABACHER. Well, I think there's something to be said about, especially now, with this $18 billion that people are talking aboutor $14, is it $14 or $18 billion? Fourteen plusbut these billions of dollars that people are talking about, maybe there's a second thought about getting us so entangled with the economies of other countries in which we are accepting risk for private companies.
Page 63 PREV PAGE TOP OF DOC Mr. SOKOL. If I might, I would defend OPIC only in the sense that OPIC responded to this issue immediately.
Mr. ROHRABACHER. Yes.
Mr. SOKOL. They stepped up with us. They helped us arrange meetings with Treasury, et cetera. If it wasn't for the involvement of the IMF-bailout package, there is no doubt in my mind, OPIC would have worked this problem out with us with the Indonesian Government at no cost to OPIC or ourselves.
Mr. ROHRABACHER. Well, George Shultz had an op-ed piece in The Wall Street Journal yesterday, suggesting that the IMF being there with the hope of bailing everybody out and making everybody whole prevented the type of businesslike approach that would have prevented the crisis from spiraling out of control, which is somewhat what you're talking about.
Mr. BERMAN. Would you yield on this?
Mr. ROHRABACHER. I certainly would.
Mr. BERMAN. Where is the IMF talking about bailing everybody out and making everybody whole?
Mr. ROHRABACHER. George Shultz talked about that yesterday, and apparently the former Secretary of Treasury and the former Secretary of State know the discussions that are going on at higher levels of government and higher levels of the financial community. Some people think the IMF is going to come back and bail people out.
Mr. BERMAN. Well, I mean, we heard testimony and from reading the newspapers we know, it is not helping corporations. They are not bailing out corporations. As far as I understand, they are not bailing out either depositors ofin banks that have been, or the governments who are paying the depositors of the banks. I mean, as I gather, it's
Page 64 PREV PAGE TOP OF DOC Mr. ROHRABACHER. It must be a pretty elite group that's getting this $14 billion.
Mr. BERMAN. Yes. Well, groups aren't getting the $14 billion. I thought the $14 billion isfirst of all, the $14 billion is going to the IMF to be a replenishment of money already spent and to be available in case this contagion spreads. But the money that's gone from the IMF is going into the public treasuries and reserves. Well, let's ask the experts.
Mr. ROHRABACHER. OK, reclaiming my time and getting into where the money is goingnow, you do business in Indonesia and you said you would never have invested in Indonesia without these government guarantees. Am I hearing you correctly?
Mr. SOKOL. Without the government of Indonesia guaranteeing the contracts and without OPIC insurance, we would not have invested there. That is correct.
Mr. ROHRABACHER. Alright. And would you say that the government of Indonesia is a pretty well, honestly-run government?
Mr. SOKOL. In the dealings we've had with them, they've been very
Mr. ROHRABACHER. You don't have to answer. I don't have to put you on record on that.
Mr. SOKOL. I do want to do future business in Indonesia.
Mr. ROHRABACHER. I do understand that I might be putting you on the spot. Let me put it this way. I understand there is a rumor going around that the Suharto family may have taken as much as $20 billion out of the Indonesian economy over a given period of time.
Now, I would suggest this. Before we talk about putting $14 or $18 billion into the financial institutions in the Pacific, that we pass a law or do whatever it is, establish the policy that we will track down the financial resources of the Suharto family, we will throw them in jail and that we will use their billions of dollars in this bailout program, rather than the taxpayers' money.
Page 65 PREV PAGE TOP OF DOC And the Suharto family isn't the only family of crooks in the Pacific who have helped bring about this crisis. If it's our $14 billion that's going to make it, well, it seems that that $20 billion maybe helped push this economic crisis into being in the first place.
The chairman is coming just in time to save you.
Mr. Suharto is about to be thrown in jail. Thank you very much.
Mr. BEREUTER. [presiding] That was your question?
Mr. BERMAN. No, no.
Mr. BEREUTER. I'll catch up then and call on Mr. Berman for his questions.
Mr. BERMAN. OK, great.
I take it, Mr. Sokol, you have a very specific problem, but this is more focused on the other end of the table. Because of other appointments and all of this, I missed both of your testimonies. I'm going to take the testimony and read it, but I have a quick sense that neither of you were saying replenishment, Congress doing this is a bad idea. I take it neither of your conclusions is that we should not do this. Is that right?
Mr. SOKOL. That's correct.
Mr. BERMAN. But I guess it was Mr. Nolandjust quickly looking through this, and this relates to Mr. Rohrabacher's questions. Let's go through the different classes of people who I think in some principled senseI'm troubled by the notion, did they come out whole. And let's see who they are and who they aren't, because I don't know about former-Secretary Schultz's column; I didn't see it.
But it is not my understanding that everybody who has invested in or lent money to or bought shares in corporations in these countries are coming out whole. It's that a very limited segment of people are, and maybe either of you or both of you could just talk about that universe of people. Who's getting hit and who isn't?
Page 66 PREV PAGE TOP OF DOC Mr. HAGGARD. Maybe we can go through it segment by segment.
Mr. BERMAN. Yes, that's what I'd like.
Mr. HAGGARD. Let's start with the companies, the nonfinancial companies in the countries in question. We know that they are not being bailed out. They're going through substantial restructuring; there are bankruptcies in all of these countries that are going to go up significantly.
The IMF is explicitly prohibited from and does not offer advice that, these companies should be bailed out by the governments in question.
Mr. BERMAN. And the stockholders in those companies have taken a hit.
Mr. HAGGARD. Both the foreign shareholders and the domestic shareholders have taken substantial losses.
Mr. BERMAN. Including the mutual funds that bought stocks in all this.
Mr. HAGGARD. Precisely. Now when we move to the financial sector, it's a little bit more complicated, and this goes back to Congressman Rohrabacher's parallel between the S&L bailout.
For reasons of averting systemic risk and collapse of the entire financial system, the governments in the country in question have been forced to bail out the banking systems in the sense of insuring depositors; that is, ordinary citizens who have deposited their money in these banks, just like our FDIC does in this country.
So, those governments have been forced to bail out the depositors in these institutions to avoid more runs on those banks which could bring down the entire banking system.
Mr. HAGGARD. And the shareholders in those banks
Mr. BERMAN. Let's stay with the depositors for a second. You're saying the depositors in those banks, much like our depositors during the savings and loan crisis, are being made whole or being made whole up to a certain amount.
Page 67 PREV PAGE TOP OF DOC Mr. HAGGARD. Being made whole up to a certain amount, which varies by country. And there's a debate about the level to which the FDIC should insure depositors in banks, and to what extent depositors should be called on to monitor those banks.
So, the governments are being forced to inject liquidity into the banking system to guarantee that there aren't runs on those financial institutions, and that's a prudent thing to do.
Mr. BERMAN. Now, let's talk about the shareholders of the banks.
Mr. HAGGARD. Now, in all of the countries in question, there have been significant bank closures. Merchant banks in Korea and finance houses in Thailand have been completely shut down, and all of the investors in those institutions have essentially lost their equity.
Now, if we turn to the foreign side, you've already captured this in your question. Any of the equity investors on the foreign side who own through a pension fund or through a mutual fund, or bought ADR's on the U.S. stock exchange, their loss has been taken in the form of the decline in the value of those assets.
And now, indirectly they may benefit from this bailout if those stock prices rise back up, but they really hold the risk.
Mr. BERMAN. But even that is an indirect relationship. The bailout is not going to those companies. It is simply that people have more confidence in those equities because of the bailout.
Mr. HAGGARD. Exactly. And keep in mind that during financial crises, perfectly solvent companies can also experience distress. That's exactly the nature of a financial crisis. It's not just weak investments, but there's a contagion from the weak investments into perfectly strong companies.
Page 68 PREV PAGE TOP OF DOC Now the last group here, running down the roster of those who have benefited or not benefited, are the commercial banks and the bondholders. And here's the area where I think the final hit has not been taken. As in the Latin American debt crisis, there has been an insistence and an effort on the part of the commercial banks and bondholders to have those bonds and loans repaid at their full face value.
Mr. BERMAN. Wait. The commercial banks in the countries or the commercial banks that lend money to the
Mr. HAGGARD. The foreign commercial banks.
Mr. BERMAN. The foreign commercial banks. That's narrowed it, then, OK.
Mr. HAGGARD. Now, my view is that we'll see over a period of the next 6 months or a year a process of workout for some of those loans, and in the case of the bondholders, where those loans will be marked down to market, their actual value will be accounted for in terms of what they're really worth, not at the $1 on the dollar value. At that point, the banks will take losses, as they did in the Latin American debt crisis.
Mr. BERMAN. Now, if I could just stay with this last group of people, the group that you're saying is the one group that one can make a case haven't really taken a hit. Larry Summers testified that the Financial Times says there was $20 billion in foreign bank, European bank losses, from this crisis. So there are foreign commercial banks that apparently are getting hit, although I don't know if that's on loans to the domestic banks or if that's on loans to foreign businesses.
I read the biggest bank in Germany just made a major allocation for loss as a result of this. The short-term obligations that were owed have been turned into long-term obligations, apparently at lower interest rates, and with, of course, a little level of uncertainty that if you could get it in 30 days or 90 days, you'd get it.
Page 69 PREV PAGE TOP OF DOC If you're waiting 3 years, there's some discount for the who knows what's going to happen and will I really get it in 3 years. So should those be factored in to the notion of hits people are taking?
Mr. HAGGARD. Well, some of the hits they're taking, for example, with the Deutsche Bank's announcement, concern loan loss reserves. The bank has essentially set aside funds for the eventuality that some of the loans they carry on their books will ultimately prove nonperforming.
The process through which they get to be declared nonperforming is a bargaining one, which is now very ad hoc and takes place between a group of the largest banks and the country in question. And that's what the negotiations in New York were about last week.
Mr. SOKOL. Congressman, I actually am in favor of funding IMF in this request, assuming transparency to the U.S. Congress can be made, because they're unaccountable.
The one point I think is that you have to look at, as a businessman in Indonesia, every economic participant in South Korea, Indonesia or Thailand benefits by the IMF bailout. IMFamentally, those economies will be stronger with it than without it. So there are elements of the economy that you can segregate
Mr. BERMAN. Investors in canceled projects aren't benefiting too much.
Mr. SOKOL. It is undeniable that if $43 billion is put into Indonesia and $50 or $60 billion in South Korea, that economy is stronger than without that money.
Mr. BERMAN. Sure.
Mr. SOKOL. And that's the point.
Mr. BERMAN. That's the point of the bailout.
Mr. SOKOL. Currencies will strengthen, and therefore, every borrower in the Indonesian economy, particularly local borrowers who borrowed in dollars but have rupiah, if the IMF package causes the rupiah to strengthen, they will pay more of those loans back than they would if they didn't.
Page 70 PREV PAGE TOP OF DOC That's not necessarily a bad thing. I think that what is trying to be created is a support mechanism of the economy. But to say that no one has benefited directly, whether they're nongovernment or not is, I think, inaccurate. They clearly will be.
Mr. BERMAN. Thank you. My point wasn't who will benefit from the doing of this. My point was the notion that if this is done, no one, none of the investors, lenders, creditors take a hit; that that just isn't quite so. And that was the only point I was trying to make.
Mr. BEREUTER. Thank you. Sorry I had to leave to deal with the North Korean problem.
Mr. Sokol, I wanted to put it in starker terms, not only to make sure I understand, but mostly to just lay it out so the public understands it in the simplest terms, if possible.
You have had strong encouragement to be involved in the business enterprises in Indonesia by geothermal projects. You mentioned Secretary Brown and the congratulatory message from President Clinton. You used the OPIC guarantees. Two of the three projects in question here had those guarantees on it. None of those projects had direct investment from the Indonesian Government. Am I right so far?
Mr. SOKOL. That's correct, yes, sir.
Mr. BEREUTER. And two of the three have loan guarantees. In fact, if there is a required payment from OPIC, the U.S. Government goes back after Indonesia trying to get that paid for. The renewable energy that will be exploited by these projects, one of which comes online in March already, can be used by the Indonesian Government to facilitate the export of nonrenewable energy resources to help in their economic situation.
What am I missing, if anything, that's relevant? How could you have taken any more responsible action? How could you have protected your investment and pursued business abroad for the benefit of your employees? What would you do differently if you had to do something differently? I'm struck that there's not much that you could have done.
Page 71 PREV PAGE TOP OF DOC Mr. SOKOL. I frankly don't have a good answer. I mean, our board did make a decision several years agowe also have investments in the Philippines, all of which are insured by OPIC as wellwe made a decision that in nontransparent economies of the world where we invest, we won't invest unless we can get government sovereign guarantees, as well as OPIC insurance.
Mr. BEREUTER. I'm concerned not only about your situation, but the precedent that it establishes, the negative precedent for other people that might want to be involved.
Mr. SOKOL. It's a huge precedent for the U.S. Congress, because what was testified to before is you don't have to worry about us giving more money to the IMF because they're going to get a guarantee from the government.
We have a guarantee from the government of Indonesia. The government of Indonesia is prepared to honor it. They told us that repeatedly up until this week. But it is Treasury and IMF's insistence in dealing with the Indonesian situation in such an oblique way that they are interpreting that they are being directed to abrogate a governmental guarantee, which makes no sense to them for a whole lot of reasons, including a final downgrade from Moody's and Standard & Poor's to not even junk bond status.
Mr. BEREUTER. Now you heard from the Secretary, at least implicitly in his comment, that they don't think they should intervene when the Indonesian Government has made a decision on a project. At least that seems to be their attitude.
And you're saying the Indonesian Government is prepared to go ahead and honor those contracts, knowing it's in their best interest, or for whatever reason
Mr. SOKOL. Absolutely.
Mr. BEREUTER. But they interpret the IMF or Treasury or both as suggesting to them that they ought not proceed with those kinds of projects, is that correct?
Page 72 PREV PAGE TOP OF DOC Mr. SOKOL. Yes. The process is one of last summer, right after the currency crisis began, the IMF put pressure, probably appropriately, on Indonesia to look at all of its infrastructure spending.
The government of Indonesia began a review process of over 240 projects, most of which the government was funding themselves directly, many of which were involved with family members.
Mr. BEREUTER. You mean
Mr. SOKOL. I'm sorry?
Mr. BEREUTER. Go ahead.
Mr. SOKOL. And our projects were on thethe Dieng projects on the continued list, the Patuha project was put on the reviewed list. This was September. We immediately met with Indonesia and pointed out Patuha has been under construction for a year, it's financed, it's got the guarantees. They moved it November 1st to the continued status.
As well as doing that, they moved a number of other projects. As we understand it, when the IMF showed up in early January, they made the point that several of those projects that had been moved in November involved family member involvements, Suharto family member involvement, and they wanted that fixed.
The easiest way for the Indonesian Government to fix that under the pressure of the IMF was to undo the Presidential decree of November 1st, which unfortunately swept our project into the mix.
Everyone agreed, including the IMF representative, the Treasury Department, and the State Department, that that was a mistake. The problem is no one is prepared to deal with the mistake. We have talked to the Indonesiansand again, the Indonesian Government is a large body, but those involved with these projects have said to us, ''We don't have a problem moving your project forward, but we don't want to be publicly slapped by the IMF, because they're the ones that told us to undo these.''
Page 73 PREV PAGE TOP OF DOC The IMF tells us, ''No, we didn't tell them to undo those. We just told them that if they proposed many of those projects to us, we'd stop those.'' Well, there's a confusion process here that could be easily rectified if someone would actually attempt to rectify it.
And that's the way it works out.
Mr. BEREUTER. You understand some of the things that I and others have been involved in to try to bring a rational decision where people seem to agree. Thus far, we haven't seemed to have the final impact we'd like on the situation.
I'm concerned about the precedent, not only your situation, but the precedent it establishes for American business. And as you said repeatedly, the big picture is made up of the small picture. And I think there is a responsibility in Treasury to try to avoid taking losses when it's not only not necessary, but it's when it's contrary to what seems to be the best interest of Indonesia and their program.
You heard the testimony, and I invited the other gentlemenI think Professor Haggard, for exampleas I would invite you, Mr. Sokol, specificallywhat, if anything, in the previous testimony from the two Secretaries would you take exception to, or want to caveat?
Mr. SOKOL. I'd make just one quick clarification and one other point. And that is the clarificationSecretary Eizenstat made a comment at the end that CalEnergy hasn't filled out its advocacy questionnaire even though we are working on their behalf.
If I can make a point how absurd that is, we met with Commerce in the middle of December. Commerce faxed to us this last weekend, Friday afternoon, a two-page advocacy questionnaire. And I have to testify we have not returned it yet. It took them 45 days to get it to us. They'll have it tomorrow. It is a form questionnaire.
We've been dealing with members of State all the way up to the ambassador in Jakarta numerous times. I've had personal conversations with Secretary Rubin. We've met with dozens of Treasury officials, IMF and World Bank officials on this. And for the closing remarks to say that we haven't filled out a questionnaire I think is indicative of the way this issue is being dealt with.
Page 74 PREV PAGE TOP OF DOC The other point that I'd like to make about IMF activities in general, because we do agree that the Asian currency issues and the economy issues have to be dealt with, that there has to be transparency and responsibility to these agencies.
The one thing we've learned in the last month is that the IMF reports to no one. They are not unwilling to tell you that. They are not unwilling to be arrogant in their attitudes, because they have no responsibility to anyone until they need money.
I think the opportunity exists. You've heard testimony that the new architecture has been under review and work for 4 years. We've asked for copies of the status of those documents and the ideas that in 4 years must be numerous, and we can't find them.
I think it's Congress' opportunity to force upon their agreement to re-up the quota share of IMF, that if within 12 months there is not a new architecture presented that will be used in the future, that the quota share drops back down. That way, you've dealt with the immediacy of the problem, but you put an obligation on an organization that today has no responsiveness to anyone.
Mr. BEREUTER. Thank you. That's the way it looks to me, too.
Professor Haggard, you talked about the excessive austerity that perhaps is being applied. Do you say that in part related to the fact that the IMF is dealing with countries that are not the traditional basket-case clients, that did not have fiscal problems, for example? That the problems were in the private sector in those countries?
Is that a part of austerity that you're concerned about, or is it a broader concept that you think in general that the program of the IMF imposes excessive austerity which has negative consequences? I want to ask you to answer that question. I know that you've got to leave in a short period of time. We want to release all of these gentlemen. But after that question, I will turn it to Mr. Sherman. He'll have the last questions of the day.
Mr. HAGGARD. The issue raised by Mr. Sokol is part of the issue of austerity, because these projects were delayed in part to meet specific fiscal targets.
Page 75 PREV PAGE TOP OF DOC And it should be noted that in both Korea and Thailand the governments were called on to generate fiscal surpluses of about 1 percent of GNP at a time when the economies are clearing undergoing substantial distress.
Mr. BEREUTER. These are projects the government had no contribution toward?
Mr. HAGGARD. Most of the projects on the list that Mr. Sokol refers to are basically projects that had been slated to go forward that involved significant government expenditure on the part of the government of Indonesia.
Mr. SOKOL. All 247 projects.
Mr. HAGGARD. And so basically, this was part of the demands on the part of the IMF that there be fiscal adjustment.
Mr. BEREUTER. I'm just saying in these two, three projects there was no actual government input, dollar input or rupiah input.
Mr. HAGGARD. I can't say for these specific projects, but that was certainly the case in the other projects.
Mr. BEREUTER. Well, that's the stipulated situation, at least.
Mr. HAGGARD. My concern about the fiscal adjustment process is really twofold. One is that during financial crises, where you have a banking sector which is subject to substantial strainrickety, I think was the word that Marcus usedthen you may be compounding those financial problems and financial distress by overdoing fiscal austerity. And there should be a little room to provide the stimulus to the economy in the face of the other shocks that are taking place.
The other issue, I think, is that there are substantial humanitarian concerns that the United States has with respect to this crisis. That's why the issue of worker rights is on the table. Is this austerity resulting in undue unemployment, unnecessary unemployment, excessive unemployment that may have some political or social manifestations which are adverse to American interests?
Page 76 PREV PAGE TOP OF DOC That's why I suggested with respect to fiscal adjustments that they're undertakenand I think the IMF should be urged in this regardwith due attention to retaining the delivery of important social services and guaranteeing and providing an adequate social safety net for those workers that are displaced.
And this is something that most of these countries have been very poor on up until this time, and this might be the moment to develop some of those mechanisms.
Mr. BEREUTER. Professor Haggard, thank you very much.
The gentleman from California, Mr. Sherman, you'll have the last set of questions. If you could ask your question, if any, for Professor Haggard first, it would be appropriate, if you have any.
Mr. SHERMAN. I'd like to put this all into context. We in the United States have much higher labor costs than most of the world. We also are the place where capital feels most secure. And naturally, the owners of capital would like to link their capital with the cheapest labor.
They've done this in part by obstructing in the U.S. Congress efforts for effective control of our borders and effective control of illegal immigration, because they want to unite their capital in the United States with cheap labor, no matter how it arrives here.
But the greatest approach that capital takes is to try to take the capital to where the cheap labor is, instead of bringing the cheap labor to where the capital is. The problem with this is that capital does not feel fully secure in countries run by murderous kleptocracies like Indonesia or even facing the crony capitalism in South Korea.
They also don't feel secure because of the military threats that may exist against this or that country or the instability that may exist in this or that country. So they come to Congress and they say, ''We want cheap labor. We want to deploy our capital where that labor is cheap; and we want the U.S. Government and the U.S. taxpayer to make sure that our capital is as secure in these other countries as it can possibly be.''
Page 77 PREV PAGE TOP OF DOC And we end up with a situation where South Korea just last week is able to borrow money at 250 basis points above LIBOR, while businesses in my district are paying 5 points over prime.
Bankers aren't stupid. They know that the total risks in South Korea are greater than the risks of lending to good, well-run businesses in my district. They say ''no'' or ''pay more'' to the businesses in my district and yours, because they know that there is some risk with small business loans, and if that risk is realized, the IMF will not be there to cushion the fall.
But if the risk they assume is one where they are cushioned, they are happy to take the risk, and as a result, capital costs more in my district than it costs in countries still suffering from crony capitalism.
So I guess it's our job to go back to our districts and explain to the small businesspeople why they're paying 5 points over prime and we're using U.S. tax dollars to make sure that countries in Asia are borrowing money for the 300 or 400 base points less.
We also have to go back to our districts and explain why countries that have used predatory practices to take over the textile market, consumer goods and steel, should be bailed out and helped at a time when they are not willing to allow the transparency in their own economies that would allow us to get a fair share when we are trying to export.
So, we have to bail out those who have displaced our goods and have no access when we try to get into markets in these Asian countries. Now, I know we probably would have difficulty getting there now, but even if our dollars are successful in turning the situation around, you can be sure that crony capitalism will keep U.S. exports out of the very countries we are being asked to help today.
So, we have to go back and explain to our workers why we're bailing out places that have displaced their jobs. So OK, those are questions I can answer if I go back to my district.
Page 78 PREV PAGE TOP OF DOC But I have a real tough one here, and I felt that having an educated panel would be helpful with the really tough question. And the tough question is, why include Indonesia? One option available to this Congress is to provide the $18 billion subject to a requirement that the U.S. representative at the IMF vote against any help for Indonesia.
Now, why consider this approach? An argument can be made that the U.S. and world economy cannot tolerate the collapse of all of Asia. I'm not sure that if this were just an Indonesian crisis, we'd even be here today. I realize Japan and Europe have some exposure in Indonesia, but it shouldn't be front page news day after day.
Outside of Europe, there are two very important island nations, Cuba and Indonesia. If Fidel Castro were dangling by a hair, if there were the risk of upheaval that could sweep away institutions in Cuba, I don't think we'd be here talking about how to bail Fidel Castro out.
Yet here we are talking about bailing the Suharto family out. We put in the money, as I know Mr. Rohrabacher pointed out. This family does almost nothing. We don't get democracy in Indonesia. We don't get the resignation of President Suharto. We don't get withdrawal from East Timor.
I want to make sure that East Timor is recognized in these hearings. We are ensuring that the Indonesian Government remains strong enough to keep its boot on the neck of a country that it conquered a couple decades ago.
And finally, of course, there is no requirement that the Suharto family refund any of the money that they've stolen. I'd like our panel to address what would be the outcome if we provided the money with an instruction to veto any help for Indonesia until we have democracy, resignation, withdrawal and refund. That is to say, democracy for the people of Indonesia, resignation of President Suharto, withdrawal from East Timor and a refund of the ill-gotten gains of the Suharto family.
Page 79 PREV PAGE TOP OF DOC Is there any reason why a country dedicated to human rights shouldn't adopt that policy? And finally, just to make the question more difficult, if we bail out Indonesia, are we just going back to the future? That is to say, are we ensuring another 10 years of kleptocracy and repression? What hope do you offer that the policy of business as usual, IMF bailout, is going to bring democracy to Indonesia and independence to East Timor?
Mr. BEREUTER. That's a question Mr. Sherman might have asked to the previous panel, but if any of you want to volunteer, you're welcome.
Mr. HAGGARD. Let me start with a legal answer, which I know you won't find satisfying. But that is that the IMF is owned by its members, and I think it's very difficult, just on legal grounds, for us to say country x can't borrow. It's certainly OK for the executive director of the United States to oppose a given loan.
Mr. SHERMAN. Wait a minute. We can vetowe've got the 17.9 votes. It takes 85 percent majority.
Mr. HAGGARD. Sure, you can do that.
Mr. SHERMAN. Is there some great moral principle of international economics that says we can't veto on the basis of human rights, on the basis of democracy? We can't protect people in East Timor; we can only protect bankers?
Mr. HAGGARD. No, but let me make two more substantive comments here.
The first is that by withholding funds from Indonesia, precisely because of the nature of the political system, those who are going to suffer most are ordinary Indonesian citizens, not the government itself.
The second substantive response is that the political situation in Indonesia itself is extraordinarily delicate, and we want to be cautious about how we approach trying to promote political change there.
Page 80 PREV PAGE TOP OF DOC As the elections in last May demonstrated, and of course, going back to the events in 196566 where upwards of 500,000 people were killed in various forms of communal violence, we know that this is a country which has a delicate social balance. And certainly, we don't want to see the crisis escalate into a renewal of those types of tensions.
Moreover, we have to keep in mind that while I wouldn't call Suharto a moderate, there also are military factions that are quite willing to step into the situation and exploit the opportunity that might be provided by certain types of social unrest that might occur there.
I think our interest in this case is certainly to encourage democracy and the promotion of democracy, but the instrument for doing it is not, in my view, through withholding funding from the IMF. But rather to do much of what we're doing now, encouraging the development of NGO's from the bottom up through AID; encouraging the Indonesian Government to live up to its own constitution, for example, by making elections, which they themselves run, more competitive; allowing parties to compete on a more equal footing; by observing constitutional procedures with respect to the succession. These are all legitimate things for the American Government to press.
The question is whether the IMF is the mechanism for doing that kind of thing. And my view is it's a crisis management institution and not the body through which we send those types of signals.
Mr. BEREUTER. Mr. Sherman, I think we should conclude. Thank you very much, thank you, Professor Haggard.
Mr. HAGGARD. Thank you very much, Mr. Chairman.
Mr. SHERMAN. I do want to comment that that was simply an effort to get an answer here. I'm by no means sure that I'm going to make that proposal formal.
Mr. BEREUTER. It was a good response, if I may say so.
Page 81 PREV PAGE TOP OF DOC Gentlemen, thank you very much for your patience today. There's a lot we have yet to digest from your testimonyand a lot of actions we need to take on the basis of your information today and the previous panel. I do want to thank you for your time. It was important to the Subcommittees.
I would ask unanimous consent that a statement on the part of the North American Export Grain Association and a letter addressed to the two Subcommittee chairmen by the Agriculture Coalition for Fast-Track be made a part of the Subcommittee's hearing record. Without objection, so ordered.
[The abovementioned statement and letter appear in the appendix.]
Mr. BEREUTER. The Subcommittees are adjourned.
[Whereupon, at 5:14 p.m., the Subcommittees adjourned subject to the call of the Chairs.]
A P P E N D I X
Insert "The Official Committee record contains additional material here."