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Committee on Financial Services

United States House of Representatives

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STATEMENT

PROFESSOR JEROME I. LEVINSON,

DEMOCRATIC APPOINTEE CONGRESSIONAL ADVISORY COMMISSION

ON INTERNATIONAL FINANCIAL INSTITUTIONS BEFORE THE COMMITTEE

ON BANKING AND FINANCIAL SERVICES, MARCH 23, 2000

I am grateful to the Committee for giving me this opportunity to testify today in connection with the Majority Report and dissenting statements, including my own, of the Congressional Advisory Commission. The Majority Report and dissenting statements are available to all who are interested. They are lengthy documents and I will not try and summarize them in their entirety. Rather, in this statement I will deal only with those aspects of the Majority Report and dissents that I believe have not been adequately understood.

The central issue which was before the Commission, as I see it, was how to assure that the international financial institutions (IFIs), as defined by the Congress, could contribute to self sustaining economic growth in the international economy with a greater degree of equity in the distribution of the fruits of that growth than is presently the case. Without that equity, there is no possibility in this country of building a broad based coalition in support of the international trade, investment and financial system of which the IFI=s are a central part. And, without that equity, that system will surely lose support as well in the other member countries, developed and developing, of these institutions.

It seemed to me that the Congress, by including the World Trade Organization (WTO), for purposes of this Commission, in the definition of IFI=s, recognized that the architecture of the international financial system had to be considered as an integral part of a system of trade, investment and finance; in the era of globalization, the traditional way of viewing the separate parts of that system in water tight compartments was inadequate.

Understood in this context, there were two overriding issues with which the Commission was confronted: first, whether access of developing countries to the private international financial markets rendered irrelevant (a) development finance by the World Bank and regional development banks, and (b) the traditional role of the International Monetary Fund (IMF) as an intermediary in resolving periodic financial crises, as well as the newer tasks with which it has been entrusted by its member countries: overseeing the transition economies of the former Soviet Union and Eastern Europe and the market opening initiatives of the developing countries. Second, whether we are to continue on the present two track path of the international economy, a rule based system for the protection of corporate property rights and no enforceable protection for core worker rights and the environment.

With respect to the first issue--whether development finance has been rendered irrelevant for countries which have had access to the private financial markets-- the Majority would, for those countries, eliminate access to development finance from the World Bank and regional development banks. The World Bank would discontinue all finance--whether grant or loan--in Asia or Latin America. In those areas, countries would rely on the regional development bank for development finance (grant or loan), but only those countries with a per capita income less than $4,000, and without access to the private financial markets, would be fully eligible for financing. (Countries with $2,500 per capita income would have reduced access). Financing would be available on a proposed grant basis for infrastructure and poverty reduction; structural adjustment programs would continue to be financed on a loan basis.

The World Bank, or, as the Majority propose, renamed the World Development Association (WDA), becomes a super-development agency for African countries, at least for such time as the African Development Bank is judged not to be capable of assuming responsibility. Under this proposed scheme, the WDA ultimately becomes a source of technical assistance, a research agency for solution of previously insoluble problems, such as tropical diseases afflicting Africa, and a disseminator of best development practices. In Latin America, the only countries eligible for financing (of whatever nature) are the Central American countries, less Costa Rica, Haiti, Bolivia and Paraguay. The other countries are ineligible for per capita income reasons or because they have recourse to the private financial markets.

Neither the World Bank, however renamed, or the Inter-American Development Bank (IDB), on this basis, can survive. We should face squarely the fact that what is being proposed is not reform, but demolition of these institutions. The great strength of the World Bank, whatever disagreement may exist over specific policies, is its universal character. It is the one forum where all developing and developed countries discuss development issues related to a concrete issue: development finance. Without that finance, the World Bank becomes another United Nations Development Program (UNDP). It is unrealistic, without development finance, to expect it, as a source of technical assistance, to have the same credibility. Both James Wolfensohn, President of the World Bank, and Ernest Stern, former Executive- Vice-President of that institution, were explicit on this point. And it is difficult to see why the Areformed@ World Bank is going to be more successful in addressing public health problems and research in Africa than the World Health Organization (WHO).

Similarly, the IDB arose originally as a reaction to the World Bank priorities. That difference, to a very large extent, no longer exists. On a regional level, however, the IDB is a truly regional development finance institution. Without that function for the great majority of its countries, it loses its reason for being. Like the World Bank, politically, and realistically, it will increasingly become irrelevant for the region. The IDB cannot survive as the truncated organization proposed by the Majority.

The Majority does not believe in the legitimacy of development finance. For them, there is no difference between development and commercial financing. Hence, if a country has access to the private financial markets, there is no basis for its continued access to the development banks for development finance. I believe this is a mistaken view. Development finance is fundamentally different from commercial bank financing. Mr Wolfensohn testified from his own personal experience as to the difference between the two:

AWhen we go in from the [World] Bank we go in on the basis of trying to look at what=s happening to the country and what=s happening to the people in the country and what=s happening to social stability and what=s happening on issues like governance, on openness of financial systems...Can you imagine the head of Goldman Sachs or Merrill competing for business, going in and talking to them about whether they should have a bigger education program?@

Moreover, access to the financial markets, over the past twenty five years, has been highly volatile. The development banks provide a reliable source of financing for high value projects and programs, particularly for human capital investment in health, education and technology related programs and projects. In times of financial crisis such financing becomes particularly invaluable. For example, in Brazil, in 1998, the IDB coupled its financing related to the then financial crisis, with a commitment by the Brazilian government, in contrast with past practice, to maintain an agreed level of investment in the education and health sectors.

Development finance provides both a qualitative difference and a balancing element to the high volatility of the private financial markets. At present levels, for both the World Bank ($15-20 billion per annum) and the IDB ($9 billion per annum), the annual lending programs are self financing from loan repayments and earnings. They require no additional capital increases. Yet, the Majority proposes to abandon this self financing mechanism and substitute for it grant financing, which is subject to the fiscal and political uncertainties of member governments. The only reason for doing so, in my opinion, is to undermine and, ultimately, abolish the development banks as a reliable source of development finance. The Congress may wish to endorse the Majority proposal, but there should be no uncertainty about what is involved: the abandonment of that cooperative effort at development that these institutions, with all of their deficiencies, now represent.

The crux of the difference between the Majority Report and the Joint Minority Statement (I filed a separate statement in addition to signing the joint minority dissent) with respect to the IMF is whether it is desirable for the international financial community--debtors and creditor banks and countries-- to have a trusted intermediary to do two things: intervene with an agreed program in times of financial crisis--and provide a continual source of economic advice and counsel to member countries on macroeconomic issues. The Majority makes automatic for pre-qualified countries, after a five year transition period, access to IMF resources; it prohibits the IMF from agreeing with a member country on a program or conditions which address the underlying conditions that led the country, in the first place, to have recourse to IMF resources.

Our joint minority statement addresses in greater detail the deficiencies in this approach; I also anticipate that Fred Bergsten, my dissenting colleague, will also speak to this issue in this hearing. Suffice it for me to say, that this proposal, like that with respect to the World Bank, places too much reliance upon the private financial markets, and, again, undermines a cooperative approach among governments with respect to the overall direction of international economic policy.

It is that direction which ought to most concern us, for it is a direction increasingly characterized by a fundamental inequity, and growing income inequality, both within and among countries. It is a trade, investment and finance system organized to provide maximum protection to corporate property interests, but does virtually nothing to protect core worker rights and the environment. On the contrary, I would suggest to you, as presently configured, it actually weakens core worker rights, particularly the most important worker right: freedom of association and collective bargaining. And it is the Bretton Woods institutions, the World Bank, the IMF, as well as the WTO, that are the major culprits in this endeavor. So long as this continues to be the case, there is no possibility, in my opinion, of assembling a broad based consensus in American society without which the IFIs, the subject of the Commission inquiry, and the international economic system itself, will continue to, and deserve to be, under siege. That is the issue that the Majority refused to address.

The specific issues are whether core worker rights and environmental provisions should be included in the main body of the WTO and other international trade agreements and the one-sided labor market intervention by the Bretton Woods institutions, designed to weaken core worker rights and drive down urban unionized wages union. These issues, along with the income inequality issues, were addressed in testimony before the Commission by John Sweeney, President of the AFL-CIO, Thea Lee, Tom Palley, and Elizabeth Drake, also of the AFL-CIO, Professor Jagdish Bhagwati, a distinguished trade economist from Columbia University, New York City, Daniel Tarullo, former National Security Council aide, Claude Barfield, American Enterprise Institute, Professor James Galbreath, University of Texas, Professor Robert Barro, Harvard University, Jeff Faux, President Economic Policy Institute, John Cavanagh, Director, Institute for Policy Studies, Douglas Hellinger, President, Development Gap, and Brent Blackwelder, Friends of the Earth.

The Majority Report does not discuss the testimony or the issues of core worker rights and the environment, or, much less the broader question of whether the one-sided labor market intervention on the side of capital has contributed to growing income inequality. In part, this is because members of the Majority do not believe that inequality is an important issue.

Commissioner Calomiris: AWhat I care about is poverty...and I don=t care very much about inequality. I don=t think it=s part of our objective as a Commission, to be talking much about inequality@. (Transcript, Jan.4 2000, p. 78). But the issue will not disappear. Reporting on the Chilean presidential election, Anthony Faiola, the Washington Post reporter, notes, that in Latin America, disillusion with democracy is widespread and not only attributable to widespread corruption: A...it also stems from the fact that the benefits of the new free market have gone disproportionately into the hands of the rich.@

With respect to core worker rights, Commissioner Calomiris is equally explicit:

...@[i]s it true that core worker standards would help very poor people? Just to remind you, we=re not dealing with the overfed Teamsters here. ...and I don=t care very much, to be honest, compared to that problem [poverty] whether employees in the United States have wages that go up or down by five or ten percent or whether anyone in the United States has wages or incomes that go up or down by five percent compared to that problem.@ (Transcript, Dec 14, 1999, p. 131).

Commissioner Calomiris continues:

AThere simply is no basis aside from gross violations of human rights for a country to be told that it cannot participate as a trading partner with the rest of the world...denial of freedom of association and collective bargaining are not such gross violations: they don=t come close.@ (Transcript. Dec. 14, 1999, p. 135).

Again, however, the issue will not disappear. Explaining the prolonged and bitter strike over seemingly modest tuition increases at the National University in Mexico City, Julia Preston, the New York Times, observes:

A...the student strikers were also a product of globalization...The government has stimulated growth by restraining inflation, mainly by depressing workers= wages. Official figures show that the minimum wage today buys 48 percent of what it did in 1982. So, while export enclaves have thrived, workers have been drawn into a spiral of downward mobility...[I] n today=s increasingly impoverished urban working class, even small tuition costs can break a family.@

We are in the process of creating not only in Mexico but elsewhere in the Hemisphere an increasingly embittered and alienated urban working class; it is seeing its former aspirations for social mobility for itself, and more importantly, its children, increasingly frustrated. At the center of that process are the Bretton Woods institutions: they share the indifference to core worker rights evidenced by the comments of Commissioner Calomiris.

The World Bank states, Awith respect to freedom of association and the right to collective bargaining@, it is Ain the process of analyzing the economic effects in order to form an informed opinion.@ Robert Holzmann, Director of Social Protection, World Bank, notes that, Awe have a problem with some of the core labor standards, in particular one which deals with freedom of association...@ In the year 2000, the World Bank has a problem with freedom of association and collective bargaining and is studying the matter to determine whether these rights deserve support? The United States Director in the World Bank should have gone straight to the Executive Board and read a statement declaring that for the U.S. Chair, the right of freedom of association and collective bargaining, for all workers, in whatever country, is a settled issue: there is nothing to study

Labor market intervention by the IMF is designed to make it easier for firms to fire workers and weaken the capacity of unions to negotiate on behalf of their members, thereby driving down wages and benefits. Taken in conjunction with the failure to address labor market abuses, such as the denial to workers of the right of freedom of association, that intervention amounts to a one-sided attempt to shift the balance of power in favor of capital and against working men and women. IMF labor market intervention is a classic case of overreaching by the Bretton Woods institutions. It has no place in IMF conditionality.

In summarizing his experience in the World Bank, Professor Joseph Sitglitz, former Chief Economist of the Bank, states that labor market issues arose in that institution but, Aall too frequently, mainly from a narrow economics focus, and even then, looked at even more narrowly, through the lens of neo-classical economics@. The same can be said of the Majority Report. It looked at the issues before the Commission from a Anarrow economics focus@, and even then, more narrowly, Athrough the lens of neo-classical economics@. It is devoid of any larger vision of a political economy which requires coming to terms with the fundamental inequity of a system rigged to protect the interests of capital and indifferent, or, worse, hostile to the interests of working people, whether those people are in the industrialized or developing world.

If I had to sum up the problem in a word, it would be balance: there is no balance in the Majority report; there is no balance in the WTO protection of corporate property rights, but no protection for core worker rights or the environment; there is no balance in the Bretton Woods institutions passion for driving down wages and benefits for unionized working people and indifference to abuse of core worker rights. Reform is in order, indeed, required in the international trade, investment and finance system, but not the reform proposed by the Majority. What is required is reform that restores some minimum equity that does not now exist in that system.



 

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