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Committee on Financial Services

United States House of Representatives

Archive Press Releases

EMBARGOED UNTIL 9:30 A.M. EST
Text as Prepared for Delivery
March 23, 2000

 

SECRETARY LAWRENCE H. SUMMERS
HOUSE BANKING COMMITTEE

 

Chairman Leach, Ranking Member LaFalce, Members of the Committee, I am pleased to have this opportunity to discuss the ongoing reform of the international financial institutions, which I know is of considerable interest to the members of this committee and other members of Congress.

I would like to address five issues today:

  • First, the case for strong United States support of the international financial institutions (IFIs).
  • Second, the important steps that the Administration has taken in recent years to strengthen the international financial architecture and the IFIs.
  • Third, our agenda for reform at the IMF.
  • Fourth, our agenda for reform of the international development institutions, particularly the World Bank.
  • Fifth, some initial reflections on the Report produced recently by the IFI commission, both the majority and the dissents thereto.

I.  The Need for Strong International Financial Institutions in the New Global Economy

Since the Mexico crisis in 1994 President Clinton has been committed to the project that has come to be called the reform of the international financial architecture – and he has been committed to change at the IFIs as a crucial part of that effort. As we have said many times, the global economy has changed immeasurably since these institutions were founded more than fifty years ago at Bretton Woods, and it is both right and urgent that the IMF and the other IFIs change along with it.

What has not changed, in this new environment, is the US stake in these institutions. Indeed, it is greater than ever in a more integrated, market-based world. The core case for the U.S. support for the IFIs rests on the core case for the U.S. supporting increased prosperity in the developing world and increased global integration.

That case has three pillars.

  • First, it advances our core values and humanitarian goals: countries that are helped to succeed economically are much more likely to become democratic, and their people more likely to avoid debilitating disease, to learn to read and to work with human dignity.
  • Second, it promotes US economic and commercial interests. Already the developing world accounts for more than 40 percent of U.S. exports and that will increase. Growth in the developing world raises the demand for our exports. And the IFIs support policy changes, such as reduced tariffs in Mexico and opening up the Indian economy that enormously benefits U.S. producers.
  • Third, it promotes our national security. From the experience of Germany in the 1930s to Bosnia and Africa in more recent times, history teaches us that conflicts are most likely in situations of economic distress – when populations turn their frustration to nationalist leaders because of a lack of a sense of economic of economic opportunity. Our ability to create a successful economic development strategy around the world reduces the likelihood of conflicts that we would otherwise be drawn into.

In their lending the MDBs support all three of these core American interests – at a cost to American taxpayers that is less than one half of one percent of our budget, and much lower than it was in the early 1990s.

Ten years ago, when the Berlin Wall came down, the United States defense budget was more than $100 billion higher, in real terms, than it is today. Reasonable people can debate how much of this dividend ought to have been invested in the ongoing protection of our interests that support for the IFIs and other foreign operations provides. But it would be difficult to make the case that the right answer is to spend a good deal less on these things than we did before. In fact, we are spending 20 percent less in real terms today on foreign assistance overall - and 40 percent less on the MDBs.

To be sure, the world has changed in profound ways: most importantly, with the spread of market ideologies and a more truly global private capital market. And so the IFIs must change and adapt as well. But their special benefit, their special efficiency; their special ability to lever funds – both multilateral and private - all make them especially important tools today. Quite simply, they are one of the most effective, and cost-effective, investments we can make in the forward defense of America’s core interests.

  • Each dollar that we contribute to the MDBs leverages $45 in lending programs in tomorrow’s economies.
  • With respect to the IMF, appropriations for the US quota do not result in any net budgetary outlay, yet they can catalyze significant international financial resources when financial crises threaten the financial stability and prosperity of the US and global economy.

Strong support for the IFIs has been central to a vision of closer integration between nations and shared global prosperity upon which United States foreign and economic policy has been based for the bulk of our postwar history. We believe that this vision has served our country extraordinarily well, and that it will serve us even better in the new century to come. But we equally believe that the investments we make in these institutions need to be deployed as effectively as they possibly can. The IFIs are indispensable. But as we have said many times, that does not mean we have to be satisfied with them as they now are.

II.  The Reform of the International Financial Architecture and the International Financial Institutions

The ongoing reform of the global financial architecture has produced some important achievements, including, more recently, the creation of the G20. This grouping, which met for the first time last December, will be a permanent informal mechanism for dialogue on key economic and financial issues among industrial and emerging market economies that collectively account for more than 80 percent of global GDP.

In addition:

  • With the creation of the IMF's Supplementary Reserve Facility (SRF), we have changed the terms of the exceptional financial support that the international community provides, working to reduce moral hazard with the application of premium interest rates.
  • We have catalyzed a major global effort to reduce national vulnerabilities to crises, with concrete steps to help countries develop stronger national financial systems and improved international surveillance, with increased incentives to pursue sound policies before crisis strikes. These include the incentives embodied in the terms of the new Contingent Credit Line, which has several of the features of the SRF, but was designed to enable the IMF to safeguard countries with sound policies from the effects of market contagion.
  • And we have found new ways to involve the private sector in the resolution of crises - most notably in the cases of Korea and Brazil.

More generally, changing the broad orientation of the IFIs has been an important focus of this Administration and many in Congress in recent years. In this context we have seen new developments on a number of fronts, including:

A sea change in transparency and accountability.

This is perhaps most visible in the IMF's new policies on the public release of documents. For example, since last June, in large part as a result of Administration and Congressional urging, there is now a presumption that key program documents considered by the IMF Board - including Letters of Intent - which detail the policy commitments that countries have undertaken as a condition for IMF support will be released. Since June 3rd, 58 arrangements have been discussed by the Board, and program documents were released in 50 of these cases.

Similarly, all of the multilateral development banks have in place mechanisms for public information disclosure and increased public participation. Increasingly the institutions use their Internet websites to post a large volume of project information and appraisal documents and other information.

At the World Bank, disclosure of the Country Assistance Strategies (CASs), the Bank's key planning document for future lending, is now routine – as are consultations with the people that will be affected by Bank projects. For many of the world's poorest, this can be the first real voice in their own future that they have ever had.

New emphases in program content.

We have advocated substantial changes in the scope and nature of the conditionality for IFI support: to place greater emphasis on the importance of market opening and liberalization of trade; to focus more on the development of the institutions and policies that will allow markets to operate; to take better account of the impact on the poor of economic adjustments; to increase national ownership and participation in reforms; and incorporate environment, social and labor issues into program design, as appropriate.

For example:

  • As part of its recent IMF program, Indonesia abolished import monopolies for soybeans and wheat; agreed to phase out all non-tariff barriers affecting imports; dissolved all cartels for plywood, cement and paper; removed restrictions on foreign investment in the wholesale and resale trades; and allowed foreign banks to buy domestic ones.
  • At the World Bank, in large part as a result of United States urging – pursued with broad bipartisan support – there is now systematic evaluation of the environmental and social impacts of Bank-financed projects, and independent inspection panels to provide recourse to people affected by these and other Bank projects.

Making good governance and fighting corruption a systematic part of IFI operations

We have consistently worked to make governance, combating corruption and the effective use of funds a core part of IFI procedures. Most recently, in light of our experience in Russia, we have led the call from the G7 for authoritative and systematic reviews by the IMF and the World Bank to find ways to strengthen safeguards on the use of their funds in all of their lending activities.

I am glad to report that largely as a result of United States urging, IMF staff are now working with outside experts to develop new tools for strengthening their safeguards against misuse of IMF funds and to support higher quality auditing and information practices in member countries. The need for such safeguards has surely been further underscored by recent reports of events in Ukraine.

Let me say a little more about this situation, which I know has been of considerable interest to this committee and others in Congress. The IMF indicated last week that the Ukrainian authorities undertook a number of transactions with their reserves in 1997 and 1998 that may have led, at the least, to the disbursement of Fund loans based on an overstated level of reserves. We are deeply concerned about this information.

The IMF became aware of these transactions over a period of time. The Ukrainians first acknowledged in August 1998 that some of their reserves were tied up and not readily available. At that time, the IMF required Ukraine to make compensating changes in reserves, tighten reserve definitions, and institute quarterly audits by a reputable accounting firm. We supported these actions.

IMF staff received subsequent information during 1999 about additional questionable transactions that it did not disclose to the IMF Board until recently. We consider this to be a matter of especially serious concern, and the Fund has acknowledged that the handling of this matter raises important issues that it needs to address.

Ukraine is cooperating closely with the IMF in undertaking detailed independent audits of the National Bank's activities for 1997-98. The first of these will be completed and published soon. Ukraine will institute more detailed quarterly audits, and has agreed to place the proceeds of any new IMF disbursements in an account at the Fund that can be used only to repay its debts to the IMF.

In addressing the issue of whether to support further IMF financing for Ukraine, we will review the results of the audits in order to determine what additional controls are needed to prevent future inappropriate reserve management practices and help ensure that future IMF resources are used for their intended purpose. We are also urging the IMF to strengthen its internal procedures, in order to do everything possible to ensure against any recurrence of such abuses – whether in Ukraine or any other borrowing country.

Progress in areas highlighted by the IMF legislation

With reference to the IMF in particular, on October 1, 1999, Treasury submitted to Congress a major report on IMF reform detailing progress in efforts to increase the IMF’s effectiveness in numerous areas such as increased transparency, strengthening of social safety nets, implementation of core labor standards, trade liberalization, promoting good governance, and the environment. This report is available on the Treasury website at: http://www.treas.gov/press/releases/docs/imfrefor.pdf.

In addition, with the active support of Treasury and the United States IMF Executive Director's Office (USED/IMF), the IMF cooperated fully in the GAO's preparation of its report on the financial operations of the IMF, which was one of the requirements of the IMF legislation. This report was completed and transmitted to Congress in September 1999 ("International Monetary Fund: Observations on the IMF's Financial Operations").

Since the submission of the October report on IMF reforms, we have seen further progress in a number of areas. For example:

  • Trade. In its most recent Letter of Intent, published on January 20, Indonesia pledged to "maintain a liberal trade regime, avoid introducing any new trade barriers, and remove remaining distortionary elements in the trade structure" and to eliminate during the program period "all exemptions to import tariffs (except those which are part of international agreements), and remove all existing non-tariff barriers (except those maintained for health and safety reasons)." Indonesia’s government has further pledged to eliminate its import monopoly on rice.
  • Labor and Social Safety Nets. In Bolivia, the authorities, in consultation with social partners and the International Labor Organization (ILO), have plans for a new labor law this year that will both enhance labor flexibility and bring Bolivian labor regulations into line with ILO standards, particularly those regarding equality of treatment between genders and labor safety. The USED/IMF has emphasized, both in the context of Bolivia’s program and more broadly, the importance of ensuring that efforts to enhance labor market flexibility should include measures to support workplace representation and strengthen social safety nets
  • Environment. In recent Article IV discussions with authorities in Laos, the IMF raised the issue of sustainable natural resource management for forestry, water, and agricultural land to prevent over-exploitation. The IMF recommended strengthening the forestry regulatory framework and enforcement as well as a review of logging and export privileges reserved to military-owned enterprises.

In addition, we have fully implemented the fiscal year 1997 Military Audit Legislation. As part of these efforts, following consultations with the U.S. Government and the IMF, the Government of Nigeria reactivated the role of its Auditor General, subjected defense spending to the same accountability standards as other ministries, and committed to consolidate all extra-budgetary military expenditures into the budget. In cases where a country’s military audit system does not meet the standards of the legislation, the United States Executive Director has opposed IMF assistance.

As the recoveries in both Mexico and in the crisis-affected economies in Asia indicate, IMF and World Bank programs have played a key role in responding to financial crises and containing their broader effects – stabilizing financial systems, and returning economies to growth. But we recognize that both institutions need to change further in a number of respects if they are to meet the challenges of this new world.

III.  Building a 21st Century IMF: Our Agenda for Reform

Our plans for reforming the IMF start from a single framing new reality of the global financial system today, that the private sector is the overwhelming source of capital for growth. We believe that the IMF must increasingly reflect that change, with a greater focus on promoting financial stability within countries, a stable flow of capital among them, and rapid recoveries following financial disruptions.

Reforming the IMF to meet the conditions of a new time will partly be a matter of policies and procedures. It will also and perhaps most crucially be a matter of culture and orientation. In London last December I laid out five core reforms of the IMF’s approach in the emerging economies that we believe are necessary.

These are:

  1. A greater focus on promoting the flow of information from governments to markets and investors.

    In a more integrated global capital market, IMF surveillance needs to shift from a focus on collecting and sharing information within the club of nations – to promoting the collection and dissemination of information for investors, markets and the public as a whole. And the IMF needs to pay more attention, not just to the quantity of information disclosed to markets, but also to its quality.

    In the context of countries receiving IMF finance, we believe it is appropriate that independent external audits of central banks and other relevant government entities be required and regularly published. We are working to forge a broad international consensus on this point. More generally, we believe that substantial deficiencies in the accuracy and quantity of data that a country discloses should be noted and highlighted by the IMF in the way that more conventional macro-economic deficiencies are highlighted.

  2. Greater attention to financial vulnerability as well as macro-economic fundamentals.

    In the wake of recent events, we believe that the IMF needs to focus much more attention on financial vulnerabilities such as those that played such an important role in causing the crises in Asia.

    This will mean, in particular, a greater focus on the strength of national balance sheets. In this context we believe the IMF should promote a more fully integrated assessment of a country’s liquidity and balance sheet. To this end, it should work to incorporate more systematically, in its surveillance, indicators that provide a more meaningful guide to the adequacy of a country’s reserves than simply their size relative to imports. Work is already under way at the IMF to explore how this can best be achieved.

    By the same token, we believe that the IMF should highlight more clearly the risks of unsustainable exchange rate regimes. The presumption needs to be that countries that are involved with the world capital market should increasingly avoid the "middle ground" of pegged exchange rates with discretionary monetary policies, in favor of either more firmly institutionalized fixed rate regimes or floating.

  3. A more strategic financing role that is focused on emergency situations.
  4. International financial institutions, no less than private companies, need to focus on core competencies. Going forward the IMF needs to be more tightly focused in its financial involvement with countries, lending selectively and on short maturities. It can and must be on the front line of the international response to financial crises. It should not be a source of low-cost financing for countries with ready access to private capital, or long-term support for countries that cannot break the habit of bad policies.

    This suggests a number of core imperatives. Let me just highlight one here: the need for streamlined facilities.

    We have supported a thorough review by the IMF’s members and its management of the myriad lending facilities that have been established over time. We are already seeing progress on this front, with the IMF Executive Board agreeing earlier this year to eliminate the BSFF and the contingency element of the CCFF and just last week supporting elimination of the Currency Stabilization Fund and support for debt and debt service reduction. But we believe that more change is necessary.

    We believe that a necessary result of this kind of streamlining would be that the IMF would come to rely on a very small number of core instruments for the bulk of its lending. These instruments will also need to be priced appropriately, both relative to each other and relative to alternative, private sources of finance. For example, in this context we believe that it would be appropriate to introduce higher charges for borrowing under standby arrangements, to encourage recourse to alternative sources of funding. The IMF Executive Board took up this issue last week, when it engaged in an initial discussion of the broad issues, and will continue work on streamlining the IMF's lending tools in the coming months.

  5. Greater emphasis on catalyzing market-based solutions to crises.
  6. In its response to financial crises, several basic presumptions should now be guiding the IMF’s approach with respect to the private sector.

    • IMF lending should be a bridge to and from private sector lending not a long-term substitute.
    • Official lending along with policy changes can be constructive in helping to restore confidence in situations where a country does have the capacity to repay.
    • Where possible, the official sector through its conditionality should support approaches – as in Korea and, more recently, Brazil – that enable creditors to recognize their collective interest in maintaining positions, despite their individual interest in withdrawing funds.
    • As we have seen, for example in Ukraine and Pakistan, it will be necessary in some cases for countries to seek to change the profile and structure of their debts to the private sector. Such agreements should have the maximum feasible degree of voluntarism, but they should not fill short-term financing gaps in a way that promises renewed problems down the road.
    • In exceptional cases, the IMF should be prepared to provide finance to countries that are in arrears to their private creditors: but only where the country has agreed to a credible adjustment program, is making a good faith effort to reach a collaborative agreement with its creditors, and is focused on a realistic plan for addressing its external financing problems that will be viable over the medium and longer term.

    The IMF Board discussed early this week the ways in which the broad principles of the G-7's approach toward involving the private sector in crisis response have been implemented -- with a view towards better operationalizing this approach going forward. Further discussion of these issues is expected by International Monetary and Financial Committee (formerly Interim Committee) in mid-April.

    More broadly, we believe strongly that the IMF should establish a Market Conditions Advisory Group to help it have a deeper knowledge of the private sector and more systematic access to market trends and views.

  7. Modernization of the IMF as an institution.
  8. We further believe that if the work of the IMF is to change, the IMF itself may also need to change. Specifically, we believe it should move over time toward both a governing structure that is more representative and a relative allocation of member quotas that reflects the changes under way in the world economy – so that each country’s standing and voice are more consistent with its relative economic and financial strength.

    We also believe that the IMF should deepen the commitment to transparency that is built into its operations, especially by making the Fund’s own financial workings clearer and more comprehensible to the public. In that context I am pleased to note that just last month we won IMF Board agreement on quarterly publication of the operational budget – to be renamed the Financial Transactions Plan – with a one quarter lag.

    This would also be consistent with the legislative mandate that was enacted in last year’s authorization of IMF off-market gold sales. The first such "FTP", covering the period March-May 2000, will be published in August.

IV. Our Reform Agenda for the World Bank and Regional Development Banks

Turning to the multilateral development banks, this week in a speech at the Council on Foreign Relations in New York I outlined the United States’ agenda for making them as effective as possible in promoting market-led development around the world.

Our approach starts from a number of crucial lessons from the global development experience of the past 50-plus years: that support should reward and strengthen domestic efforts to reform rather than try to force those efforts into existence; that it must support, not supplant the development of open markets and the growth that open markets can bring; that it should be conditioned on an effective framework for promoting market-led growth; and that conditions should focus on the essentials, including critical public investments

We believe that the MDBs need to bring these lessons to bear in improving their capacity to fulfil three core missions:

  • Above all, supporting effective growth and poverty reduction in the poorest countries at a time when there are now 1.3 billion people living on less than $1 a day.
  • Targeting lending to countries with access to private markets, focused on areas of clear market failure, catalyzing additional private flows, and supporting government efforts to respond to financial disruptions.
  • Promoting the provision of global public goods such as vaccines for killer diseases such as AIDS and more effective tools for international environmental protection efforts.

Let me highlight the key changes that we are promoting in each of these areas.

More Effective Policies in the Poorest Countries

What the MDBs do to promote development in the poorest countries is without a doubt their most morally urgent and important work. These are countries that cannot expect to mobilize private flows on a consistent basis and can expect to be reliant on official flows for some time to come. This is the right moment for a fundamental reassessment of how these flows are provided.

The Heavily Indebted Poor Countries (HIPC) initiative is a one-off attempt to wipe the slate clean. It is essential that we make it work so that countries do not find themselves in this situation again.

We believe that an effective approach will require a shift in the emphasis of the MDBs in these countries in the following respects.

  • A more human-centered approach and new division of labor between the IFIs. Official estimations of the need for external support need increasingly to move from a predominant focus on macro-economic issues to more clearly emphasizing the nature of human needs. As a condition for receiving debt relief and new loans, HIPC countries are now required not only to have established a solid track record of reform, but also to produce forward-looking Poverty Reduction Strategies. These strategies will and must form an important part of the basis for a satisfactory financing framework for countries. Over time we expect this to become the primary responsibility of the World Bank given its expertise and mandate in global poverty reduction. But the IMF needs to have a continuing role in macro-economic evaluation, because no plan is viable if there is not a sustainable financing framework.
  • Increased selectivity. As the World Bank has recognized in implementing IDA 12, we need increasingly to shift the balance in favor of providing support to countries where donors can have confidence that assistance will be well used - and denying it more often where this is likely to be misused, particularly in cases of corruption. By some estimates, this would more than triple the effectiveness of development assistance in reducing global poverty.
  • Better procedures for the interaction between countries and the IFIs. We believe that the MDBs should rely on a smaller number of clear and measurable performance targets, set more realistically, and then more vigorously adhered to. An important part of this shift will be developing more effective mechanisms within the MDBs for evaluating when targets and intermediate benchmarks have been met, including a stronger commitment to disbursing in stages and more frequent formal reviews. There also needs to be a stronger presumption of publication for key loan documents and transparency in the relevant operations at the national level, so that the domestic population, outside investors and donors can track disbursements and results.
  • Additional concessional resources. We should not delude ourselves that HIPC or the reforms that it has inspired will translate into better basic schooling or health care in these countries without a genuine increase in the pool of concessional resources. This makes it especially urgent and important for Congress to help the US play our proper part in this effort, by enacting the President's supplementary appropriations request and the funding contained in his FY2001 budget.

This last point is a crucial one: the earlier version of HIPC saved Uganda $45 million in debt service in 1999 alone. This relief has helped it to double enrollment in primary education in just two years. Under the enhanced HIPC, Uganda would receive an estimated $650 million more, in net present value terms, to invest in these basic priorities. But these benefits for Uganda and other countries will remain in question if the United States does not do its part.

More focused MDB lending in emerging market economies

Emerging market economies, where there are private financial flows, involve different issues than those posed in the poorest countries. Specifically: MDB lending in these countries should be confined to those areas where they can increase the country’s overall capacity to access external resources, and add value that the private markets cannot.

This suggests an emphasis on three types of circumstances:

  • Where they can effectively deploy the MDBs’ unique capacity to apply conditions and to promote key public investments - including basic health and education and other social spending and the development of an effective institutional infrastructure for markets – that add to the total stock of public resources available for these purposes.
  • Where the involvement of the MDBs can attract genuinely additional private flows: for example, where MDB co-financing arrangements and guarantees can enhance the credibility of developing country borrowers in the eyes of investors. In this context we believe that the MDBs should continue to explore more innovative ways of catalyzing private capital flows to such countries, where these can be pursued within strict and clear guidelines that safeguard the financial position of the institutions.
  • Where the MDBs can help to counteract temporary disruptions or limitations in a country's access to private capital due to contagion or other external shocks. To this end, they should be taking advantage of the substantial recent improvement in global financial conditions to develop a large, more flexible, contingent financial capacity to respond to deterioration in investor confidence in emerging markets down the road. This is an important point, because financial emergencies are times when there is more social and human distress, and as we have seen, they are times when more structural changes can be achieved in 18 months than would otherwise been achieved in a matter of years. On the basis of recent experience, we strongly believe that the World Bank should find ways to upgrade substantially its capacity to respond rapidly and effectively to such emergencies in the future.

As part of this approach, the World Bank and others need to work harder to ensure that their lending is genuinely productive, and that is supports, rather than supplants, private sector finance.

Accordingly:

  • We believe there should now be a strong presumption that the MDBs have no business lending in countries for sectors in which private financing is available on appropriate terms, and where there is a risk that such lending will simply supplant private financing. These include credit programs serving mainly large-scale industry, support for large-scale infrastructure in cases where these would have no significant environmental benefit, and lending in oil, telecoms and other sectors where the private sector is already active.
  • We further believe that in a world in which the MDBs are promoting policies that succeed in increasing the capacity for emerging market economies to access private finance, the share of MDB lending that is devoted to these economies should be expected to decline in volume over time and become more closely linked to the end-goal of graduation. The MDBs cannot expect to live in a world where they can count on successive capital increases for their non-concessional loan windows. Going forward, they should incorporate this reality in their identification and management of lending in middle income countries.

For all MDB lending in emerging market economies, we also believe that a review of pricing policies is appropriate. Pricing needs to avoid excessive encouragement of public rather than private sector reliance. And it needs to assure that, given the enormous needs for concessional finance, the MDBs are in as strong a position as possible to contribute resources to concessional programs and to the creation of global public goods. A review based on these principles will, I suspect, lead to higher prices in many cases.

An Enhanced Focus on the Provision of Global Public Goods

Increasingly, as integration proceeds, the world is confronting a broad class of problems that cross borders and defy solution by individual governments and markets. Whether it is money laundering and financial crime, global warming, new killer diseases, or reductions in global bio-diversity - the solutions to these problems will be global public goods, requiring concerted global cooperation. We believe that the World Bank and other development institutions potentially have an enormous contribution to make in helping to push the frontier of international efforts to promote these kinds of goods, many of which will especially benefit developing countries.

Let me highlight one area in particular where we believe that the MDBs should be looking especially hard for new kinds of responses: promoting the creation and dissemination of medical knowledge.

Infectious diseases such as HIV/AIDS, tuberculosis, malaria and respiratory and diarrheal disease, are responsible for almost half of all deaths of people under 45 worldwide. Life expectancy is now actually declining in a host of African countries struck by HIV/AIDS, with adult mortality rates in the worst affected countries now twice what they were even a few years ago. Yet the WHO estimates that only perhaps 10 percent of the $50-60 billion spent worldwide each year on health research is directed toward diseases that afflict 90 percent of the world's population.

President Clinton has proposed a number of important bilateral efforts that he hopes will catalyze further efforts by other bilateral and private donors. But we agree with President Wolfensohn that the World Bank has an important contribution to make, by helping to create a market for new treatments and vaccines in many of the countries worst affected. That is why the President is proposing that the MDBs dedicate a further $400 million to $900 million each year of their concessional lending for basic health care to immunize, prevent and treat infectious diseases in the poorest countries.

V.  Initial Reflections on Recent Alternative Reform Proposals for the IFIs

These steps for reorienting the institutions build on and, in many cases, significantly expand upon the progress we have already made in recent efforts to strengthen the international financial architecture. Fully implemented, our proposed reforms would greatly enhance the IFIs’ capacity to support global financial stability and growth – while remaining true to the basic ideals upon which they were founded.

As will be clear from my preceding remarks, our approach shares with the reports of the IFI Commission and the dissents thereto a number of important goals and aspirations. Notably:

  • The need for a clearer delineation of the respective roles of the World Bank and the IMF – and clearer priorities.
  • The need for more effective program design to make best use of the lending provided to respond to crisis situations – including, with regard to the IMF, the potential for ex ante conditions to help strengthen incentives for sound policies outside of crises.
  • The need for greater accountability and transparency at all of the IFIs – an objective that we have vigorously pressed in the past and will continue to push for in the future.
  • The need for strong and well-targeted support for successful development in the poorest countries and America’s enormous stake in the global development effort as a whole.
  • The need for substantial, conditioned debt relief for highly indebted countries with a track record of economic reforms.
  • And the fundamental recognition that no amount of official finance in the world can make up for a lack of domestic commitment in the country itself. Countries implement and sustain reforms to which they are themselves committed.

At the same time, it is fair to say that we part company with the IFI Commission’s Report on how these principles can best be applied.

Mr. Chairman, we have not completed our full review of this Report, but frankly, we find a number of the more drastic recommendations highly troubling. However, while we have not completed our full review of the Report’s recommendations, we believe that taken literally, they would straitjacket these institutions to the point where would no longer be able to advance America’s core values and interests around the world. The combination of restrictions that the Report proposes would essentially eliminate these institutions’ capacity to provide support for countries as diverse as Mexico, Bulgaria and Thailand. This would put at risk American wages, American savings and American security.

Let me highlight for the Committee some of our leading concerns with respect to both the Commission’s recommendations for the IMF and for the World Bank.

The Report’s proposals for the IMF:

First, the Report could limit lending to a narrow set of relatively prosperous economies, thereby preventing the international community from responding to financial crises such as the Asian financial crisis. Taking at facing value the recommendations in the Report, few, if any of the countries that have suffered financial crises in recent years – notably Mexico, Brazil and Korea – would have qualified for emergency IMF support.

The Report’s brief acknowledgment that these rules might have to be overthrown in times of systemic risk is welcome, but it equally calls into question how the rest of the Report’s proposals in this area are to be interpreted and applied. The authors offer no guidelines or rules for how to implement this exception, which by its nature surely merits more serious discussion than the Report acknowledges. Until and unless the implications are fully understood, it must be assumed on the basis of the rest of the Report that a very large number of countries that are potentially vulnerable to crises would not, under the proposed system, have access to IMF official finance.

Second, the Report would allow the set of pre-qualified borrowers unconditional access to IMF resources. We believe this would be an irresponsible use of taxpayers’ money, would be likely to fail in stemming crises, and would be a standing invitation to irresponsible behavior by investors and governments as a result of moral hazard. For the Committee’s information I am submitting with this testimony a brief survey of the IMF’s experience with the use of conditions.1 As this survey shows clearly, countries that fully implement IMF reform conditions, for example, Thailand and Korea, have consistently had the greatest success in stabilizing their economies and restoring growth.

Third, the Report would presume, through its qualification criteria, that crises emerge almost exclusively from flaws in the financial sector. This neglects a major lesson of recent crises, that problems that surface in the financial sector will often have their roots in much deeper economic and structural problems. These are problems that the Commission’s suggested criteria would be likely to overlook.

A global economy with the kind of IMF that the Report envisions would be one in which the vast majority of IMF members would be without the IMF’s financial support in finding constructive means of dealing with balance of payments problems – including the newer kinds of crises that we have seen in Mexico, Korea and elsewhere. The net result would be that US businesses, farmers and workers would be more vulnerable to contagion from crises that countries were unable to contain on their own – and more vulnerable to the re-emergence of restrictions on trade and payments and other beggar-thy-neighbor policies that governments in crisis without international support have all too often resorted to in the past. We do not believe this an outcome that the United States should support.

The Report’s proposals for the World Bank and other MDBs:

With regard to the World Bank and other MDBs, the Report would exclude the vast majority of the current recipients of MDB lending from the additional finance and insurance against instability that access to these programs can provide. As I noted earlier, we believe that the MDBs’ lending to countries with access to private sector finance needs to be more tightly focused on adding value that the private markets cannot. But we categorically reject the idea that there are few such opportunities for the MDBs to exploit in these countries – or that they are not crucially important to US interests.

  • As we saw, most vividly, in the Asian crises, the emerging market economies have increasing systemic significance for the global economy as a whole. Emergency lending by the MDBs at times of crisis can enhance a country’s capacity to make necessary policy adjustments, not least by making it possible for governments to protect the most vulnerable from the short-term effects of the crisis.
  • Second, and no less important, the Report would rule out MDB support for the majority of the world's poorest people. One third of the people in Latin America live on less than $2 a day, and most are in countries that would be made ineligible for support. Despite the fact that more people live on that income in China and India than the entire population of Sub-Saharan Africa, neither of these countries would have access. Private financial markets alone will not finance needed investments in basic health and education and rural infrastructure. And appropriately targeted MDB finance can itself catalyze additional private investment.

With regard to the poorest countries, the Report would substitute grants for loan-based funding in the vast majority of World Bank programs.

  • The Report’s proposals in this area would raise serious workability problems with respect to both the timing of the delivery of assistance and the reliance on NGOs as the main conduits of aid. For example, the recommendations for promoting the provision of public goods would essentially require countries to build the school and enrol the children, before the official assistance to pay for it would be provided.
  • Perhaps most fundamentally the shift to grant-based funding would drastically reduce the total amount of official resources that can be brought to bear in these economies, and bringing to an end any capacity for concessional flows to be re-lent. It bears emphasis that roughly half of the $20 billion in IDA 12 is made up of "reflows" of funds due to past recipients’ repayment of loans. In a world in which official assistance is in such scarce supply, this re-lending of very highly subsidized concessional support, is a benefit that the international community should be very wary of giving up.

In essence, the Report’s recommendations would drastically undercut the global role of the World Bank by limiting it to the "knowledge" business. This ignores the fact that knowledge without funding can be sterile; the fact that useful knowledge is a product of real operations, which require real finance; and not least, the fact that the World Bank is the broadest, most effective source of development expertise that the world possesses.

Mr. Chairman, the founders of the Bretton Woods institutions more than half a century ago recognized that there could be no successful global integration without truly global institutions for promoting prosperity within countries and a stable flow of capital between them. This was the painful lesson of the 1930s, when the absence of an effective global response to financial panics helped pave the way for deflation and depression – and ultimately, World War II. The same lesson has been taught again and again in the postwar period: indeed, can only apply more forcefully at a time when the world is more interconnected than ever before. Seen in this light, adopting the view that the IMF should serve only an elite club of nations, and the World Bank’s global role should be drastically curtailed, would be a large step backward indeed.

The Commission’s call for expanded debt relief

Finally, we welcome the support that both the Commission’s Report and the dissents thereto have offered for reducing on a conditioned basis the official debts of the poorest countries. As I mentioned earlier, this has been a primary goal of the Administration since we led the development of the first HIPC initiative in 1996.

These efforts have already worked to help countries such as Uganda direct their scarce resources on poverty reduction rather than debt service. When the enhanced HIPC initiative is fully funded and implemented we believe it will make an even greater difference to the prospects for growth and poverty reduction in countries that are committed to reform.

However, we do not believe that the Report’s recommendation to "write-off" all HIPC debt would be either desirable or feasible. Specifically:

  • First, because the United States and the international community’s commitment to this effort will be judged less by the scale of our aspirations than by the resources we are prepared to invest in making these aspirations bear fruit. Comprehensive debt forgiveness for the HIPCs would raise the costs of the Initiative for the IFIs from around $14 billion to roughly $43 billion. A clear-eyed assessment of the record must conclude that this would require a substantially larger donor commitment to HIPC than the international community or the US Congress has shown itself willing to make.
  • Second, and as a consequence, without a commensurate increase in the global pool of concessional resources, the additional costs of such a proposal would have a commensurate negative impact on new concessional lending. This would negate the very financial benefits to these countries that HIPC is intended to provide. And to the extent that it had the effect of depleting resources for non-HIPC countries, it would amount to the "poor funding the poor". This is at odds with the Commission’s own recommendations for increasing financial support for poor countries with a track record of reform.

VI.  Concluding Remarks

Mr. Chairman, my colleagues and I anticipate a complete and thoughtful examination of the IFI Commission’s Report and the dissents thereto to better help us identify and address the global issues and realties confronting us. Our hope is that the work of the Commission might help accelerate and strengthen the ambitious reform agenda, which is already on the table.

However, let me end by highlighting once again that we welcome the unanimous support for debt relief within the Commission. At this point, our ability to advance U.S. interests in the IFIs will depend crucially on meeting our current reduced obligations for these institutions and playing our full part in the enhanced HIPC initiative agreed in Cologne. There has also been broad national and international support for President’s efforts to promote the provision of vaccines and cost-effective treatments for HIV/AIDS and other diseases that hurt the poorest countries worst of all.

Mr. Chairman, these two initiatives need urgently to move forward. It would be tragic indeed if these common priorities were delayed by less morally compelling debates of IFI reforms. I look forward to working with this Committee and with others in Congress on finding the most constructive means by which this can be achieved. Thank you. I would now welcome any questions you may have.

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1. Compliance of Countries with Agreements Made as a Condition of Receiving IMF Financial Assistance, attached.



 

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