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Document 6 of 21.

April 6, 2000, Thursday

SECTION: PREPARED TESTIMONY

LENGTH: 5211 words

HEADLINE: PREPARED TESTIMONY OF LAWRENCE H. SUMMERS TREASURY SECRETARY

BEFORE THE SENATE APPROPRIATIONS COMMITTEE SUBCOMMITTEE ON FOREIGN OPERATIONS

BODY:
Chairman McConnell, Ranking Member Leahy, Members of the Committee, I appreciate the opportunity to testify today about the Administration's FY2001 budget request for Treasury's international programs.

Let me say at the outset that this Committee;s effective leadership and strong support last year resulted in securing appropriations sufficient to meet a large portion of U.S. scheduled commitments to the Multilateral Development Banks (MDBs), as well as the bilateral element of the enhanced Heavily Indebted Poor Countries Initiative (HIPC), and in the authorization of U.S. participation in resource replenishments for five of the multilateral development banks and use of IMF internal resources, including earnings on investments of profits of sales of IMF gold, for HIPC. Literally hundreds of millions of people, in some of the poorest countries on earth, owe you their thanks for your support in these efforts.

Today I would like to address three issues: - First, the strong case for continued United States support for MDBs and debt reduction programs.

Second, the central elements of our request for funding for Treasury international programs. - Third, our ongoing reform agenda for the MDBs. I. The Case for Strong Support for the MDBs and Debt Reduction Programs

The case for U.S. support for the MDBs and debt reduction programs rests on the importance of successful economic development in the developing world and the role of the MDBs and debt reduction in promoting such development.

These institutions promote our core interests in three ways. First, the MDBs advance our core values and humanitarian goals. Countries that are helped to succeed economically are much more likely to become democratic, and their people are more likely to avoid debilitating disease, to learn useful skills and to find dignified work. Second, they promote our economic and commercial interests. Already the developing world accounts for more than 40 percent of U.S. exports and that will increase. The MDBs support policy changes, such as reduced tariffs in Mexico and opening up the Indian economy, which enormously benefit U.S. producers. There are also more direct benefits for US companies: in 1998 alone, US firms received $ 4.8 billion from contracts arising from MDB investment and adjustment programs Third, they promote 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 more likely in situations of economic distress, as populations mm their frustration to nationalist leaders because of a lack of economic opportunity. Our ability to create a successful economic development strategy around the world reduces the likelihood of conflicts that we might otherwise be drawn into.

The MDBs provide a strong and uniquely effective means to promote these core American interests. 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. The development institutions must change and adapt as well. But their special benefit, their special efficiency; their special ability to lever funds - because they are both financed multilaterally and able to borrow from the private markets - all make them especially important tools today.

Each dollar that we contribute to the MDBs leverages $45 to build tomorrow's markets and democracies. Each year these institutions carry out lending around the world in the range of $5060 billion, at a cost to American taxpayers that is one tenth of one percent of the total U.S. budget.

It bears emphasis that as private capital markets have grown and global realities have changed, we have successfully reduced our annual contributions to the MDBs by nearly 40 percent, or $700 million, in real terms since 1995. Treasury has subjected every MDB request for additional resources to the closest possible scrutiny, and has structured each new US funding commitment to obtain maximum impact from the resources available.

At the same time, strong U.S. leadership and advocacy on a wide range of bipartisan issues have produced major operational and policy improvements across the MDBs. The result is a multilateral system that addresses, directly and cost effectively, priority U.S. policy objectives On issues of global importance. This system is also able to address regional and country-specific challenges where substantial U.S. interests are at stake.

By any standard, these institutions provide exceptional value for money. And through their policies and programs they can and have had a tangible impact on millions of lives.- Infant mortality in low and middle-income countries has dropped from 107 per 1,000 births in 1970 to 59 per 1,000 in 1998. And life expectancy in these same countries has increased from 58 in 1980 to 65 in 1998 - or more than three times the increase we would achieve in the United States by eliminating cancer. In South Asia, access to safe water increased from 52 percent of the population in the early 1980's to 77 percent a decade later. The fraction of Sub-Saharan Africa's children that can read has risen from 38 percent to 59 percent since 1980. The Green Revolution, developed and disseminated through research supported by the World Bank in conjunction with other international organizations, has literally lifted hundreds of millions out of poverty. It has been estimated that it has helped to lift 230 million people out of poverty in Asia alone. The African Development Bank and World Bank provided important financial support in the fight against river blindness (onchocerciasis), the transmission of which has been halted in eleven African countries. As a result of eradication efforts over the past twenty years, over 30 million people are now protected from infection and 185,.000 who were already infected have been spared blindness. Most recently, the HIPC Initiative, created in 1996 and further enhanced last year at the Cologne Summit, has helped some of the poorest nations in the world free up precious resources for reducing poverty that would otherwise have been spent on servicing debt. For example, thanks to the earlier version of HIPC, Uganda was able to save $45 million on debt service in 1999 alone. The reduction in its debt under HIPC has helped Uganda to double enrollment in primary education in just two years.

II. The FY2001 Request

For FY2001 we are requesting a total of $1.6 billion for Treasury international programs.

There are 3 components of the Treasury request: The first, and largest element is a $1.4 billion payment to the multilateral development banks, of which $1.2 billion is for scheduled U.S. commitments -the majority for concessional lending by these institutions to the poorest countries - and $167 million is for clearing a portion of U.S. arrears. Second, a request of $262 million for debt restructuring programs, comprising $150 million for the HIPC Trust Fund; $75 million for HIPC bilateral debt reduction; and $37 million for. debt relief for tropical forest countries. Third, a request of $7 million for international technical assistance programs.

Let me say a little about each of these.

1. Funding for the MDBs

With respect to the MDBs, let me emphasize again that as a consequence of our international negotiations, US commitments to these institutions have been very substantially reduced in recent years. The going rate of annual US commitments has been reduced from $1.9 billion in 1996 to $1.2 billion in FY 2001.

As I will highlight in a few moments, even as we have reduced our financial contribution to these institutions we have worked to change them in ways that are important to the United States. We believe that there are important further changes that the MDBs will need to make if they are to be as effective as possible in a new 21 st century global economy. But our capacity to maintain our leadership of these institutions and influence their future direction depends crucially on our capacity to meet our commitments to them. In this context, the level of US arrears is an especially important concern.

Mr. Chairman, at the end of FY1997, our arrears to the MDBs totaled $862 million, threatening to undermine our leadership in these institutions and the multilateral system more broadly. Several years of bipartisan collaboration in the Congress helped us cut these arrears to $335.'3 million by end-FY1999. However, a shortfall in funding last year reversed this progress, and arrears rose to $451.1 million.

My hope is that this year we can reduce that number by more than one third. Our request for $167.1 million for FY2001 would still leave $284 million in arrears to clear in future years, but it is an important down payment.

The details of our request for the MDBs are as follows: For the International Development Association (IDA): $835.6 million, of which $803.4 million is for our second of three payments under the IDA-12 replenishment and $32.1 million is to clear U.S. arrears. For the Multilateral Investment Guaranty Agency (MIGA): $16 million, of which $10 million is for our second of three payments under MIGA's general capital increase and $6 million is to clear U.S. arrears. For the IDB's Inter-American Investment Corporation (IIC): $34 million, of which $25 million is for our second of five payments to this private sector-oriented facility's general capital increase and $9 million is to clear US arrears. For the IDB's Multilateral Investment Fund: $25.9 million to clear a portion of U.S. arrears to this Fund, which focuses on stimulating domestic investment and private capital flows to the region. For the Asian Development Fund (ADF): $125 million, of which $100 million is for our fourth and final payment under the ADF's seventh, replenishment and $25 million is to clear a portion of U.S. arrears. For the African Development Fund: $100 million, for our second of three payments under the Fund's eighth replenishment. For the African Development Bank (AfDB): $6.1 million, of which $5.1 million is for our second of eight payments under the AfDB's modest capital increase and $1 million is to clear U.S. arrears. And for the European Bank for Reconstruction and Development (EBRD): $35.8 million for our fourth of eight payments under the EBRD's general capital increase.

In addition, we are requesting $175.6 million for the Global Environment Facility (GEF). Of this amount $107.5 million is for our third of four payments under the second replenishment. The remaining $68.1 million is to clear a portion of U.S. arrears. Today U.S. arrears to GEF total $204.2 million, the single largest amount we owe to any of the MDBs. With full funding of this request, our arrears to GEF would be cut by one-third. This is progress that we need to make if we are to preserve our credibility as seriously supporting environmental protection in a multilateral context.

2. Debt Relief

The enhanced HIPC initiative is the core of our request for debt restructuring programs this year. In 1999, under U.S. leadership, the international community undertook to provide deeper, broader, and faster debt relief within HIPC. The enhanced initiative is built around a basic commitment to a more systematic and effective effort against poverty by the benefiting countries themselves and by the IFIs.

The centerpiece of this new framework is the Poverty Reduction Strategy, prepared by the borrower country in consultation with representatives of civil society, the World Bank and other donors, which lays out a framework of policy reforms to ensure that the one- time benefits of HIPC debt relief are translated into demonstrable progress toward poverty reduction and economic growth. In particular, these agreed strategies focus on monitorable performance standards for macroeconomic criteria and a greater allocation of public expenditures for priority social needs.

Last year, Congress acted on a bipartisan basis to enable the Enhanced HIPC Initiative to begin. The steps agreed to last year will help us to cover roughly one-third of the direct costs to the United States of implementing the enhanced HIPC. But much work remains to do our share, notably with respect to the multilateral HIPC Trust Fund, to which we have yet to make a contribution. Overall, every dollar of our total request will leverage well over $20 in international debt relief.

That is why we are requesting a supplemental budget and authorization request for FY2000 and appropriation request for FY2001.

First, and most urgent, is the FY2000 supplemental request. This contains three elements: Appropriation of $210 million for the HIPC Trust Fund Authorization of $600 million for the HIPC Trust Fund over three years. Authorization for the IMF to use remaining earnings on investments of profits from its sales of gold.

Mr. Chairman, these supplemental FY2000 appropriations are urgently needed if this crucial initiative is to move forward. The Latin American HIPCs will be especially affected if we fail to do our part to ensure that the HIPC Trust Fund is adequately funded this year. To put it bluntly: if we do not play our part in this area, debt relief for Bolivia will not happen.

There should be no doubt that any delay in funding for this effort will have real consequences. For example: Earlier this year, Bolivia became the second country to qualify for enhanced HIPC and is expected to receive about $850 million in debt relief in present value terms. Bolivia, however, will not see a reduction in its debt payments this year unless the current financing gap in the IDB's portion of Bolivia's HIPC package is addressed. This gap is directly related to the failure of the US to contribute to the HIPC Trust Fund. If the gap is not filled, Bolivia will not receive debt relief this year that might have been invested in more rapid growth and poverty reduction. Without United States support, debt relief for Sub-Saharan Africa is also at risk. Due to contributions to the HIPC Trust Fund from the European Union and other creditors, most of which is specifically earmarked for Africa, it appears that there is funding for the first few African countries.

However, because donors have based their pledges to the HIPC Trust Fund on an American contribution, and because there are over 25 African countries in the HIPC program, we will not be able to deliver a comprehensive debt relief program without additional appropriations.

For FY2001, in order to play our full part in this initiative going forward, we are requesting: $75 million for bilateral debt reduction costs. $150 million for multilateral debt reduction under the HIPC Trust Fund to assist regional development banks and other multilateral institutions meet their costs of debt reduction. $375 million in advance appropriations for FY2002 and 2003 to cover costs of multilateral and bilateral debt reduction.For FY2001 we are also requesting $37 million for debt relief for countries that have tropical forests, as permitted under the Tropical Forest Conservation Act of 1998. The program provides local currency resources to non- government organizations (NGOs) and private voluntary organizations (PVOs) for tropical forest conservation or restoration projects. These resources would be generated through debt buybacks and debt reduction that would entail a budget cost.

For example, Bangladesh, which is the first likely beneficiary of this fiscal year's $13 million appropriation for tropical forest debt reduction, will now be able to reduce a portion of its concessional debts owed to the United States, while generating funds to conserve or restore its tropical forests. While the debt reduction component of the legislation is modest, the amounts generated for tropical forest conservation programs would be meaningful. The roughly $6 million that we have already set aside for Bangladesh's participation will leverage even more resources to conserve or restore its more than 3 million acres of tropical forests, roughly half of which are in the southwestern Sunderbans region. This area is home to the world's last genetically viable population of Bengal tigers, a total of only 400.

3. Technical assistance

Our request also includes $7 million for Treasury technical assistance programs, which are important in our efforts to support countries engaged in fundamental reforms. These programs have operated for nearly a decade in Central/Eastern Europe and the FSU, and beginning in FY1999, a direct Congressional appropriation allowed us to expand the program on a global basis. For FY2001 we are requesting increased funding to support work in key, reform-oriented countries in Africa, Asia, and Central and South America.

III. The Reform Agenda

As I noted earlier, effective U.S. engagement and advocacy at the MDBs have produced substantial results over the past decade. Working together, the Administration and Congress have helped to make these institutions increasingly effective advocates of policies that reflect core American values:

For example: We have obtained information policies at most of the MDBs based largely on the presumption of disclosure. Key policy and operational documents are now routinely made public through public information centers and, increasingly, through the Internet. For example, on the basis of IDA-12, starting July 1 1999, all new IDA Country Assistance Strategies (CASs) will become public. Many of the Bank's non-IDA borrowers are also voluntarily making their CASs public. As a result of strong US advocacy, MDB consultations with the public about project plans are required, which gives an effective voice to many people who have never had one. Issues of good governance and corruption, once considered off-limits for the institutions, are now being considered systematically in program design and lending decisions. The World Bank has developed a range of programs and tools to identify and address pervasive corruption in member countries. These range from technical assistance for civil service reform in Senegal, to procurement reform in Tajikistan, judicial modernization in Venezuela and legal and tax reform in Latvia. As a direct result of Administration and Congressional efforts, the World Bank and AfDB are now using clear and monitorable performance indicators to determine certain concessional lending allocations. In addition to fiscal and monetary, policy criteria, these indicators have related to the development of social safety nets, and borrower efforts to improve the efficiency and equity of public expenditure. More generally, IDA resources are now being directed overwhelmingly to better performing borrowers demonstrating a real commitment to. poverty reduction. In large part as a result of US pressure, the MDBs now have in place environmental, natural resource use, and resettlement policies that many, including critics, regard as state o.f the art. All of the MDBs require environmental assessments as part of the project development process, with public disclosure and consultation with affected people an increasingly important element in this process.

- The basic budgetary and public policy choices being made by borrowing countries themselves are now the focus of close MDB attention, ranging from the adequacy of spending for primary health and education, to excessive spending for the military. Traditional development investments, such as for basic infrastructure and social needs, are increasingly complemented by programs to build the efficient and accountable institutions and transparent legal frameworks needed for private enterprise to take root.

A great deal of progress has been made. But as we have said many times, to say these institutions are indispensable is not to say we can be happy with them as they now are. In a speech to the Council on Foreign Relations in New York last month I outlined our suggestions for a new framework for multilateral development policy designed to accelerate the pace of growth and equitable economic development in the world's poorer countries. This highlighted three areas where we believe that additional efforts by the MDBs will be especially important in the months and years ahead.

First, more effective policies in the poorest countries.

What the MDBs do to promote development in the poorest countries is without doubt their most morally urgent and important work. The HIPC initiative is a one-off attempt to clear away the mistakes of the past and offer these countries a fresh start. 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 greater emphasis on the nature of human needs. As I noted earlier, 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. They will and must form an important part of the basis for a satisfactory financing framework for countries. 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 it 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. Continued support for 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 continued donor country support for the provision 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.

Second, 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 impose 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 - and add to the total stock of public resources relative to what governments and the markets would have achieved by themselves.

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 it supports and complements, rather than supplants, private sector finance. Notably, 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. We also believe that a review of pricing policies is appropriate, and that pricing needs to avoid excessive encouragement of public rather than private sector reliance.

Third, 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 biodiversity - 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.

One issue that we believe ought to be especially high priority in the future is 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. Indeed, 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.We need to harness the scientific and technological skills of our nation and others to accelerate the development of new vaccines and medicines for infectious diseases. Because poor countries often cannot afford to buy vaccines, the market provides little incentive for pharmaceutical companies to develop vaccines for diseases that disproportionately affect those countries.

The President has proposed a number of proposals to strengthen our bilateral efforts toward this objective. Specifically: - The President's FY 2001 budget for the National Institutes of Health includes a significant increase in research critical to creating vaccines for deadly diseases that afflict primarily developing countries. Funding for AIDS vaccine research will increase substantially in FY 2001 and will have more than doubled since FY 1997. The President is also proposing a new tax credit for sales of vaccines against malaria, tuberculosis, HIV/AIDS, or any infectious disease that causes over one million deaths annually worldwide. Under the proposal, the seller of a qualified vaccine could claim a credit equal to 100 percent of the amount paid by a qualifying nonprofit organization (such as UNICEF) that received a credit allocation from the U.S: Agency for International Development (AID). The tax credit would match the purchaser's expenditures dollar-for-dollar, thereby doubling its purchasing power. For 2002 through 2010, AID could designate up to $1 billion of vaccine sales as eligible for the credit. This credit would provide a specific and credible commitment to purchase vaccines for the targeted diseases once they become available. And the President is calling on other governments to make similar purchase commitments, so that we can ensure a future market for these critically needed vaccines. In addition, Treasury and other Administration agencies have recently conferred with others on this issue. And as a result, we now also support a tax incentive that would be applied at a developmental stage - a tax credit for qualified clinical testing expenses for certain vaccines, similar to the existing orphan drug tax credit. The credit would be for 30% of the expenses for human clinical testing of vaccines for the diseases targeted by the President's initiative.

This credit will provide an additional incentive for drug manufacturers to undertake research on new vaccines and accelerate their development.

We also believe 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.

Mr. Chairman, can I take this opportunity to bring to your attention an item that has been of great interest in previous years.. We have worked hard to make the domestic window of the North American Development Bank, the Community Adjustment and Investment Program (USCAIP) fully productive. It is fulfilling its mission, and I urge the Congress to support this year's request, which is contained in the domestic section of the President's FY2001 budget.

IV. Concluding Remarks Mr. Chairman, Senator Leahy, let me conclude by reiterating that our strong support for the international financial institutions strongly promotes America's well being and national security interests. This Committee is central to providing that support, and we look forward to continuing our good working relationship as this budget request is considered. I would be happy to answer any questions that you have about our request.

END

LOAD-DATE: April 7, 2000

Document 6 of 21.


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