Copyright 2000 Federal News Service, Inc.
Federal News Service
March 23, 2000, Thursday
SECTION: CAPITOL HILL HEARING
LENGTH: 24134 words
HEADLINE:
PANEL ONE OF A HEARING OF THE HOUSE BANKING AND FINANCIAL
INSTITUTIONS COMMITTEE
SUBJECT: REPORT OF THE INTERNATIONAL
FINANCIAL INSTITUTION ADVISORY COMMISSION ON THE IMF, WORLD BANK, AND OTHER
INTERNATIONAL FINANCIAL INSTITUTIONS
CHAIRED BY: REPRESENTATIVE
JIM LEACH (R-IA)
LOCATION: 2128 RAYBURN HOUSE
OFFICE BUILDING, WASHINGTON, D.C.
TIME: 9:49 A.M. EST
WITNESSES: SECRETARY OF THE TREASURY LAWRENCE SUMMERS
BODY:
REP. LEACH: (Strikes the
gavel.) The committee will come to order.
On behalf of the committee,
I'd like to extend a warm welcome to Secretary Summers, as well as our second
panel, representing members and staff of the International Financial Institution
Advisory Commission.
Unfortunately, the chairman of the commission,
Allan H. Meltzer, could not be with us because of a scheduling conflict, but I'm
confident the views of the majority will be well represented, along with those
who dissented on the report. And we're fortunate, of course, to have one of the
panelists, Mr. Campbell, as a member of our own committee. The chief purpose of
this hearing is to examine ongoing efforts to improve the architecture of the
international financial system. In the IMF quota increase provisions contained
in the Omnibus Appropriations Act for Fiscal Year 1999, the authorizing language
of which stemmed from this committee, Congress laid the groundwork for active
and ongoing oversight of the IMF in the emerging issue of international
financial reform. The act called for specific IMF reforms in a number of areas
and included a requirement for an annual report and testimony by the secretary
of the Treasury on progress made in reforming the institution, on efforts to
strengthen the international financial system, and on the compliance of
countries that have received IMF conditional assistance.
The Omnibus
Appropriation Act provided for the establishment of the International Financial
Institution Advisory Commission to consider the roles of several international
financial institutions, including the IMF and the World Bank, and report its
findings to Congress and the executive branch. That report was received on March
8th. It was statutorily stipulated that the executive branch would have 90 days
in which to respond.
As we all recall, just 18 months ago, the world was
jolted by the worst international financial crisis in decades. Certain
high-flying economies of East Asia were grounded by plunging exchange rates and
stricken economies. The financial contagion spread to Russia and Latin America,
and the resulting confidence crisis got reflected in the demise and rescue of
the world's largest hedge fund, Long-Term Capital Management.
With the
global outlook at the dawn of this century increasingly stabilized in Asia, it
would appear particularly propitious for the United States to review the
policies of, as well as our policies toward, the international financial
institutions.
By historical background, representatives of some 44
countries met in Bretton Woods, New Hampshire, in 1944, as World War II was
drawing to a close, to review the causes of the collapse of the international
economic system, which had helped lead both to the Great Depression and the
Second World War. The three Bretton Woods institutions that came into being --
the IMF, the World Bank, and the General Agreement on Tariffs and Trade, which
has now become the World Trade Organization -- were designed to help rebuild
Europe, to address the causes of the Depression, and, most significantly, to
mitigate the economic causes and consequences of war itself.
Despite
errors made, any reading of history would indicate that the IMF and its sister
institutions have generally advanced U.S. interest in maintaining a stable
international political and financial system that promotes global economic
growth and open markets.
Indeed, in the last two decades alone, world
GDP has quadrupled, and international trade has quintupled. While it would be a
mistake to argue that the Bretton Woods institutions were principally
responsible for this stunning increase in world trade, it is credible to suggest
that they have generally played a constructive stabilizing role in the evolving
global economy.
Within the American economic community, there are
skeptics about certain IMF policies, but there is an impressive degree of
consensus among conservatives and liberals on many of the core elements that
should come to characterize the international financial system in the 21st
century. Among these are the following precepts: that appropriately liberalized
financial markets offer compelling benefits to the world economy, that
globalization and capital mobility are here to stay, that domestic and
international financial-institution issues are increasingly intertwined; and
that, when financial crises erupt, the IMF can play a constructive role in
helping contain systemic risks, and that the World Bank and the other
multilateral development institutions have an important role to play in the
effort to spread economic opportunity and raise standards of living in
developing countries around the world.
Likewise, common ground appears
to have been established in the principle that the international financial
institutions should focus their energies on the fundamentals, various core
competencies. In the case of the Fund, this means dispensing macroeconomic
advice, encouraging the development of international standards for minimally
acceptable financial practices and crisis management, rather than
quasi-development lending in underdeveloped economies. In the case of the World
Bank and the other MDBs, concentration on the fundamentals means focusing
effective assistance aimed at promoting sustainable growth and poverty
reduction.
To date, the administration has advocated a gradualist
approach. Others have made proposals that are more sweeping. In this context, I
find some of the conclusions of the split-commission report credible, while
others appear to go too far. For example, the recommendations to transfer the
World Bank's Latin American and Asian programs to the regional development
banks, and to end the Bank's role in private- sector development, strikes me as
radical and contrary to the national interest.
But I would highlight
three areas where the Meltzer Commission is in lockstep with this committee:
one, that the notion that protectionism in finance is profoundly
counterproductive to the development of a robust domestic economy and banking
system with a sound credit culture; two, that the World Bank is uniquely well
placed to play a leadership role in addressing a variety of transnational
problems, and particularly well positioned to lead at this juncture in history
the battle against the scourge of AIDS; and three, that debt relief for heavily
indebted poor countries is an economic and moral imperative that should proceed
in a forthright and timely manner, which I believe is so critical that it should
proceed without reference to other contentious issues.
I have quite a
bit more I'd like to add to this opening statement, but let me just ask
unanimous consent to revise and extend it, and turn at this point to Mr.
LaFalce.
REP. JOHN LAFALCE (D-NY): Thank you very much, Mr. Chairman.
First let me say how much I share your sentiments. Recent months have brought
increased attention to the need to help reform the IMF, the World Bank and the
regional Multilateral Development Banks. Late last year, Secretary Summers
recommended some very constructive reforms of the IMF which merit our attention.
And more recently, the International Financial Institutions Advisory Commission
issued their series of recommendations. I think it's wise that we use this
opportunity to examine the proposals more closely today.
Our committee
has already taken substantial action, both in the IMF quota legislation and in
last year's debt relief effort to call for reform of the operations of the
international financial institutions. I believe we have made some very concrete
and important improvements in the way these institutions operate. Of course our
job is not finished. I would support further reforms, in all probability,
broader reforms than the secretary has suggested; different reforms, in many
cases, than what the commission has recommended. I know that reform of the
international financial institutions will surely be a priority of this
committee, as it should be.
But let me emphasize a very fundamental
point on which Chairman Leach and I agree. Last year our committee took a very
major, a very progressive step by passing historic debt-relief legislation, and
Congress has already appropriated $123 million for HIPC debt
relief, a very significant beginning to the debt-relief effort. This year we
very much need to complete the job by providing all of the necessary funding.
Now, some proponents of the commission's report are insisting that
funding of the HIPC trust fund, and otherwise funding debt relief, should be
tied to the implementation of the reforms that the majority recommends. I
fundamentally, unequivocally disagree with that. Funding the debt-relief
initiative must be an immediate and an independent priority for this Congress.
Our committee reached a strong bipartisan consensus on this issue last session,
and our recommendations were largely reflected in the omnibus appropriations
bill, now the law of the land.
We must finish what we started by
providing all the funding required this Congress without any tying to the
majority or the commission's recommendations. If Congress were to withhold or
delay further funding for debt relief, pending further IFI reform, as some would
have us do, we would fail to meet our common goal of relieving the devastating
poverty that people in the poorest countries struggle with every day, and that
would be unconscionable.
The commission, whose recommendations I find
disappointing in some other key regards, has agreed that debt relief is an
important priority. And the way to truly make it a priority is to move
immediately to get it funded.
Mr. Secretary, I know that you, as a
representative of this administration, which has made such a commitment to
international debt relief, are doing everything in your power to see that the
debt relief initiative is fully and quickly funded. The ball is in our courts. I
hesitate to make tennis references with you, Mr. Secretary. (Laughs.) Gene
Sperling, while he's on crutches, okay. Okay.
Mr. Chairman, I thank you
very much.
REP. LEACH: Thank you.
Mrs. Roukema.
REP.
MARGE ROUKEMA (R-NJ): Thank you, Mr. Chairman. And I ask consent to have my full
remarks included --
REP. LEACH: Without objection. And let me also say,
without objection, the statements of any and all members will be revised and put
in the record. Please proceed.
REP. ROUKEMA: And thank you, Mr.
Chairman, for your opening remarks and the way you presented an overview of
these issues concerning the structure of the architecture of an international
financial system, particularly in this evolving global economy. And I want to
stress that.
The IMF we have known has been a controversial entity, and
it evokes some strong feelings in both directions. Some members of Congress have
very grave reservations about the IMF and would like to see it abolished. Other
members, like myself, believe in the institution but that it should be scaled
back both in its missions and activities, or at least to have more
accountability, up-front accountability, and probably some structural changes.
As I understand, this last approach is the approach that Secretary Summers has
recently voiced, and we'll be asking more questions about that today.
We
did have a significant debate about the IMF when we provided in 1998 the
additional billions in funds, and others, as has already been mentioned by you,
Mr. Chairman, the Asian and the Russian financial crises had just occurred at
that time, and it was suggested that the IMF might not have adequate resources
if we didn't provide the funds. But the critics of the IMF raised very valid
concerns about the transparency and the accountability at that time, and I
certainly shared those concerns and supported the adoption of the provisions
that we are addressing here today with our overview -- oversight hearings here.
And I'm looking forward to that.
But let me say up front that the IMF
should be maintained, but we must address the real problems here. It is for this
reason that I believe that we should not be eliminating -- these reasons that I
believe we should not be eliminating them, certainly with the recent experience
of Asia, Russia, Brazil, Mexico, Korea and other countries, and again stressing
that we're speaking about our position in a global economy. However, I must
stress that we are not done with the IMF transparency and accountability
questions, and especially -- and I regret to have to say this -- the Treasury's
accountability. And I am disturbed by reports that 1998, the IMF staff knew, and
apparently communicated, facts to the IMF board that the Ukraine Central Bank
had violated the IMF loan terms.
The Ukraine apparently double-counted
reserves, encumbered reserves, and intervened in the Ukrainian T-bill market.
All, if done, would have been violations of the IMF loan program, and I think
that we'll have to ask these questions and ask for a response from the
secretary. How did the Treasury and the United States executive director to IMF
miss these notifications and miss this situation? Were they not informed? And
how can we -- or something worse than not being informed? And what is being
done, in your recommendations today and in your operations up until now to fix
these oversight problems?
In addition, it is still not clear whether
there was a diversion of IMF monies to private parties, and there are assertions
about the possibility of money-laundering activities. I would hope that that can
be dismissed with credibility. I want to support and vote for additional IMF
funding, but only if we can expect a full and open accounting here and specific
recommendations for a tightening of the responsibilities here, and I'm looking
forward with great anticipation to this hearing and to hearing Secretary
Summers.
REP. LEACH: Thank you. Does anyone else seek recognition? Mr.
Frank?
REP. BARNEY FRANK (D-MA): Thank you, Mr. Chairman.
REP./MR. : (Off mike.)
REP. FRANK: Oh, yield to --
REP./MR. : Mr. Chairman, in connection with the remarks of Mrs. Roukema,
I wonder if I could make an insertion into the record. This is a report from the
-- on the condition of the National Bank of Ukraine and problems with a Credite
Suisse transaction. I don't necessarily subscribe to the report. It's a
recognition of the fact that the Ukrainian Parliament had examined the situation
and forwarded its findings to the general public prosecution office.
REP. LEACH: If there's no objection, that report will be made part of
the record. And let me stress to members of the committee, we will be hearing on
the Ukraine issue specifically as the hearing goes forward.
Yes, Mr.
Frank.
REP. FRANK: Thank you, Mr. Chairman. This is a difficult task,
deciding what to say, because as I confront this subject and the array of people
whom I respect, there are so many disagreements that I have with so many people
that I do not know which ones to pursue.
The purpose of this hearing, I
think, is to talk very specifically about some of the recommendations of the
Commission, so I will withhold my disagreements with some of the Commission's
recommendations until the time that we get into the questioning.
But I
do want to address here a disagreement I have with a lot of others and an
agreement that I have, and I would like to call people's attention to the very
thoughtful dissent filed by Mr. Levinson, a commissioner who, in the i nterest
of disclosure, I say I strongly supported his appointment. And it is a
fundamental issue that has to be addressed.
And I'm going to deviate a
little bit, but we have people here from the financial press and elsewhere, and
part of the problem that we have in trying to muster the support we ought to
have for American participation in the globalization process in general, in
alleviating poverty in particular, is the sense among a lot of Americans that
the burdens of doing that have been unfairly distributed. And what Mr.
Levinson's report -- what his dissent does is point to a way to break out of the
deadlock that we now face.
The deadlock is that the old consensus that
supported globalization, which was essentially, in American political terms, a
center to right consensus which said the answer to this is to free capital of
all constraints, help it along the way, and that's how we will alleviate poverty
-- that's broken down because a number of Americans feel that that creates
benefits for the country as a whole, but distributes the burdens unequally.
These are people who are concerned about less skilled workers; people who have
been concerned about the manufacturing sector, particularly the
non-technologically sophisticated manufacturing sector; people who have been
concerned about the environment.
And I want to say, we've had a recent
example of why people feel this way. And I know it's a little bit off, but the
broader context is important. I have been struck -- for some time I have been
critical of Mr. Greenspan's interest rates increases, although I recognize that
Mr. Greenspan has been on the Federal Reserve Board the best of the people, I
think, in terms of being willing to accommodate growth. But I have been critical
of the Fed. I have often felt very alone. I now find, as I read the financial
pages and other respectable journals, that there are people who are agreeing
that the Fed may be going too far.
And it's very interesting; it was one
thing for the Federal Reserve to be raising interest rates when its goal was to
increase unemployment, and in the short term they felt that was necessary, not
because that was an end in itself, but because it would slow down inflation. So
when the Fed was worried that unemployment was getting too low, that was
respectable and there was a great chorus of support. Now, however, they are
threatening stock prices. And while I have never thought that the porcine
metaphor was a fair one, because I don't accuse people of false motives when
they're trying to raise money, I do think that the financial community and the
financial press, their response to the Federal Reserve's concern about interest
rates really does have to -- I have to invoke a porcine metaphor. They have
become Miss Piggy -- "Moi!" they shout. I mean, it's one thing to raise interest
rates because unemployment is getting too low. But stock prices? How dare they
worry about stock prices! And I am now delighted to have allies in being
critical of the Fed's decision to raise interest rates in the absence of any
inflation because it's now starting to hit other people.
Now, I hope to
pursue that in other fora, but I do want to say that's the context in which Mr.
Levinson's dissent is so important.
Think what it's like -- you know,
Mr. Greenspan himself has said -- and he said it with regard to trade, but it's
also true with regard to the IMF, debt relief, intervention in the crises; we
couldn't get the votes in 1995 to help with Mexico. The chairman wanted to do
that, many of us wanted to do that. The votes weren't there.
We need to
create a new consensus -- and by the way, the commission report itself says that
in some areas; the commission report says America is not putting enough of its
tax revenues to this purpose. And I welcome the commission saying that. I was
just reminded by staff that the commission does recognize that. Why does such a
wealthy nation begrudge a pittance of our great wealth to this important task?
And it's partly because it is seen within the country as being something where
the benefits are distributed broadly and the burdens distributed unequally, and
the people who get the least out of it are asked to pay the most for it. And
that's why the stock market situation is so relevant.
If, in fact, we're
going to have a situation where growth is slowed down and unemployment
increases, and wage growth is retarded because of people making too much money
in the stock market, then you are going to see an increase in the resistance.
So I will get more into specifics later, but I do urge people to read
Mr. Levinson's dissent, not simply for what I think is it cogency on its own
terms, but because it points the way to the creation of a new consensus.
The last point, twice in the last few years, this very committee has
taken the lead in the Congress in being responsible about globalization. Mr.
Chairman, you and the ranking member have forged a very important bipartisan
coalition. And we have, I am glad to say, given a lead to others in the
Appropriations Committee. Once we did it with an IMF replenishment with regard
to the crises in 1998; last year we did it with regard to debt relief. In both
cases, this committee took the lead in formulating a responsible approach to
aspects of the global problem. We were able to do it because this committee,
under the leadership of the chairman and the ranking member working together,
deviated from the old pattern and showed some concern for the social issues; for
the rights of workers, for the environment.
But we know that in many
cases what we were saying wasn't going to be absolutely be accomplished. Much of
what we did was aspirational. But at least people understood that we were trying
to at least put it on the agenda. And so I urge people, recognizing the
successes we have had in this committee, with both debt relief in '99 and IMF
crisis in '98, to look at Mr. Levinson's dissent because he points the way to
doing more of that more successfully.
REP. LEACH: Mr. Campbell?
REP. TOM CAMPBELL (R-CA): Thank you, Mr. Chairman. I appreciate the
chance to speak a few words on the commission's work at this point. And then in
questions, I'll develop them.
But hearing my colleagues, particularly
the ranking Democratic member, Mr. LaFalce, I wanted to draw attention to what
it seems to me is not properly understood regarding the HIPC question, the
writing off of debt to the heavily indebted poor countries. And, Mr. LaFalce,
I'll ask for your attention on this particularly.
The prepared testimony
of Secretary Summers -- and he'll explain it, of course, in his own words -- but
his prepared testimony says: "We do not believe" -- and I take it that's the
administration -- "we do not believe that the report's recommendation to write
off all HIPC debt would be either desirable or feasible" -- end quote, page 17.
And he gives his reasons, and I am sure he'll develop them on this own time.
But it's important to recognize that that the criticism here is from the
administration against the commission in -- so far as the commission went
towards writing off HIPC debt. And the conditions that the commission
recommended for writing off HIPC debt said: provided there was some
understandable and credible plan towards economic structuring in the countries
as to which the debt was to be written off. It was a very generic sort of
conditionality.
But if I didn't draw attention to this, it might be
misperceived what the overwhelming consensus of the commission is, and what this
committee's consensus is, which is towards the writing off of HIPC debt. And to
the best of my perception, it is the administration whose view is against
writing off HIPC debt, as I read the secretary's statement: "We do not believe
the report's recommendation to write off all HIPC debt would be either desirable
or feasible" -- again, page 17.
Second and last, as to the Levinson
dissent, it was a pleasure to serve with Professor Levinson. He will speak on
his own behalf, and we'll have that testimony. But I do note that the
administration, once again, is more on the commission majority side than it is
on the dissent side as to the insertion of worker protection and environmental
standards into the international financial institution. I think the
administration is to be applauded for trying to continue the WTO process and
what happened in Seattle was regrettable. I think that there could have been
progress in Seattle had those meetings not been shut down.
But the array
of opinion on this, actually to my perception, puts the administration more on
the commission's side, against a structural insertion at this moment into the
IFIs, of environmental and labor concern, not precluding their possibility in
the future.
Mr. Chairman, thank you for allowing me to make the opening
statement.
REP. LEACH: Thank you, Mr. Campbell.
Yes, Mr.
Sanders?
REP. BERNIE SANDERS (I-VT): Thank you, Mr. Chairman. And thank
you very much, Mr. Summers, for coming to discuss what is certainly one of the
most important issues we will be dealing with all year.
Mr. Chairman, I
think the good news is that Congress has come a very long way in the last few
years in forcing some changes on the IMF. Many of us for a number of years --
and I would perhaps cite some of the more conservative members of this
commission in Congress and some of the more progressive members of Congress, who
said the status quo is not good enough, in terms of the lack of the
accountability from the IMF to the taxpayers of this country and in terms of
what the IMF has been doing to the poorest people in the world. And some of the
objections that some of us have raised for the last several years are now
falling into the mainstream, and I think we are making some good progress.
Mr. Chairman, the bottom line is that the IMF is losing support in the
United States Congress. Last November this committee voted overwhelmingly to
stop the IMF from imposing austerity conditions on debt relief for the poorest
countries. Last year IMF funding authorizations had to be sneaked -- let's
remember this -- had to be sneaked into an omnibus spending bill at the end of
the legislative session, because it might not otherwise have passed on its own
merits. And now a congressionally appointed commission has recommended that the
IMF should be significantly scaled back.
The IMF's mission creep has
made it the most powerful financial institution in the world, with
decision-making authority over 50 national governments around the world. And
that's why it has been so terribly important that this committee and the
Congress begin to address the enormous power of the IMF over billions of people
throughout the country.
The IMF's debt-reduction program for the world's
most heavily indebted poor countries has also been, up to this point, a dismal
failure, resulting in more debt and deeper poverty for the poorest of the
world's poor. In many of these countries, where AIDS, hunger, illiteracy, and
unemployment are rampant, it is now common for governments to spend far more on
debt service than on urgent human needs. And I congratulate the United States
Congress for finally recognizing this reality and demanding a change in terms of
what's happening with the debts of the poorest countries.
The IMF's
misguided policies in recent decades are largely responsible for the lack of
per-capita economic growth in Latin America, declining per-capita income in
Africa, and skyrocketing trade deficits in the United States.
The IMF as
an institution is in desperate need of some structural adjustment of its own.
It's time that we gave them some medicine and said that if they do not shape up,
the American taxpayer is not going to continue to provide them with the funds
they request.
Some of the reforms that I think we should be instituting
is, number one, the IMF must become more open and accountable. As I understand
it, today, Mr. Chairman, the IMF is going to approve a new director. Where was
the open discussion regarding that director? Where was he asked to answer
questions before the world's press as to where he wants to take that enormously
powerful institution?
We were told that the United States objected to
the first gentleman who was proposed. We don't even know why. We are told that
he didn't have the stature, perhaps, to come to Congress in order to get money
out of us. That's not a good reason to reject that guy.
We want to know
where this new person is going. When Mr. Summers became secretary of the
Treasury, he was grilled by the Senate, right? And that's the process. Where do
you stand? Where are you going to take the Treasury Department?
We
believe in that process, and it is incredible to me that today, after all the
discussion about accountability, the new director is going to be appointed, with
very little knowledge of where he intends to take that institution.
Further, the IMF should reverse its mission creep of the past three
decades and focus on its original mission of helping countries with short-term
balance of payment problems and monitoring capital markets.
Further, to
discourage the reckless speculation that leads the financial and economic
crisis, the IMF should make lenders pick up the tab for their losses and
financial crises. It is not the function of the American taxpayer to bail out
the largest financial institutions in the world who make poor investments in
Third World countries.
The IMF should stop dispensing one-size-fits-all
austerity programs, which only make financial crises worse and lead to long-term
economic stagnation. As I have been around the world talking to Third World
leaders, what they keep telling us, "They only give us one cookie-cutter
prescription; our country is different than other countries; why do they always
prescribe the same set of remedies?"
The IMF further should stop
pretending to be a development bank. Its misguided attempts have resulted in
rising debt and deepening poverty for the poorest countries in the world.
The IMF -- and Mr. Campbell just made this point -- the IMF should
cancel, not just reduce, the debt it has created among the most heavily indebted
poor countries. Its current debt reduction program, even under its new name,
keeps poor countries hopelessly in debt and the IMF forever in charge.
So, in conclusion, Mr. Chairman, I think we are making some progress. I
think we have got a long way to go and we cannot lose focus on this issue which
affects not only the American people but the lives of literally billions of
people throughout the world.
Thank you, Mr. Chairman.
REP.
LEACH: Thank you, Mr. Frank.
Does anyone else seek recognition?
REP. : Mr. Chairman?
REP. : Mr. Chairman?
REP. LEACH:
Let me turn first -- yes, the gentlelady from New York.
REP. SUE KELLY
(R-NY) (?): Thank you, Mr. Chairman.
I'm going to ask that under the
existing unanimous consent agreement, that my statement be in total put in the
record, but there are just two points I'd like to bring up.
I find merit
in the ideas of removing the debt relief initiative from the IMF and moving it
to the World Bank so that the IMF may focus solely on emergency liquidity
problems when the private markets dry up in a crisis. And throughout all of the
committee's work, I am going to continue my efforts to work to ensure
transparency, a greater transparency in these institutions.
And I thank
you, Mr. Chairman, for letting me speak.
REP. LEACH: Thank you.
Yes, the gentlelady from New York.
REP. CAROLYN MALONEY (D-NY):
Thank you, Mr. Chairman.
And it is a pleasure to see you again, Mr.
Secretary, and thank you for coming on this important issue and your leadership
on financial modernization. With Secretary Summers' combination of experience on
the front lines fighting economic contagion in Asia and other countries, and his
academic background, there is no more qualified person that the U.S. could have
at this point as its representative as the world considers reform to
international financial institutions.
Mr. Chairman and Ranking Member
LaFalce, this committee did really a wonderful thing last year when we voted in
a bipartisan way for debt relief for the world's poorest countries. At that
time, Mr. Chairman, Mr. Leach, you said, and I quote, "Relieving the debt
burdens of the world's poorest countries is one of the foremost economic,
humanitarian and moral challenges of our time." Your words of last November must
guide Congress this year.
I look forward to the debate over reform of
the international financial institutions. I am very concerned by statements that
opponents of IFIs may use HIPC legislation as a vehicle to attach their agenda.
Additional debt relief for desperately poor countries must not be delayed by
congressional efforts to coerce reforms of the IMF and the World Bank.
I
applaud and join with my colleague on the other side of the aisle, Mr. Campbell,
when he noted that the IFI Advisory Commission unanimously voted in favor of
debt relief.
Separately, the debate over the future of international
financial institutions is highly appropriate. In some areas there is broad
agreement. Undoubtedly, private capital is the preferred way to address
international financial problems. When situations require the assistance of
IFIs, I agree with my colleague from New York, Mrs. Kelly, that their operations
should proceed in a transparent and accountable way.
The arrival of the
IFI Commission's report does not mark the beginning of the effort to
significantly reform these entities. The administration is already leading the
world effort to modernize the IFIs. Treasury is already working to refocus the
IMF to lending on shorter maturities. Secretary Summers has already stated that
the World Bank should focus on lending to projects that would otherwise go
unfunded by the private sector.
Today I expect Secretary Summers will
report on the progress we've made in these areas and the administration's plans
to continue to lead IMF reform. I welcome the report of the IFI Commission and I
welcome this debate and I look forward to the day's testimony.
Thank
you, Mr. Chairman.
REP. LEACH: Thank you, Mrs. Maloney. Is any -- Yes,
the gentlemen --
REP. : Mr. Chairman, thank you. I won't belabor the
point and I want to welcome the secretary and look forward to his testimony.
We've already eaten up too much of your time.
Let me just make comment
and I'll submit to the record my formal statement, but I concur in some respects
with my colleague, Mr. Frank's, resistance here in America as it relates to
globalization, because there are any who feel that the burden is unfairly
distributed. And I agree that we need to develop and create a new consensus in
that regard, because it does have an effect on a lot of the reforms that we talk
about in terms of the international financial architecture, especially on those
issues like debt relief.
That burden, in the sense that it is being
unfairly distributed, affects a lot of my constituents who really question why
we in America would want to dedicate more resources than we already do. So
before we judge the notion that some in America aren't willing to move forward
with globalization, I think we need to look at the reforms that need to be
realized here, including -- and like Mrs. Kelly's comments -- those reforms
relating to transparency and accountability, because in the end it's their
lives, their money that we're affecting.
So I thank you, Mr. Chairman,
for conducting this hearing and I'll yield back my time.
REP. LEACH:
Thank you. Let me turn over here -- yes, Mrs. Waters?
REP. MAXINE WATERS
(D-CA): Mr. Chairman and members, I commend the Meltzer Commission for
recommending that the IMF completely write off the debts owed by heavily
indebted poor countries, but implement economic reforms. Debt relief is
desperately needed by many poor countries. The governments of these countries
are being forced to make drastic cuts in basic services, such as health and
education, in order to make payment on their debts. In Niger, in Zambia,
government spending on debt service payments is greater than government spending
on health and education combined. And Tanzania spends four times as much money
on debt payments as it does on health and education combined. Debt relief will
give poor countries a fresh start and improve their ability to serve the people.
I am deeply concerned that the current IMF debt relief plans do not go
far enough to relieve the debts of impoverished countries. The enhanced Heavily
Indebted Poor Countries Initiative of the IMF is intended to provide sufficient
debt relief to reduce poor countries' debts to theoretically sustainable levels.
However, the initiative would nevertheless require poor countries to
make significant debt service payments.
H.R. 1095, which was passed by
this committee last fall, includes two amendments, which I offered to urge the
president to support improvements in the HIPC initiative. One amendment would
require that the amount of debt relief provided to a country be sufficient to
ensure that the value of the country's outstanding debts does not exceed the
value of the country's annual exports. The other amendment would ensure that
poor countries would not have to spend more than 10 percent of their annual
revenues on debt service payments. Unfortunately, neither of this modest
provisions were provided in H.R. 3194, the fiscal year 2000 appropriations bill
which provided authorization of debt relief.
The Meltzer Commission is
to be congratulated for recognizing the value of complete cancellation of the
debts of heavily indebted poor countries.
Let me just close by saying
this, Mr. Chairman:
We have an opportunity with reform to get this thing
right. I think we've heard over and over again -- not just from me, but from
many members of Congress -- that we are unhappy with the way they have put these
poor countries -- the IMF has put these poor countries in a position where,
number one, they can't get out of debt; number two, they're starving the
children in order to repay the debt.
Now I'm trying to understand the
recommendation for grants. Grants are fine, and I certainly would support
grants. But what I don't know is how the determination will be made to give the
grants to these poor countries. Who will be responsible for those decisions and
those evaluations? And when will we leave poor countries out that desperately
need assistance, because somehow they don't meet the criteria for the grants?
Everything that I've attempted to do with these poor countries speaks to
technical assistance. We just talked about it with AIDS, and I talk about it all
the time. I have learned over the years that many of these countries do not have
the systems by which to receive and implement funding in ways that you will get
the best bang for your buck.
So we have great leverage with IMF and the
World Bank, and I'm hoping that our country, our representatives will exercise
great influence in helping to get this thing right. I mean, again, total
cancellation of debt.
Secondly, if we move to a grant system, we've got
to make sure that the criteria makes good sense, and we've got to make sure that
we have technical assistance, so we don't end up with the poorest and the most
needy of these countries not being eligible for grants simply because they don't
have the systems to implement them.
So I'm hopeful that we will have a
lot more transparency on this whole operation, so that we can have the kind of
input that's necessary to do the best job we can do with these tremendous
resources that we have. And I don't expect the United States to go along. I
don't expect them to be silent. I don't expect them not to exercise their power.
And I expect you to get input from us about how to get this done.
Thank
you very much.
REP. LEACH: Thank you.
First, let me recognize
John LaFalce for a unanimous consent request.
REP. LAFALCE: Mr.
Chairman, a group of NGOs, from Bread for the World to -- alphabetically --
World Vision, sent an outstanding letter to members of the Senate Foreign
Relations Committee in connection with their authorization legislation for
multilateral debt relief for poor countries. And I ask unanimous consent to
insert that letter into the record.
REP. LEACH: Without objection, so
ordered.
And before turning to the gentleman from Wisconsin, would you
like to request unanimous consent to put that sterling statement you gave on the
House floor in the record last night as well?
REP. PAUL RYAN (R-WI):
Thank you. Yes. Yes, I would like unanimous consent to do that.
REP.
LEACH: Without objection, so ordered.
REP. RYAN: Thank you, Mr.
Chairman. I will be brief, since I know we have a vote, and I'd like to get to
the secretary's comments, because I'm sure he's busy.
It's nice to see
you again, Secretary Summers.
The report and its recommendations focus
around three main issues: incentives, interest rates and information. I find it
worrisome that the IMF or the World Bank has had continuous difficulty with
these factors. These are basically the foundation of basic macroeconomics. In
many ways, the IMF has done more harm than good in both the developing countries
and in former Soviet Union countries, like Russia and the Ukraine.
But I
find it very refreshing and intelligent that the commission is recommending that
countries avoid pegged or adjustable rate systems. I firmly believe that a
reliable currency and stable money are the best ways to achieve long-term
economic growth. Failing to implement currency boards or dollarization in
countries with weak or corrupt central banks, or with unstable financial
institutions, is one of the IMF's greatest flaws. The theory behind pegged rates
is outdated and has been proven wrong over and over again.
Further, by
following the path of currency boards or dollarization, the IMF would
effectively kill two birds with one stone. By encouraging these systems, the IMF
would not only be encouraging sound economic policies but, intrinsically, also
the institution reform that is greatly needed in the countries that the IMF
seeks to help.
Additionally, I support the commission's recommendation
to eliminate the ESAF, now the Poverty Reduction and Growth Facility. The
conditionalities attached to the long-term development lending loans are
counterproductive, they're invasive, and flat-out harmful to the citizens of
impoverished countries. I have had the opportunity to meet with several very
thoughtful constituents of mine in my own district who feel very strongly about
this as well. I appreciate the time that they have expended on working to
eliminate the ESAF and the conditional lending policies of the IMF.
Mr.
Chairman, legislation has been introduced in the House by Joint Economic
Committee Chairman Jim Saxton, which addresses the concerns of the Advisory
Commission and the recommendations for reform. If we want to give more than lip
service in what we're doing here on the committee to IMF reform, I think that
this committee should look into this bill or others like it. We want these
countries to succeed economically. After decades of poverty and central
planning, their citizens deserve a better standard of living. However, the
sustained long-term planning needed for such prosperity cannot take place until
the IMF gets on the right track.
Thank you, Mr. Chairman. I'll ask that
the rest of my remarks be included in the record.
Mr. Secretary, it's
nice to have you here, and I look forward to your testimony.
REP. LEACH:
The chairman would just like to make a comment. We have a vote on the floor. We
also want to get our secretary. So I would like to close opening statements
before the vote on the floor, and begin with the secretary immediately
thereafter. That makes just several minutes for the two, if that's alright.
Mr. Sherman.
REP. BRAD SHERMAN (D-CA): Mr. Secretary, thanks for
coming here. I think some speakers have been inclined to blame the IMF for the
difficulties that impoverished countries are facing. I think we should remember
the IMF provides concessionary loans, which is a lot more helpful than a poke in
the eye with a sharp stick.
But just because the IMF has tried to be
helpful, and I think in most cases has been, does not mean that it cannot do
better. The chief mechanism for doing better is to provide more sunshine into
the process.
Inevitably, what this will do is it will take IMF
decision-making, and national decision-making about the IMF, out of the hands of
a few experts and into the hands of, to some extent, the Congress and the public
at large. But I think that that's a necessary process as these institutions'
importance becomes more apparent.
And I think that the country and the
Congress would be well- served if we spent more time getting more information
about the IMF and the World Bank and debating it on the floor, and maybe
shortening some of our debates about abortion and the NEA and the others things
that clog both the Congress and the pages of our newspapers.
Thank you.
REP. LEACH: Thank you.
Mrs. Tubbs?
REP. STEPHANIE TUBBS
JONES (D-OH): Thank you, Mr. Chairman. I'd just like to congratulate you and the
ranking member for bringing these issues before our committee.
It's
always good to see you, Mr. Secretary.
I think that it's very important
that we debate all these issues. I'd like to associate myself with the comments
of many of my colleagues who said that underdeveloped countries truly -- and
underdeveloped and underserved and heavily indebted countries need our support
and help so that, as we talk about the global marketplace and we talk about
financial modernization, they have an opportunity to be at the table and
participate and be a part and parcel of it.
I'd just like to thank you
for being here, and I look forward to your comments.
Thank you very
much, Mr. Chairman.
REP. LEACH: Well, I thank you very much. And I
appreciate the brevity of both yourself and Mr. Sherman.
At this point,
the committee will be in recess pending the vote, and then we will proceed
directly to Secretary Summers' statement. The committee is in recess.
(Recess.)
REP. LEACH: (Strikes gavel.) The committee will return
to order.
Secretary Summers, please proceed as you see fit. You're
extraordinarily welcome back before the committee.
SEC. SUMMERS:
Chairman Leach, Ranking Member LaFalce, members of the committee, I'm pleased to
once again have the opportunity to appear before the Banking Committee to
discuss the crucial issues relating to ongoing reform of the international
financial institutions, in the context of the rapidly changing global economy.
It's a particular pleasure to appear before this committee, because of the
contributions that it has made to consideration of these issues over the last
several years.
In my testimony today, I will address three issues.
There's a much longer statement that has been submitted for the record.
First, the strong case for United States support for international
financial institutions.
Second, our reform agenda for both the IMF and
the multilateral development banks.
And third, some initial reflections
on recommendations of the recent report of the International Financial
Institution Advisory Commission.
Let me turn first to the case for
strong support for the international financial institutions. It is a case that
rests on the core case for the United States supporting increased prosperity in
the developing world and increased global integration. It has three pillars.
First, the desire to advance our core values and humanitarian goals in a
world where 1.3 billion people live on less than $2 a day.
Countries that are helped to succeed economically are much more likely to become
democratic, their people more likely to avoid debilitating disease, more likely
to have the opportunity to learn to read and to work with human dignity.
Second, the institutions promote U.S. economic and commercial interests.
Already the developing world accounts for 40 percent of U.S. exports, and this
is increasing. And the international financial institutions have supported
policy changes, such as reduced tariffs in Mexico and the opening up of the
India economy, that enormously benefit U.S. producers. And of course, the events
of the financial crisis in 1997 and 1998 remind us, as Chairman Greenspan has so
often, that the United States cannot be an oasis of prosperity in a troubled
global economy.
Third, programs of the international financial
institutions 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 into which we will be drawn are most likely in situations of economic
distress, when populations turn, in their frustration, to nationalist leaders
because of a lack of sense of economic opportunity.
In their annual
lending of more than $40 billion, international financial
institutions support all three of these core American interests. They do so at a
cost to American taxpayers that represents one-tenth of 1 percent of our federal
budget. And I think it bears emphasis that, as a consequence of our working
together, U.S. support for international financial institutions is today 40
percent lower than it was in the 1990s, and yet each dollar that we contribute
to the international financial institutions levers some $45 in
new lending.
Let me turn now to our reform agenda for the IMF and the
Multilateral Development Banks. As we have said many times, to say that these
institutions are indispensable is not to say that we are satisfied with them as
they now are. The world has changed dramatically since the IFIs were founded,
and we must work to reform them to function effectively in this new world. That
has been a focus of our cooperation with this committee and other members of
Congress, and a focus of our ongoing efforts. Those efforts have made progress,
but there is a long way to go in completing what I believe will be and should be
the most far-reaching set of changes in these institutions in several decades.
So far, working with Congress, we have made progress with respect to the
IMF. Enormous amounts of information about the Fund's operations are now
publicly available on its website. When it negotiates programs, it pays much
greater attention now to trade liberalization, labor rights, and other issues of
critical U.S. concern. And the IMF has strengthened its focus on corruption,
moving in a number of cases to suspend lending until investigations of
corruption are completed.
At the World Bank, working with members of
this committee, we have worked to raise the fraction of projects that further
environmental values and to put governance and combatting corruption at center
stage. And disclosure of the Bank's key planning documents for lending is now
routine, as are consultations with local people who will be affected by Bank
projects.
In statements in London last December, and at the Council on
Foreign Relations this week, we have outlined a program of reforms for both the
IMF and the World Bank. Central to our approach is the idea that today there is
a global private capital market, and that the central objective of the
international financial institutions has to be supporting and complementing
private capital flows, not supplanting private capital flows; and that it is
essential for the institutions to function as effectively as possible in support
of human development. This will require reviews of pricing and other aspects of
their financial arrangements.
We believe that the most important issues
for reform at the IMF are: an emphasis on transparency and accountability, and
in particular, shifting the focus from governments providing the information to
the IMF to their providing it to markets; greater attention to the kind of
vulnerabilities in national balance sheets and financial issues that played such
an important role in causing the crises in Asia; a more strategic and limited
financing roles, with lending to emerging market economies more centered on
emergencies, conditionality more focused on conditions for financial stability,
and the IMF's financial role in the poorest countries more narrowly
macroeconomic; and greater emphasis on catalyzing market-based solutions to
crises. It is important to have market confidence and to support economic
reform, but the private sector must also play its part in resolving crises.
I might add, Mr. Chairman, that one of the crucial issues that we will
face, working together in formulating American policy with respect to the
International Financial Institutions, is managing and achieving the right
balance between our common objectives of reducing intrusions on sovereignty,
increasing focus on conditionality, and appropriately constraining the role of
the IMF on the one hand; and on the other hand, using the IMF as a tool to
pursue the wide range of important interests that we have identified, from
bankruptcy laws to military spending, from labor rights to credit allocation and
trade liberalization policies.
How we manage this balance in the pursuit
of American interests needs to be a crucial area of dialogue in the time ahead.
With respect to the World Bank, the agenda we have advanced calls for
the banks to focus on three core missions and to be more parsimonious with
respect to their activities outside these areas: first, providing and
coordinating development assistance in the poorest countries, with a
human-development-centered approach focused on lasting growth and poverty
reduction; second, focusing their role in the emerging-market economies on
places where they are able to do things that the private sector cannot, such as
financing crucial social investments and responding to emergencies. They should
not be alternative sources for projects that can and are financed by the private
markets. Third, and I think ultimately most important over the longer term, the
Bank should have an increased role in supporting the development of global
public goods; issues such as vaccination programs, research on vaccines,
agricultural research and environmental protection with respect to global
issues.
Let me just say, as important as any mission for the World Bank
in the years ahead, will be support for strong economic programs in the
countries benefiting from the HIPC debt-relief efforts.
We believe that
this approach, focused on complementing the private markets, delineating roles
clearly, offers the best prospect for these institutions to serve our interests
and promote our values, to do so in a way that respects the need for flexibility
with respect to the contingencies that may arise in the future.
We have
not yet completed a full review of the report of the International Financial
Institutions Commission but are in a position to offer some observations. The
recent report shares a number of key goals with our approach: the importance of
helping the poorest countries, the importance of debt relief, the importance of
global public goods, and the need for a clearer delineation of the roles of the
World Bank and the IMF.
However, we believe that, taken literally and in
full, the recommendations contained in the report would straitjacket these
institutions to the point where they would no longer be able to advance
America's core values and interests around the world. Taken together, these
recommendations would essentially eliminate these institutions' capacity to
provide support for countries as diverse as Mexico, Hungary and Thailand. They
would put at risk American wages, American savings and American security.
More specifically, we are concerned that the commission's
recommendations for the IMF, in implemented, could limit lending to a narrowly
set of relatively prosperous economies, thereby preventing the international
community from responding to crises such as those in Asia. Taking at face value
the recommendations of the report, few if any of the countries that have
suffered financial crises in recent years -- Mexico, Brazil or Korea -- would
have qualified for emergency IMF support.
A second and quite different
concern with the recommendation of the report is that on those occasions when
IMF financing would be possible consistent with the terms of the report based on
prequalification, the absence of conditionality with respect to other issues
from private sector involvement to fiscal reforms to social safety nets to
anticorruption, the absence of conditionality covering such issues would
jeopardize the effectiveness of programs and, indeed, put taxpayers' money at
risk.
With respect to the recommendations bearing on the development
banks, our concerns are in two primary areas. First, the exclusion of the banks
lending to countries at investment grade or with income above
$4,000 per capita would make it impossible to advance U.S.
interests in a diverse range of countries. We would lose a crucial tool for
supporting poverty reduction, for supporting the kinds of structural reforms
that we want to promote, and we would do so with very little offsetting benefits
because the bank's operations in these countries largely pay for themselves.
Second, the idea of replacing loans with grant-based assistance not
channeled through governments seems to us to run in the face of direct
experience. Funds are more effectively levered when they're in the form of
loans, both because a larger volume of resources can be brought to bear, and
because of the accountability that comes with the obligation to simply pay.
Mr. Chairman, let me conclude by highlighting common ground: the
unanimous support for debt relief within the international financial institution
advisory committee. At this point, our ability to advance U.S. interests in the
institutions and in the poorest countries will depend crucially on meeting our
obligations to these institutions and for debt relief. There has also been broad
national and international support for the president's efforts to promote the
provision of vaccines, research on vaccines and cost effective treatments for
HIV- AIDS and other diseases that hurt the poorest countries worst of all.
These two initiatives need urgently to move forward. We should and we
look forward to full and continuing dialogue with members of this committee and
other members of the Congress on the range of issues affecting international
financial institutions. But it would be tragic if anything were allowed to delay
steps in terms of debt relief, in terms of promotion of support for vaccines
that would offer the potential to save literally hundreds of thousands of lives
in the poorest countries in the world. I look forward to working with members of
this committee both on debt relief and global public good issues and on the
crucial task of supporting institutions in the form that will best support U.S.
interests in the years ahead.
Thank you.
REP. LEACH: Well, thank
you, Mr. Secretary, for your thoughtful statement.
We have before us a
report with a critique of the international financial institutions, some
proposals for change, some of which I consider constructive, some less so. We
also have a defense, in the minority report, that puts a little different
perspective.
I would just like to raise one particular issue. It
appears, as we look at the successes and failures in general -- and when you
deal with international institutions and lending to -- in very difficult
circumstances, you can't always expect successes. But it would appear that there
have been a few successes, but that the great failure in the last decade, to the
degree there's been a failure, has been in the newly emerging economies of the
former Soviet Union. And part of this appears to be related, unfortunately, to
corruption.
Does the Treasury have a perspective on this issue? And does
that perspective include proposals for reform of IMF and World Bank lending?
SEC. SUMMERS: Let me say, Mr. Chairman, that I think it is always
important that we remember, as I've often said before this committee in the
past, that countries shape their own destinies and that ultimate outcomes in
countries are determined very heavily by the policies that their governments and
that their people pursue.
There have been important successes in the
transition economies, notably in Poland. And even in those cases where we have
to be much less than fully satisfied with the results, it's important to
remember that there have been real changes with respect to what many people
feared in the early '90s -- widespread hunger, hyper-inflation,
remilitarization, a return to communism.
I think you're right -- and we
had a chance to discuss this when this committee held hearings on Russia and
Ukraine in September -- I think you are entirely correct, Mr. Chairman, in
placing enormous emphasis on the issue of corruption and integrity in the use of
funds.
And we have put in place, for that reason, both with respect to
Russia and Ukraine, and are working to put in place as part of the common
practice of the institutions, a set of measures to assure that funds are used in
the right way. Those include requirements that satisfactory progress be made
with respect to monitoring and evaluating and holding individuals accountable
with respect to past financial mispractice. Those include ongoing external
audits of central banks that are involved in the receipt of IMF funds. Those
involve new procedures, such as those that are in place with respect to Russia,
that assure that there is no technical possibility for the diversion of IMF
support, because it's provided in the form of illiquid SDRs that can be used
only to pay the IMF back. Those include much greater transparency with respect
to operations of the World Bank as it works with individual ministries on
priorities such as the social safety net.
Those include clear policy
statements, which have been implemented in a number of cases, pointing up the
unwillingness to lend if a satisfactorily resistant-to-corruption policy
environment doesn't exist.
Mr. Chairman, I would urge that as we look at
the record in Central Europe and in the former Soviet Union that we recognize
that if the glass is not full, it is also not empty. And I think there was a
temptation at the beginning of this experiment and this experience to suppose
that these countries, despite the vast malformations during the Communist
period, could quickly converge to a more traditional European economic
experience. That has not happened, but I think that is more a reflection on the
difficulty of the problem than it is on aid efforts. We certainly have learned a
lot about the importance of corruption and the rule of law.
REP. LEACH:
Well, I appreciate that, and I just want to end with one observation that's a
catch-22 the committee finds very difficult. The Fund is -- the IMF, that is --
has taken on a policy of contracting certain audits, which is, of course,
appropriate. On the other hand, it's not sharing the information.
We've
requested Pricewaterhouse to come before this committee to present its findings.
That company has indicated, because of confidentiality agreements, it is
precluded from so doing. Well, that is a very difficult circumstance. The reason
you have audits is to have transparency, but transparency to insiders is not
transparency to publics that are sharing the burden of these institutions, and I
would urge in the strongest possible way that the United States prod the IMF to
make available appropriate information to legislative bodies in the principal
donor countries that are shouldering the responsibility for providing those
resources.
SEC. SUMMERS: We will certainly do that, and I appreciate
that. I very much share your view that it is important that there be
accountability and that there be the provision of information, and we will work
to achieve that objective in a workable fashion that is consistent with
everybody's contractual obligations.
REP. LEACH: Okay. Mr. LaFalce.
REP. JOHN J. LAFALCE (D-NY): Mr. Chairman, I have to defer my
questioning. I just received a phone call that I have to testify on a project,
the federal courthouse in Buffalo, within the next four minutes. I'll return and
ask my questions at that time.
REP. LEACH: Mr. Frank.
REP.
FRANK: Thank you, Mr. Chairman. Mr. Secretary, I noticed when my colleague from
California -- Mr. Campbell isn't here now -- he suggested that he found the
Commission report to be more committed to debt relief for the highly indebted
poor countries than the administration, so I wanted to address that. That had
not been my experience, and this may give us a chance to clarify it. If, in
fact, we are to have a competition as to who among us, the Commission, the
administration, the members of Congress, are most committed to the HIPC, then I
think that will be a good result.
So let me ask you, one of the problems
I see is, I received a copy of a newspaper article from the Dallas Morning News
in which the majority leader of the House and the chairman of Senate Banking
Committee are quoted as saying that "debt relief should be conditioned on
implementation of the other reports of the Commission regarding the IMF." That
is, they say that that would give them leverage.
"As with U.N. debt
relief, however, Republicans may have the whip hand" -- I'm quoting the Dallas
Morning News. Mr. Landers (sp) is the author. "Republicans may have the whip
hand in the IMF debate. To reach a goal nearly everyone accepts -- eliminating
the debt burdens of the poorest of the poor -- the Clinton administration may
have to whittle down the duties of a pillar of the international order." In
other words, linkage.
Now, as I read the commission report I didn't see
that; I didn't see that it was there. And I must say, it would be rather odd. As
I would understand the structure of the argument, it would be: One, we must give
debt relief to the poor countries; two, we must prevent the IMF from victimizing
the poor countries; and to show how much we love the poor countries, we will not
give them debt relief until the IMF stops victimizing them. That would seem to
me very odd.
I do notice in the letter that Mr. LaFalce read into the
record, from that coalition of groups, they are aware of this danger and very
specifically address it. Lest someone think this is some kind of straw man --
and I quote, "We, however, are steadfast in our support for debt relief and do
not want to see IMF reform stall this initiative. Additional conditions or
requirements for debt relief in order to restructure the IMF hurts both
proposals."
So we do know that while this committee was very supportive
of full debt relief last year, elsewhere in the process, in the appropriations
process, it was slowed and conditioned. Work has to be done.
I would be
interested in your response to the suggestion that the majority leader and the
Senate Banking Committee chairman want to make it conditional. And maybe if you
come out strongly against conditionality, the commission will trump you and
they'll come out even stronger against conditionality, and we can go on to debt
relief. And the commission will get second chance. So here is your chance to set
a mark for them to shoot at in opposing conditioning IMF debt relief on the rest
of the report.
Mr. Secretary?
SEC. SUMMERS: Congressman Frank, I
certainly share the concern that you express. It seems to me that debt relief is
financially right and morally urgent. And it seems to me that anything that
delayed this step, which is favored by a wide cross-section within our country,
would be very unfortunate.
By all means, let us debate and discuss the
questions relating to the role of the institutions. But it seems to me that it
would be very, very unfortunate and very, very costly if debt relief, which we
believe should be funded in part in the context of the supplemental now being
considered by the Congress, were to be held hostage to debates about the
questions having to do with the role of the institutions in lower- and
medium-income countries that weren't even the countries that were involved in
receiving debt relief.
REP. FRANK: So, to clarify -- because, again,
although he's not here, Mr. Campbell referred to some passage in your statement
about debt relief. Am I correct that that did not refer to the current HIPC
proposal? Is that -- he said -- quoted you somewhere as saying that you were a
little skeptical of complete debt relief. I don't have your -- he said it was on
page 17.
SEC. SUMMERS: Congressman Frank, I believe there is a
compelling case for moving -- for Congress to act with respect to the current
HIPC proposals to provide the necessary funds, to provide the necessary
authorizations so that the regional development banks can forgive debt, and to
provide the necessary authorization so that the IMF gold resources -- the
remainder of the IMF gold resources can be mobilized at the earliest possible
date. If there is not congressional action, I believe there is a serious risk
that the momentum of debt relief will be sacrificed.
REP. FRANK: Well, I
thank you. And I'm hoping -- I'll just close, Mr. Chairman, and say I hope the
commission will be reinforcing that. And perhaps the commission can persuade the
Senate Banking Committee chairman and the House majority leader. The House
majority leader seems in many respects enamored of the commission, and maybe
they can expand the area of agreement between them and him so we can get debt
relief.
REP. LEACH: Mrs. Roukema?
REP. MARGE ROUKEMA (R-NJ):
Thank you, Mr. Chairman.
Mr. Secretary, I do apologize for not being
here for your full testimony. I was unavoidably detained.
But I did ask
the question in my opening statement, and I'd like to get back to that, as to --
not to rehash the past, but how the experience of the fact that the IMF loan
terms having been violated had been reported by the staff but, if our
information is correct, but had not been recognized or applied in the problem by
the IMF board with respect to the Ukrainian T-bill market and the fact that, if
true, all these violations were -- I mean, all these actions were a violation of
the terms and conditions of the loan program.
I'd like you to apply that
-- those questions to the present situation, particularly in terms of what I did
hear you say about the ongoing central audits and the new procedures would
prevent such a thing as happened in Russia. Can you be a little more specific
about that?
And perhaps related to it, or another part of my question is
-- or integral to it or another part of the question is the issue of
transparency. Everybody keeps using the terminology, but unless you defined it
very clearly in your statement, how does this so-called transparency translate
into real policies and implementation by Treasury and IMF?
SEC. SUMMERS:
Congresswoman Roukema, there are three key areas here. The first is with respect
to the reporting of reserves and the encumbrances on reserves. We saw in a
number of countries -- Ukraine was one, Korea was another -- that reserves were
in some way encumbered or invested in non-liquid forms, and that was not fully
disclosed. So we have, working with the international community, agreed on new
standards for the reporting of reserves that will much more clearly distinguish
between reserves which are in a real sense available and reserves which are in
some sense encumbered.
Second, we have -- we are putting in place
procedures that will make a component of IMF programs be satisfactory accounting
by central banks, satisfactory reliance on external audits. This is a subject of
ongoing discussion at the IMF. But our position is clear; those who wish to
receive this support need to accept external auditing as a condition for the
receipt of this support.
Third, in the cases that are particularly --
that have raised particular concern -- and we've touched today on Ukraine and
Russia -- we are pursuing approaches that reflect those concerns: in insisting
on clarifying what happened in the past as a condition for future assistance; in
requiring that there be procedures for subsequent disbursement that will put in
place rigid controls that apply no possibility of diversion, such as making the
disbursement in the form of an SDR that can be used only to repay the IMF.
So the basic approach is transparency in the definition of reserves to a
much greater extent than there has been before -- external auditing as a common
practice and specific additional restrictions, both with respect to review of
the past and with respect to preemptive prevention of future problems in those
countries where there have been serious problems.
REP. ROUKEMA: But
you're saying that this should be left totally up to the discretion of the
Treasury as to how these so-called reforms are implemented, or do you have, with
some specificity, a way that we should be putting a requirement in the law?
Well, I'm asking the wrong person that. You have a little -- but it seems to me
--
SEC. SUMMERS: Congresswoman --
REP. ROUKEMA: Yes, go ahead.
SEC. SUMMERS: The -- just as a matter of --
REP. ROUKEMA: In
other words, because you've already had this discretion in the past, how can we
make it more precise as to the standards of operation here and so that we don't
have these questions again, Did the board know or did they not? Did the staff
make the recommendations and, if so, why were they not followed?
SEC.
SUMMERS: There are now policies coming into place that are policies -- that are
announced policies of the institutions and that are announced policies of the
Treasury with respect to these issues, along the lines that I outlined.
REP. ROUKEMA: Of course -- I will be asking, following through with this
question, of course, in the next panel with those people that have studied this
issue and see -- I think we have a good idea of what their recommendations may
or may not be, but -- I think there has to be more precise definition in the
law. I don't know if we can come to that agreement or not.
Thank you.
REP. SANDERS: Thank you, Mr. Chairman. Mr. Summers, let me pick up on
the question that Mrs. Roukema asked, and the word "transparency" means
different things to different folks. As I understand it, today Horst Koehler, I
think is the way his name is pronounced, is going to be appointed head of the
IMF, and despite all of the talk about transparency, I am not aware that there
has been an open process where the different member countries of the IMF have
been able to ask this gentleman about his views. And as I indicated earlier,
when you get appointed to be secretary of the Treasury, you have to go before
the Senate, the TV cameras are there, people have a right to know, What are your
views? How are you going to take the Department of Treasury?
How can we
be talking about transparency when just today the same old process takes place
behind closed doors with the appointment of the most important -- the guy who is
replacing Mr. Camdessus?
Second question is, in terms of transparency,
it's not only, I think, making those people who want to lend or invest money in
countries understand the economic conditions, the financial conditions of those
countries, but it's opening up knowledge for the poor people of those countries
themselves and of all of us. We learned -- Mr Bachus and I were involved in a
hearing last year with our IMF representative, and at that hearing we learned
that despite -- we had never known this before -- for years, members of Congress
had asked our representative to the IMF to use her voice and vote. Well, it
turns out, you know what? She told us there are virtually no votes at all. No
votes at all at the IMF. She indicated that there were very, very few votes.
Now, what I want to know is, when we talk about transparency, is C-SPAN
going to be in these discussions, or are they going to continue to be done very
quietly, huge agreements made which have profound impact on hundreds of millions
of people throughout the world, are we going to see that debate or, in fact, are
they going to continue to be done in secrecy without any votes? We don't know
how anyone votes, because there are no votes.
So, in terms of
transparency, number one, your view on the appointment of Mr. Koehler and that
process. Number two, are we going to see the TV cameras in the IMF and open
discussion, open debate. Question number one, please respond.
SEC.
SUMMERS: Congressman Sanders, with respect to the selection of heads of
international organizations, this is a process that plays out with respect to
the heads of each of the international organizations through a process of quite
extensive consultations among the countries that are involved. There has not
been, historically, any analog to a Senate confirmation for the head of the --
for the secretary-general of the U.N. or the president of the World Bank or the
managing director of the IMF or the head of the WTO or the head of the World
Health Organization.
I think it would be fair to say that the
consultation process within governments does give the governments who are
involved in making the choice some sense of the strengths and weaknesses of the
candidate. I would also say that, without being in a position here to prescribe
specific procedures, that I think there is a common desire that is felt quite
widely internationally to improve the processes by which the heads of
international organizations are selected and to make sure, given the growing
importance of these institutions, that we get the best and most qualified people
for --
REP. SANDERS: Mr. Summers, if I can interrupt you. I mean,
basically what you have told us, this is the way it has always been and that's
the way it is. We are talking out reform, that's the whole purpose of this
meeting. Are you going to change it? I don't see that there's anything wrong for
the people of the world, the people in the poor countries, who are going to be
affected, the taxpayers of this country, What does this person stand for? Get
the TV cameras there. It shouldn't only be done -- I understand that it's done
by, you know, people through the various countries and leaders of those
countries.
Open up the process. That's what transparency means.
I would hope that -- do you agree with that?
SEC. SUMMERS: I
think we've made -- I think if you look at the kind of approach that the IMF has
taken to -- and World Bank have taken to describing their activities, indicating
their policies, participating in public debate, frankly, as a response to
pressure from this committee and to many, many others, there have been important
changes in that over the last several years.
Just what procedure the
countries of the world will be comfortable with, with respect to the choice of
heads of international institutions going forward, is not something I'm in a
position to prejudge --
REP. SANDERS: Well, excuse me, if I may. There's
not a lot of time, Mr. Summers. In fact, you are in a position. We have veto
power over the IMF. We have enormous clout; we contribute an enormous sum of
money.
But getting back to the issue again of transparency, are we going
to know who votes for what? Are we going to see transcripts of the debates? Are
television cameras going to be allowed in as some of the most important economic
issues facing the world are debated? Or do we continue with the same old
secrecy?
SEC. SUMMERS: We provide full reports to the United States
Congress on the positions that are taken by the United States executive director
with respect to all crucial issues at the IMF.
REP. SANDERS: But there
are no votes.
SEC. SUMMERS: With respect to the positions that are
taken, with respect to the interventions that are made, statements that are made
in the course of the debate. We have also worked to achieve a situation which is
unprecedented, where essentially all of the IMF programs are made available on
the Internet at the time in which they are agreed.
I do not foresee in
the near future that there would be any kind of consensus internationally for
IMF board meetings to be open to the public. And indeed, given what is discussed
at those meetings, which in many cases is extraordinarily market sensitive, I
believe that an effort to open IMF board meetings to the public would run into
the same kinds of problems that an effort to open up meetings of the Federal
Open Market Committee at the Federal Reserve to the public would do. In the case
of the Federal Reserve, there has been progress there have been changes over
time that have led with reduced lags to greater information being provided about
the deliberations. And certainly a program of that kind is underway with respect
to the IMF.
REP. SANDERS: If I could interrupt. Several years -- last
question, Mr. -- last follow-up --
REP. LEACH: Excuse me. We have a
number of people. And our new clock goes to how much time has gone over, and
you've gone about 50 percent over.
REP. SANDERS: Okay, thank you.
REP. LEACH: But if you'd like to submit a question for writing, that
would be appreciated.
REP. SANDERS: Thank you, Mr. Chairman.
REP. LEACH: Mr. Bereuter?
REP. DOUG BEREUTER (R-NE): Thank you,
Mr. Chairman.
Secretary Summers, thank you very much for your oral and
written testimony. There are points where I'd like to pursue some questions, but
I'm going to depart from the usual fashion. Since I wasn't here, because of a
markup, for an opening statement, I may perhaps mostly or totally devote my time
to a statement.
And I want to thank the chairman for conducting these
hearings on international financial architecture, and particularly the work of
the recent commission and its report. I have particular interest in the work of
the commission, since I am the author of the language which found its way into
the '99 Omnibus Act, with the special help of the chairman.
Before
proceeding with a couple of comments on the commission report, I'd like to offer
a few candid remarks on the IMF and the executive branch.
A great many
in Congress have lost confidence in the IMF. I'm among them. Regrettably, I
believe that the IMF and its defenders in the Treasury Department, past and
present -- and I take you at your word, you've been looking seriously at
reforms, Secretary Summers, so I exempt you from this statement of mine -- have
been unwilling to admit to some of its flaws, its errors, and especially its
recent misjudgments.
I think the first step in the process of reform is
to face up to recent failures of the IMF and to what I believe has at times been
a very serious misuse of its resources. That's something that this
administration and the IMF has been unwilling to do. And I would say it goes for
the previous administration perhaps, too.
The fact is there were
counterproductive IMF policies employed in the early stages of the Asian
financial crisis in both Thailand and Korea. They were treated like fiscal
basket cases. Neither were, particularly in the early stages, until they were
pushed to that status or they reached that of their own effort. And I also think
that there were massively wrong-headed loans to Russia, which might better be
labeled "Yeltsin loans," and which I think will be shown over time to be part of
one of the biggest blunders of the late 20th century.
At the same time,
I think Congress -- we need to be candid that if we didn't have the IMF or an
institution like it, we would have to create one. We also need to recognize in
reality the U.S. Treasury has a very large role in dictating important IMF
policy. Mr. Sanders was talking about that. We may also have a European in
charge again we are, I think -- at the IMF, as we always have, but in fact, the
U.S. Treasury Department, under the U.S. administrations, have often, maybe
usually, in effect called the shots on crucial policy matters. There has been a
demonstrated resistance to reform in the executive branch -- at least in the
past, Secretary Summers -- in the IMF, and apparently in a great many of the
member states as well. And I think that's very unfortunate.
I think
perhaps the most significant recommendation in the report with regard to the IMF
is the proposal that the IMF withdraw from questionable long-term loans and
focus instead on the extension of short-term credit, more like an emergency
effort, a fire station. I believe that this focus on IMF short-term loans is a
significant step in the right direction. And the commission suggests that they
be given in three specific ways and under three kind of conditions: short
maturity; pay-a-penalty rate above the borrower's recent market rate; should
specify the IMF is given priority in payments over all other credits, secured
and unsecured.
I appreciate the independent judgment of those dissenting
members who made a statement on the commission report with respect to IMF
prequalification criteria, and particularly the statement signed by Messieurs
Bergsten, Hoover, Levinson and the Honorable Esteban Torres, contend that
limiting the IMF to a set of prequalifying criteria would preclude certain
countries which are central to global financial stability from receiving
assistance. They may be right. If so, that's an extraordinarily serious problem,
and accordingly, I think we need to have the committee focus on that warning. I
would like to explore how these prequalification criteria in practice would
affect specific countries, such as those in Southeast Asia. Certain exigent
factors, such as global financial stability, should be considered by the IMF on
a case-by-case basis.
Of course, the IMF does not operate in a political
vacuum. In light of the past Asian financial crisis, it is vital and obvious
that the IMF consider political and economic repercussions of its recommended
actions on the global economy.
Lastly, Congress, I think, Mr. Chairman,
my colleagues should study the comprehensive recommendations of the commission.
And I want to recommend, and would ask unanimous consent now that the executive
summary of this task force report, 1999, by the Council on Foreign Relations on
this very subject be a part of our record, along with various editorials and
from national newspapers in this country, and a couple from the Financial times.
I think they would be important.
And I'll submit questions, Mr.
Chairman. Thank you very much.
REP. LEACH: Without objection, those
statements will be placed in the record.
Mrs. Maloney.
REP. C.
MALONEY: Thank you, Mr. Chairman. Mr. Secretary, you represented our country in
many of the Asian crisis meetings. Can you talk about the specific dangers that
the spreading Asian contagion presented to the United States, and if the
recommendations of the International Financial Institutions Advisory Commission
had been enacted in 1998, what would the impact have been on your ability to
fight the Asian crisis?
SEC. SUMMERS: Congresswoman Maloney, I believe
that if the Asian crisis had not been contained, that it would have put American
wages at risk from reduced exports and a surge of imports into our countries
from countries experiencing massive devaluations. It would have put American
savings at risk because of what it would have meant for the broad pattern of
financial markets, and it would have put American security at risk, given our
stake in a prospering Asia.
I believe that if the Commission's report
recommendations had been in place and I want to be fair, and there's
considerable ambiguity in those recommendations and so it is possible that I
have misinterpreted those recommendations, there would have been two different
risks that we would have run. One risk is that a number of the countries would
not have prequalified, and therefore it would have been more difficult or
impossible to have extended them credit to respond to the emergency and to
provide the confidence that was so important to the return to economic health
that's taken place in a Korea or in Thailand.
The second risk, which in
some ways may be the more serious risk, is that the prequalification approach of
the Commission would have precluded the imposition of ex post conditions in the
context of those programs, which would have made the policy changes that led to
increased confidence impossible. I am inclined to agree with Congressman
Bereuter that it would have been desirable if the shift to fiscal expansion had
taken place more rapidly in those countries and if the situation had been more
fully understood and there had not been the initial fiscal contraction. And so I
think that is an important issue.
But I think in a variety of respects,
the ex post conditions that were imposed on forcing structural change and trade
liberalization in Korea -- requiring private sector involvement as a condition
for subsequent tranches, bringing about reform of the banking sector, addressing
issues relating to corruption and directed lending -- I believe those measures
were all important to the restoration of confidence. And that if a judgment had
simply been made that the countries had prequalified -- and it's possible, as I
think the Commission would argue, that in an environment where that was
necessary, these countries would have prequalified, and there had simply been
the provision of resources based on their prequalification I believe those
structural changes would not have been brought about.
And without those
structural changes having been brought about, you would have seen large amounts
of taxpayers' money flow into these countries that would have simply left them
with a large burden of debt.
So the two concerns with the
prequalification approach, which I believe would have rendered it ineffective in
responding to the Asian financial crisis, are both how you handle those who do
not prequalify, and how, in the event there is prequalification, you assure that
a satisfactory reform program is in place ex post.
REP. C. MALONEY: The
United States is currently trying to lead the world in providing IFI reform.
What would the signal be to our partners in the IFIs if the U.S. adopted the
International Financial Institutions Advisory Commission's recommendations?
SEC. SUMMERS: I think the consequences would be catastrophic for our
ability to cooperate internationally in a situation where the United States had
already reduced substantially its contributions to the Multilateral Development
Banks by 40 percent over the last six years. For the United States to take the
position that the banks should simply cease -- World Bank should cease its
lending to both Latin America and Asia would, I think, be seen internationally
by the United States as repudiating an institution which had been its creation,
and I think it would lead to radical changes in the terms of cooperation between
the United States and other countries with respect to these institutions.
Let me emphasize that these institutions do need to be changed in very
substantial ways. And I've sought in my statements, in London and at the Council
on Foreign Relations on Monday, to lay out what we regard as the appropriate
directions of change to reflect the realities of a new world. And certainly with
respect to their culture and their approach, they do need to be much more
transparent and accountable.
But I think we will succeed in these
matters much more if we work cooperatively with other major shareholders, rather
than if we seek to impose proposals by fiat. And it's our intention to work
closely with other shareholders to try to bring about the necessary and large
changes, and I think that we have made progress in doing so.
You know
Congressman Bereuter, I think, rightly emphasized with respect to financial
crisis three areas as being particularly important: shorter-term lending, a
penalty rate, and the assurance of priority. And those are the three pillars of
the so-called SRF facility, which the IMF adopted some time ago, at our
instigation, as a mechanism for enabling it to respond in a strong and vigorous
way to emergencies.
But I think we have to be very careful with respect
to taking any steps that would so limit flexibility as to straitjacket us
whenever the next crisis comes because we can't right now know what form that
crisis will take.
REP. C. MALONEY: Okay. My time is up, and I, with the
chairman's permission, will submit some further questions for the record. Thank
you.
REP. LEACH: Thank you. Mr. Bachus.
REP. SPENCER BACHUS
(R-AL): Thank you, Mr. Secretary (sic). Mr. Secretary, I'm looking at your
recommendations and I'm also attempting to look over the Commission's
recommendations. I think y'all both agree -- let me see if I'm right -- that the
IMF needs to focus more on emergency lending. Is that a consensus there?
SEC. SUMMERS: It needs to be -- I'm not sure it needs to do more
emergency lending, but its focus needs to be more on emergency lending.
REP. BACHUS: Right. Okay. So the focus on emergency lending. Other than
emergency lending, should they do -- should they eliminate most long-term
development lending?
SEC. SUMMERS: I think it's important, Congressman
Bachus, to distinguish between nonconcessional and concessional lending. In the
case of nonconcessional lending, I don't think that longer-term development
lending is appropriate. There may be cases where the provision of funds over a
slightly longer horizon is desirable, as with countries that are graduating from
concessional lending or cases where desirable financial profile would involve
more medium-term financing, but in general, the focus should be on shorter-term
response to financial emergency, to return to a more normal situation.
That, by the way, goes not just to the question of longer-term lending.
It also goes to something that I think requires increased attention, which is
the question of repeat use of IMF resources, where the IMF is involved over a
protracted basis. We have called for a full review of the IMF's facilities and,
in particular, of their pricing practices, directed at that objective.
With respect to the concessional countries, we, the United States, has
not made a contribution in a number of years to the IMF's concessional lending
facility, the ESAF poverty growth reduction -- poverty reduction in growth
facility. But we do believe that there is a case for continued IMF involvement
in the poorest countries, both to assure a macroeconomic framework that prevents
capital flight and assures that debt relief proceeds are used, and -- REP.
BACHUS: Okay, let me --
SEC. SUMMERS: We believe that some financing
makes that macroeconomic framework more meaningful and real.
REP.
BACHUS: All right, and I think that's maybe the disagreement, is that I think
that both of you are saying it's appropriate to focus on emergency lending and
lend only to those countries after looking at their balance sheet and seeing
whether or not they'll be able to repay it. You both agree that that's an
appropriate thing for the IMF to do. I think where the disagreement is, is
lending longer-term to countries that may not be able to pay back in the short
term. Is that -- is that accurate?
SEC. SUMMERS: I think there are a
variety of disagreements in the nonconcessional cases.
REP. BACHUS:
Okay, that's right, and --
SEC. SUMMERS: Go to the points I made about
prequalification in answer to Congresswoman Maloney's question.
REP.
BACHUS: I understand that. But the disagreements are on those countries which
may not be able to have the financial resources to pay back in a short time. I
mean, that's where the disagreements come in. But --
SEC. SUMMERS: Well,
I think there are some -- I think are a number of disagreements -- I think there
are more disagreements -- I think there are a number of issues in the
non-concessional countries.
With respect to the concessional countries
--
REP. BACHUS: But by non-concessional, we're talking --
SEC.
SUMMERS: -- we believe that it is useful that the IMF's existing trust fund for
concessional lending -- very low interest rate lending -- the poorest countries
in the world be maintained. Although the United States has not and is not making
contributions to it --
REP. BACHUS: Right.
SEC. SUMMERS: -- that
that trust fund, which is funded by others, be maintained in order to enable the
IMF to be involved not in the broad range of development policies in these
countries, but only in the macroeconomic issues that are important to ensure
that aid does not give rise simply to capital flight. We believe that that's a
core competence of the IMF --
REP. BACHUS: Right. I understand that --
SEC. SUMMERS: -- and that it -- for it to be effectively carried out, it
needs to be associated with a financing option.
REP. BACHUS: But let me
say this. What I -- again, I think you're saying is you agree -- you both agree
if you have a solvent country, whether they're prequalified or whether they're
not, that short-term emergency lending is appropriate. I think the disagreement,
again, whether it's -- it's in lending to countries in which solvency or
stability or ability to pay back is in question. The poorer countries, as you
keep --
SEC. SUMMERS: Well, I don't think the IMF should make loans --
that it should ever make loans that it does not expect to have repaid.
REP. BACHUS: Well, okay. I think -- SEC. SUMMERS: But we believe there
is a case for concessional lending in certain cases where that concessional
lending will be repaid, associated with a narrowly defined macroeconomic role in
countries that can't expect to have substantial involvement with the private
capital market.
REP. BACHUS: All right, I think you've just said
something that I sort of believe is more of the essence of this, and that's I
think the debate is on countries which don't have the ability to repay, and
particularly in the short term. Now, if you say they may have the ability to
repay in 10 years or five years or 20 years, then these are poor countries with
all sorts of problems, and if you loan them money and that interest just runs,
can they ever pay it back? Why would you ever -- why wouldn't you address that
through grants through the World Bank, for instance? And let me maybe rephrase
that and say this --
SEC. SUMMERS: Let me -- the only -- the long-term
lending that I've indicated we believe is constructive in the poorest countries,
is concessional lending.
REP. BACHUS: Very low interest rates.
SEC. SUMMERS: Very low interest rates. It does not compound in a major
way, that includes a significant grace period. We believe that that is, frankly,
essential if we are not to condemn these countries to a permanent second-tier
status, but are, instead, to support their re-joining the global economy.
REP. BACHUS: And isn't there sort of a -- I mean, I see some agreement.
You know, the commission is saying don't loan to the poorer countries because
they may not have the ability to repay. And you're saying loan to the poor
countries, but do it at such a low interest rate that they may be able to repay
at some future date.
I think there's an agreement on both parts that you
can't loan to poor countries at a market interest rate. You have to -- if you do
so, you're going to basically have to give them what is either -- is almost a
very low interest rate, I mean, if at all, because we found that loaning them
money at any higher interest rate, there's very little way to get repaid.
SEC. SUMMERS: Let me share where I think there is an important point of
agreement, and that is that we need to work through the debt reduction exercise
--
REP. BACHUS: Exactly.
SEC. SUMMERS: -- work through the HIPC
program, and do it in a way that, A, assures the human development objectives
are met and that B, does not involve new hard lending, new high-interest rate
lending, of a kind that would simply set the stage for further debt reduction in
the future. And crucial to successful debt reduction is agreement on a policy
framework that does not involve taking on new debt that would have to be reduced
at some point in the future. That's certainly something that we deeply believe,
and I would suspect that that's something the members of the commission would
agree to.
REP. BACHUS: Do you think maybe that is part of their
motivation for saying don't -- "We don't think the IMF ought to be making long-
term debts to the poor countries," is a recognition like you recognize, that
this in fact is not -- it's just burdened them down with debt?
SEC.
SUMMERS: I would rather not try to speak to their motivations, but from reading
their report, I think it goes more to issues of institutional delineation.
REP. BACHUS: Let me ask -- let me -- one more question.
REP.
LEACH: Please, this would be your -- you've doubled the --
REP. BACHUS:
My final question. This will be it.
REP. LEACH: Fair enough.
REP. : Will this be Mr. Summers' final answer?
REP. BACHUS: When
it comes to the poorer countries, when it comes to the poorer countries, their
problems are more systemic, whether it's a political situation, a social
situation, the lack of development. Those are the problems. Why can't those
needs, why can't those problems be addressed by the World Bank exclusively and
be done in a better way? And I say that, and I think they've failed to do that.
I think maybe one of the reasons IMF has begun to do this is part of the
report said that 70 percent of the regular loans by the World Bank are to 11
countries which have adequate access to the private capital market. So you
basically have the World Bank making 70 percent of their regular loans to 11
countries which could go to private sources. So why can't we take it out of the
IMF as far as the report, have debt relief, then take lending to poor countries
that can't repay out of the IMF, put that in the World Bank and get the World
Bank to commit more of their resources to countries which may not have adequate
access to a private capital market?
SEC. SUMMERS: There are -- I would
make two points with respect to what's a very important set of issues that you
raised, Congressman Bachus. First, with respect to the poorest countries, there
are broad systemic difficulties, as you suggest. But crucial to any economic
success in any country is that it have a stable money. And if it doesn't have a
stable money, it's going to have capital flight. That is the IMF's expertise, is
not an area of competence for the World Bank, whose concern is with longer-term
development, not with the requisites of a stable money.
So conditions
addressing a stable money, so that assistance doesn't flow right out to Swiss
bank accounts, does have to be an element. It is necessary. It is, as you
stress, very, very far from sufficient, but it is necessary in the poorest
countries -- hence, a role for the IMF.
Second, there are a variety of
issues with respect --
REP. BACHUS: But could it be a non-lending role?
SEC. SUMMERS: It could possibly be. That is a suggestion that is
sometimes made. Experience with the institutions I think suggests that
non-lending roles tend to be non-real roles, and that if the conditionality is
to be meaningful, it has to be associated with the availability of finance. And
indeed, from the point of view of the countries, the resources that the ESAF
makes available represent a contribution to their budget and to funding
education, to funding health care, and to meeting social objectives.
REP. LEACH: The time of the gentleman has expired.
Before
turning to John, let me, in 10 seconds, note that in response to some of the
concerns, the World Bank has put out a statement noting that it's true that 11
countries get 70 percent of the resources of the IBRD, but it's also true that
80 percent of the people with incomes under $2 a day, of those
countries that qualify for IBRD assistance, live in those 11 countries. And so
there are kind of two statistical ways of looking at it.
Mr. LaFalce?
REP. LAFALCE: I thank the chairman for bringing that extremely important
point out.
Mr. Secretary, I get comments from people on the left and the
right, pro-debt relief, anti-debt relief, et cetera. And even some of the people
who are for debt relief say, "Well, you really didn't accomplish anything in the
last Congress. Come on, you really have to do something this Congress because
what you did was insignificant, and you certainly haven't put your money where
your mouth is." And that is flat wrong. And yet there are other people who say,
"Hey, you took care of the problem last year. You know, slow down. You know,
don't be pushing."
To put it in perspective, I think what we did was
historic, and yet I think what we did was the beginning of what we must do.
What's your analysis of what we did and what we must do?
SEC. SUMMERS: I
think you got it exactly right in your comments. We -- to paraphrase Churchill,
we're certainly not at the end; I don't actually think we're at the beginning of
the end. But perhaps with Congress's actions last year to provide initial
funding and to recognize the importance of the problem, we're at the end of the
beginning with respect to the historically important issue of creating a sound
financial framework for relieving the debt and achieving educational and health
care and social development in the world's poorest countries. But the momentum
we have built up will be lost if we do not act this year.
REP. LAFALCE:
Can you flesh that out a bit more? Can you juxtapose what we did financially
with respect to debt relief, how significant it was, what we need to do and how
significant that is; can you also make a little more explicit what we did to
help bring about reforms that's truly significant legislatively -- it was part
of the Omnibus Appropriations bill -- and yet what we still need to do?
SEC. SUMMERS: To take your second question first, Mr. LaFalce; the mode
of the international financial institutions addressing the poorest countries is
changing fundamentally with the Poverty Reduction and Growth Facility, with the
agreement on Poverty Reduction Strategy papers, towards an approach that's
defining objectives, not in terms of macroeconomic abstractions but in terms of
concrete measurable indicators of human progress, like infant mortality and like
literacy, and is harnessing the other measures, the financial and macroeconomic
measures, towards that objective. So we have seen a real change in approach, I
think an overdue change in approach, to a more development-centered approach.
That is something that is under way, and it is something we are going to have to
work with going forward.
Frankly, there is going to be trade-offs, as we
have had a number of opportunities to discuss with our friends in the NGO
community, between on the one hand, the desire to move rapidly with debt relief,
and on the other hand, the desire to fully implement and carry through the kinds
of participatory processes that we prescribed last year. And that's a trade-off
that we are going to have to manage.
With respect to what we can do, we
have seen progress in a number of countries. But for example, our ability to
provide full debt relief for Bolivia, which is a country that has made real
progress, a country that is a positive success if you like, of economic
development as part of an anti-drug strategy, will depend both on more adequate
funding and will depend upon authorization for contributions to the HIPC Trust
Fund, since a substantial part of Bolivia's debt is to the regional development
bank in our region, the Inter-American Development Bank. So we need both more
finance and further authorization, if nations like Bolivia and Mozambique are to
benefit fully from the debt relief.
REP. LAFALCE: All right. Let me just
ask one last question, and then we're going to have to go for a vote --
switching gears from debt relief.
Globalization is one of the most
important phenomenons that has taken place, is taking place, that will take
place. It is a reality. Oftentimes, globalization has taken place, however,
without in my judgment, adequate consideration of the human face that's attached
to or can be attached to globalization.
Now, some people view Seattle as
a renunciation of everything that the United States -- well, as a renunciation
of globalization. I don't think that it was that at all. Some people view it as
a renunciation of the tactics of either organized labor or anarchists. I don't
think it was that at all. My judgment is that it was the fact that the other
countries of the world were simply not ready to deal with the human face that
the United States government, the United States administration, said should be a
part of the globalization trend; it should be on the agenda.
Coupled
with globalization and an attempt to put a human face is a big debate looming
right now over permanent NTR status for China.
It's my understanding
that the administration and you believe this to be one of the most important
initiatives that we can take and must take, not only for economic and trade
purposes, but for geopolitical purposes and for furthering the forces of
openness within the largest country on the face of this earth.
I want
you to address, in your judgment, the importance of permanent NTR to the United
States, to China, and to the world. And then I want you to deal with the
question of how we can best go about bringing the human face to globalization
within the world context, and then within the context of China in particular --
in 60 seconds or less. (Laughter.)
SEC. SUMMERS: Congressman LaFalce, I
believe that there's a compelling case for the United States to support
PNTR. It starts from the recognition that this about us, not
about them. It is about the pursuit of our interests rather than the question of
whether China should be rewarded in the abstract. That case rests on three
primary arguments.
First, enormous commercial benefits to our country
from this agreement, which if we do not accede to PNTR, would
simply go to our major international competitors discriminatorily against us.
Those include reductions of more than 50 percent in tariffs on major
manufactured products, the opportunity to do business in China in new,
innovative ways; substantial reductions on tariffs and quotas on agricultural
products.
Second, the changes in China that will result from
PNTR. China, like any country, has divided politics. A vote for
PNTR reinforces those who believe in the Internet, those who
believe in markets, those who believe in freedom. A vote against
PNTR weakens those same forces at real detriment to our
interests in a more open and a more democratic China.
Third, the
security case rests on the overwhelming lesson of global history, going back to
Assyria and Sparta, that major changes in the balance of economic power
frequently lead to armed conflict, particularly when those countries that are
gaining in economic strength are not allowed to become part of a rule-based
global system.
These three considerations -- the security case, dynamics
in China, and our commercial interests -- make a strong case for China to be in
the WTO. This needs to be associated with initiatives that further our values;
our values in terms of labor rights, our values in terms of the rule of law,
which we further in a variety of ways, including through the international
financial institutions, assuming they're able to continue to engage with major
developing countries. We do it through our technical assistance programs, we do
it through our commercial diplomacy, we do it in various other multilateral
dialogues --
REP. LEACH: Mr. Secretary --
SEC. SUMMERS: -- and
we need to do so as vigorously as possible.
REP. LEACH: Mr. Secretary,
at this point, I apologize to both you and Mr. LaFalce, but we have a vote on
the floor, and so the committee will be in recess pending the vote.
(Recess.)
REP. LEACH: (Strikes gavel.) The committee will come
back to order. Our next speaker is a member of the commission and a
distinguished colleague and friend, Mr. Campbell.
REP. TOM CAMPBELL
(R-CA): Thank you, Mr. Chairman, and you are my distinguished colleague and, God
knows, friend. All right, Secretary Summers, thank you for your patience. I know
it was hard because we had the break and all, and I deeply appreciate it,
because I was the next one in line, and a less patient man might have said you
had to go, so I take it as a personal favor that you didn't.
My focus is
on HIPC, so I'm going to give you my rebuttal to your written testimony, and
then allow you to tell me your point of view and perhaps there will be a meeting
of the minds. I read you to say that we do not believe the report's
recommendation to write off all HIPC debt would be either desirable or feasible.
I'm going to pause there, because the word "desirable" is quite different from
the word "feasible." I think it's highly desirable. I do think you might want to
say that it's desirable, but so be it. We'll see.
Now, you give two
reasons for that. The first is, you say, because the money's not there. We can
talk a good game, but the money's not there, and that to me is -- just picking
up a little bit of recent debate history in the presidential campaigns -- we
ought to debate what should be done and if somebody says, Well, the will is not
there, that's quite different from saying it should be done. So as to the
"desirable" word, you point out that it'll cost more, 14 billion to 43
(billion). If it's worth doing, then let's put it forward. It would still be
desirable.
But the heart of your argument appears to be that if there is
no increase in overall concessional resources, then this would mean less money
for the other purposes of IMF in the concessional area. And here are the points
that I would offer in respectful potential disagreement: first, are those debts
owed by the HIPC countries to the IFIs, are they real anyway? Are they being
carried at any reasonable actuarial number based on likelihood of collecting? I
have my doubts, point one.
Point two, you remember this, I know, because
you were involved in it and indeed you testified on it, the gold reserves
question and at what level they are carried on the books of IMF, becomes a
factor in deciding whether we would have to go to the participant countries and
hit them for a contribution if, instead, we could, without selling an ounce of
gold, write up the reserves, we could have a -- to tell you the truth, a paper
increase in assets to offset a paper decrease in obligations, assuming they
weren't collectable; assuming my first point.
So my first point is that
they're probably not collectable anyway, hence I doubt the number is as high as
you say. And number two, could we not effectuate that through a write-up of the
reserve?
Third and last, in response, is now outside the realm of
economics for a moment, but it will come back to it. Not every country is the
same in this category. Some incurred the debt under a previous tyrannical
regime, the benefit of which debt, of which lending, did not in any real sense
go to the people. And for example, Mobutu is an example, in Congo. And in
international law, the general rule is if you build an asset with the lending
that stays in the country, then the country, whatever the form of government, is
obliged to pay the debt service on the loans to construct the asset, like a
railroad.
But where the money went to a tyrant who took it out of the
country, the lending didn't reflect the democratic will of the people, I just
don't think it's fair or right for a fisherman in the Congo River to have to set
aside two fish out of a catch to pay interest on a debt to a loan that was made
to Mobutu, to choose an extreme example.
So that sounds non-economic,
and maybe it is, but I think it comes back, in the sense that it says that where
there is an asset that remains capable of producing the revenue, then the debt
remains. But where the funds that were advanced, supposedly for monetary
purposes, were in fact dissipated -- and you can make that on a case- by-case
basis -- then it's fair to write it off.
Those are my points on HIPCs.
If we have time at the end, I have another question, but this is most important.
And I give you the rest of my time. Thank you.
SEC. SUMMERS: Thank you.
In the remaining 34 seconds, let me make --
REP. CAMPBELL: Oh, I'm
sorry. I wish it was more.
SEC. SUMMERS: Let me make these points, if I
could.
First, I agree with your last observation that it's important to
have a country-by-country approach to writing off debt in situations where
there's no capacity to repay, but where there is a capacity, to repay, not
writing off the debt. And that's one of the reasons why the commission's report
-- recommendation that there be 100 percent write-off in all HIPC cases seemed
to me to not be a warranted report warranted recommendation. It seemed to me
appropriate to make those judgments on case-by-case circumstances, which is what
the current framework provides.
Second, it seems to me that it is
essential that we not just look at the IMF, where, in principle, if there was
the will there, there would be possibilities of mobilizing gold resources to the
regional development banks, where the allotments to the HIPC trust fund are
required and where there are not internal resources that could be put to use in
addressing the debt relief question, and certainly where to make those
commitments would be potentially to eviscerate the capacity for new concessional
lending, which, it seems to me, would be very dangerous, in light of the
continuing social needs in these countries.
Third, it seems to me that
it's important -- and this was something you touched in your statement -- that
we be prepared to support countries on a transition path back to participation
in the normal system, and that an approach of writing off all debts would not be
an approach that many of these countries would favor, precisely because it would
reduce their capacity to make a transition back into the global system.
And finally, with respect to your first observation, because of the
traditional preferred creditor status of the institutions, the vast majority of
-- the overwhelming majority over the last years of these debts have been repaid
in full with respect to the preferred creditor, IMF and World Bank and
multilateral development bank institutions, and that's why they have been in
triple-A, and that's why they -- or those institutions are triple-A, and that's
why the debts are carried in full. So I don't think there any actuarial
reduction would be appropriate in these cases.
So I guess, if we're
going to find a meeting of the minds -- and I certainly hope we can -- it seems
to me it should be on the idea that it's important that we move as rapidly as
possible on debt relief without regard to other -- without holding it hostage to
other issues; that we do so in a way that allows us to respond sensitively to
differing country circumstances, and that we do so in a way that achieves the
social objective by not putting the concessional lending at risk. And I think
that would be an approach that, it seems to me, would enable some finding of
common ground, though it's -- well, it's certainly not precisely the approach
that's contained in the commission report.
REP. CAMPBELL: There is one
point you didn't respond to. I am going to ask the chairman for unanimous
consent for an additional minute to pose it? Thank you, Mr. Chairman.
REP. LEACH: Yes, without objection.
REP. CAMPBELL: "Pre cogit
consentire" (sp).
The point was, do you -- in making this
country-by-country analysis, which I understand, do you take cognizance of the
problem I described in the last part of my question to you, or not? namely,
whatever the ability of the country is to pay it back, putting that to one side,
do you take cognizance of the fact that the loan may have not gone to anything
real that stayed in the country but really left the country? the moral question
about do the people owe it -- does the fisherman in the Congo River owe it? Do
you find a way to take that into account or not?
SEC. SUMMERS: You know,
I think there are many factors that go into these things. And certainly the
capacity of the country to pay, which after all is greatly reduced if the money
is all gone off to somebody's Swiss bank account, is something that has to enter
into the equation.
I think we have to be careful, very careful, if we
want to have a capital market in which there is going to be future lending,
about the way we would draw a principle that allows new governments to renounce
the debt of old governments that they find unattractive. I think that would be a
principle that would have to be very narrowly drawn, if one wasn't to interfere
with new lending in the future.
But certainly, there is -- you know, I
suspect, given your background, Congressman Campbell, vastly more about the
international law in this area than I. My impression is that, in order to
support new lending, it's -- very careful about allowing the renunciation of
national obligations because of change in national governments.
REP.
CAMPBELL: I'll close then -- with the chairman's indulgence, thank you -- that
the possible area to follow, if you really care about this line of thought, is
when there is a legitimate revolution, a legitimate total repudiation of
government, which happens in some occasions, and where there is no continuing
real asset; and those conditions may be --
SEC. SUMMERS: But "no
continuing real asset" is -- you know, that's something that has to be looked
at. But certainly, I think, if we can move to the idea that you have to make
case-by-case judgments about appropriate debt reduction and that a hundred
percent write-off, as an absolute in all HIPC countries, is imprudent, I think
that would be a very important point of common ground.
REP. CAMPBELL:
Thank you very much.
Thank you, Mr. Chairman.
REP. LEACH: Thank
you -- (inaudible).
Have you had your questions asked, Mrs. Waters? I
think --
REP. WATERS: If I may, Mr. Chairman? I came in when Congressman
Campbell was raising the question about --
REP. LEACH: Excuse me. I want
to -- just for regular order purposes, have you asked your questions? I forget.
REP. WATERS: No.
REP. LEACH: Okay, then, I'd like to recognize
you. And you are recognized.
REP. WATERS: Thank you. Thank you very
much. I came in when there was some discussion about debt forgiveness and debt
cancellation, and I'd like to pursue that a little bit further.
REP.
LEACH: Absolutely. Absolutely.
REP. WATERS: It has been said and stated
over and over again, and many of us on both sides of the aisle feel very
strongly about poor countries that are forced to repay handsome debt, or debt,
and they literally are starving their people trying to do that. You just talked
about renouncing debt must be carefully crafted, those kinds of possibilities.
How do you factor into that the knowledge of corrupt money, unidentifiable
money, placed in American banks such as we see with the Abacha boys, and the
money that was stolen under the dictatorship of their father, that's at
Citibank?
SEC. SUMMERS: The -- I'm not going to get into commenting on
-- I don't think it would be appropriate for me to comment on specific cases,
Congresswoman Waters, but it's in response to that problem that we have proposed
legislation which I think has been endorsed by the chairman and ranking member
and many other members of this committee to increase the strength of the U.S.
legal framework with respect to money-laundering, including in particular by
making foreign corruption a predicate offense and by enabling us to have a more
differentiated set of sanctions that can be pursued with respect to countries
that facilitate money laundering. I think it's something that has to be an
increased priority for us as we deal with the consequences of globalization.
Certainly with respect to debt reduction, as the colloquy I had with
Congressman Campbell suggests, we've got to maintain a case-by- case awareness
of countries' capacity to pay which will be related to the ways in which their
governments have used money in the past and will obviously be reduced when the
money has been stolen rather than translated into investments that have the
capacity to generate repayment capacity.
REP. WATERS: I appreciate that,
and one of the reasons this is so much on my mind is I'm focused on Nigeria, as
you know, and we have not determined that we can do full debt cancellation there
and still, I think, we're talking about restructuring and some other kinds of
things that may be helpful. Nigeria -- and, as my grandmother would say, "Mark
my words, as I sit here today," Nigeria is going to fall apart again with us
watching.
Obasanjo will not be able to maintain this democracy that he
is attempting to create under the circumstances. Debt relief is extremely
important. In Nigeria the people are saying, "We can't eat democracy." And one
of the greatest things that could happen for Nigeria at this point is for us not
only to announce our role, whatever it is, in debt relief, but to do everything
that we can to leverage in the Paris Club for complete debt relief and go after
the money that was stolen -- that's in the banks -- by the Abachas.
I
just don't know why we can't do that. And I'm appreciative for, you know,
whatever has been fashioned that will help us to get at this big question of
money laundering sometime in the future. But this stands out as a case that we
ought to be focused on now, we ought to be working with IMF, World Bank -- well,
no, actually Paris Club. And the United States I think could pull this off. So
let me ask you to respond to that.
SEC. SUMMERS: Certainly all of us
share the concern with corruption and the desire to the extent that it's
feasible to locate any ill-gotten gains. Certainly we recognize the enormous
stake that the United States has in democratic transition in Nigeria and are
working very hard to assure that Nigeria's debt repayment obligations this year
and in succeeding years are consistent with a successful economic development
strategy for Nigeria. And that certainly means that recognizing that Nigeria is
not able this year nor with any likelihood next year to pay back all of the debt
that is coming due. We are therefore seeking to achieve appropriate debt relief
arrangements within the Paris Club.
REP. FRANK: Will the gentlewoman
yield?
REP. WATERS: I yield.
REP. FRANK: I just want to
underline -- Mr. Secretary, I know we've been able to work together, the
Democratic members of this committee in particular have been very important, and
I just want to stress the importance of what my colleague has just said.
Substantial relief in Nigeria really is going to be, I think, a sine qua non for
the continued good working relationship. We kind of took on faith last year that
we'd get some. It's very, very important. And I can't think of anything the
administration could do that would be more helpful to the overall agenda here
than to work that out along the lines she's been suggesting.
REP.
CAMPBELL: Would the gentlelady yield?
REP. WATERS: Yes, sir.
REP. CAMPBELL: And I would say there's a strong bipartisan element to
that same message.
REP. WATERS: Thank you very much.
REP. LEACH:
Mr. Bentsen.
REP. KEN BENTSEN (D-TX): Thank you, Mr. Chairman.
Mr. Secretary, a couple of points I'd like to make.
First of
all, previously -- about an hour ago, maybe -- in discussion on HIPC you made a
comment that you -- I think this is right -- that you believe that nations --
that we should be careful of the hazard of nations that go through the HIPC
process of getting back into the lending world, the hard loan window and the
capital markets. And I would just tell you that Mr. Campbell and I, when we
considered the HIPC legislation, proposed an amendment that would have excluded
those countries from non-concessional lending and fund the public markets for a
period of time in return for being part of the HIPC process. To some it might
have seemed hard-hearted. I think our feeling exactly that, the hazard that
exists in getting somebody out of debt, and then putting them right back in debt
again. And at the time, I think your staff was opposed to that idea. They may
still be opposed to it, but I'd ask you all to look at that, and I appreciate
your comments about that, that maybe you all have -- either didn't fully explain
at the time or have changed your tune on that.
With respect to the
purpose of this hearing, let me say a couple things.
First of all, I
think both you and your predecessor Mr. Rubin have done a very good job in
addressing world financial crises that have occurred both in the case of Mexico
and in the Asian crisis, and maybe to a lesser extent Brazil, and perhaps to a
lesser extent Russia. But -- and in many respects it's worked. In some cases it
hasn't worked that well. But I think the problem has been that you all -- while
you all have been successful, you've been flying by the seat of your pants.
You've used the tools that are available to you, and you've used them well. But
there hasn't been an overall strategy. And I know both you and your predecessor
have said that you believe that the next great test for the United States and
for Treasury secretaries and others is a restructuring of the world financial
institutions like the Fund and the Bank.
And obviously, we have the
commission's report that goes in one direction, we have your recommendations
that you're proposing, which the Fund is taking up, we have a new head of the
Fund coming in, who I guess is not even there yet, who will -- I assume coming
in -- who will be faced with this. And we also have a world that has changed
dramatically since Bretton Woods. I don't think Bretton Woods expected the rise
and fall of the Soviet Union. I don't think it expected the modern economic and
financial structure that we have. And I don't think it expected even the HIPC
situation that we have.
And at the same time, I think the greatest
foreign policy crisis facing the United States is the expanding divide between
the haves and the have-nots. And last week or two weeks ago, this committee
adopted the chairman's bill to create a trust for addressing the worldwide AIDS
crisis, particularly in Subsaharan Africa, which I think is an enormous foreign
policy problem for the United States, or could become an enormous foreign policy
problem for the United States.
And so my question to you is, building on
the proposals that you have talked about in your testimony, do you think it is
time that -- and probably under the leadership of the United States -- that it's
time to convene a new Bretton Woods to talk about both proposals from the
commission -- which I agree, from what I've read, probably go a little too far,
and I understand you don't want a situation to tie down the tools that the Fund
and the Bank and the other multilateral development banks have available to them
-- but to maybe look at what our focus should be. There are times when I think
maybe the Fund should be the Bank and the Bank should be the Fund, based upon
what their purposes are. But is it time, perhaps, that the industrialized
nations of the world reconvene a Bretton Woods and look at the financial
architecture of the world and lay out some new ground rules, or is it premature
to do something like that?
SEC. SUMMERS: I think you have, Congressman
Bentsen, a different situation than you had in 1946. In 1946, you had no
institutions and the problem was to create institutions. Today we have
institutions and the challenge is to modify them to meet our needs. And we have
established important new global fora, such as the G-20 that brings together the
heads of the -- the finance ministers and central bank governors of the 20 major
economies, both industrial and emerging markets. We have meetings every six
months that bring together the major officials of the world's -- of the world's
major countries to discuss and debate the future of these institutions.
So I think what's appropriate is to try to forge consensus, and we've
tried to lay out what I think are a quite far-reaching set of recommendations as
to how we believe these institutions should be reformed. And I think we have an
adequate schedule of meetings and fora for debate about the future of the
institutions, and the real challenge is not to establish a new forum or a real
meeting; the real challenge is to establish the right kind of consensus on how
these institutions can best achieve our objectives in the future.
And
the set of recommendations that I provided in the speech in London and the
speech on development to the World Bank, at the Council on Foreign Relations
earlier this week, provide one blueprint, which we are ready and prepared to
discuss with others as to how best to modify the institutions. But I think it's
really the task of ongoing discussion that's most important, rather than
scheduling some particular meeting of people who meet with each other quite
regularly now.
REP. BENTSEN: Well, I think I would -- and I know my time
is up but I would just add that I understand that you are having these meetings
and that recommendations are being made. But I don't think I am not sure that
anybody outside those organizations believes that anything is really being
changed structurally. I think you are sincere, and I think you are very serious
about doing this.
And I think that the world as a whole looks at this
and says: "The Fund and the Bank are just muddling through this process. And
they are going to give lip service to these ideas and those ideas. But at the
end of the day, it's not really going to be that different." You can rename
ESAF; you can try and say you are going to involve NGOs. And I am not
necessarily talking about radical overhaul of the operations, but I think -- if
nothing else, I think that both the United States and the participants within
the Fund and the Bank, need to speak with a clearer voice about what they see as
their roles and what reforms they impose.
As you know, I think a lot of
what had to be done in Mexico, in Asia were the right decisions at the time. I
think the critics had a lot to criticize but had very little to offer as an
alternative to arrest the situation at hand. But some of the criticism we ought
to look at in going forward. And so I would just encourage you -- because I know
you are thoughtful on this -- to try and perhaps have the Fund and the Bank be a
little more open and a little more forceful in explaining what changes they are
making and whether or not they are really going to follow it. And I don't need a
response to that, but that's just sort of my observation.
I thank the
chairman.
REP. LEACH: Thank you, Mr. Bentsen.
Let me just say in
conclusion -- I do want to stress several things: One, there is a report that
has been issued by the commission that was precipitated by an act of Congress.
That report resulted in a divided conclusion.
There is a second very
significant private-sector report done by the Council on Foreign Relations under
the co-chairmanship of two former Republican Cabinet members, Carla Hills and
Peter G. Peterson (sp). It was a bipartisan report that received unanimous
endorsement on both sides.
My own personal view is that the second
report appears to be more balanced. Do you share that conclusion, Mr. Secretary?
SEC. SUMMERS: I am not sure I want to make comparisons. I suspect
there's more in the Council on Foreign Relations report with which I could
agree. And I think that it's a stronger reaffirmation of the need for the
institutions to have a strong and continuing role in the developing world. It's
certainly something that we could support.
Frankly, there are a number
of points, however, in the Council on Foreign Relations report, that we would
also regard as not representing the best policy. And there are important changes
that we would favor, particularly in the development banks, that are not
addressed in the Council on Foreign Relations report.
REP. LEACH: Fair
enough.
One of our problems in timing is, A, that you've been here a
very lengthy period, and we're very respectful. Also, one of the next panelists
is delivering the Summers lecture this evening and has a serious time
constraint. But I would, just so that --
REP. FRANK: Is the "serious
time constraint" getting to the lecture or the length of the lecture? Which is
it?
REP. LEACH: It could be both.
But just so it's understood
that there can be differences of judgment between myself and you, because there
aren't an enormous number, one of the recommendations of the Council on Foreign
Relations report -- and I'd like to read it -- is recommendation number four,
which reads -- and this is executive summary -- "Just say no to pegged exchange
rates. Further, the IMF and the Group of Seven should advise emerging economies
against adopting pegged exchange rates and should not provide funds to support
unsustainable pegs."
Frankly, one of the mistakes I believe the IMF made
at the urging of this Treasury was to support the pegged rate in Brazil. I know
that you have suggested that that may have deferred a further international
crisis, but it seems to me -- and the evidence is pretty well in -- that a bet
was made, and that bet was lost, in supporting the Brazilian currency.
In retrospect, A, do you think that a mistake was made? B, do you agree
or disagree with the recommendation of the Council on Foreign Relations report
in this area?
SEC. SUMMERS: Let me take your questions in the opposite
order you asked them, if I could, Mr. Chairman.
We have stated on a
number of occasions, including in my London speech and for presentations in the
IMF board, IMF board of governors, and other places, that we believe the
middle-ground exchange-rate regimes are increasingly dangerous, and in general
there should not be they should be advised against. And in general, they should
not be supported.
It is, I think, difficult to come to absolute rules.
There are questions of moving out of hyper-inflation. There are questions of
countries that are of systemic importance that have to be addressed. And so
whether an absolute rule or not is appropriate, I think an absolute rule might
well be unwise. But the direction of -- the direction that is reflected in that
recommendation is absolutely U.S. policy, and we have stated it on a variety of
occasions.
With respect to the Brazilian case in November, Mr. Chairman,
it's something where I think we will never know the answer. The judgments that
the international community made with our support were framed by a sense that
this was as fragile a moment in global financial markets as any that had taken
place in the previous 50 years. And in that context, it was judged best to make
an attempt to maintain stability. The judgment was made in full awareness of the
general risks associated with pegged exchange regimes, but also an awareness of
the exigencies of that moment.
In the event, time was bought. There was
a subsequent supported adjustment of the exchange rate, and the crisis was
averted.
Would it have been possible to have forced an adjustment at
that moment, when the crisis was in a much greater fever pitch, and maintained
the same degree of stability? Quite possibly. At the time, it was a risk that we
felt was a risk not taking, not worth having -- a risk that should not have been
taken. In general, should there be support for pegged exchange rates facing
speculative attack, as the tone of your question suggested? In our judgment,
absolutely not.
REP. LEACH: Fair enough. The only reason I raised it,
this committee frequently deals with the question of "too big to fail" for
financial institutions. And my own view is that no currency is too big to fail.
And as a matter of fact, our currency is at a flexible rate; why should we think
any others, which by definition are of lesser significance to us and to the
global economy, should be fixed is not something that I've ever particularly
understood, although one can view at least one Asian circumstance where one
hesitates to move away from it. But I'm not so sure that there should be a great
international effort to protect it.
Let me just end with Mr. Bachus, who
wants to make a comment.
REP. SPENCER BACHUS (R-AL): Thank you.
Secretary Summers, first of all, when we look at debt relief, the entire
issue, I'm not sure that you've received due credit. I do not think that the
debt relief that passed the Congress last year would have occurred had you not
become involved effectively and committed really your heart and soul to debt
relief. And you're very much to be commended by that.
SEC. SUMMERS: I
would certainly say the same about you, in spades. And I think your efforts made
an enormous difference on that issue.
REP. BACHUS: Thank you.
When we talk of debt relief, when we talk about the World Bank, when we
talk about the IMF, the question from the American people is why are we
involved; why is this in our national interest; why is this of concern for us;
why are we even having a hearing on reforming or restructuring the global
financial institutions?
Mr. Chairman, to answer that question, I would
like to introduce the speech that you delivered March the 20th to the Council of
Foreign Relations. Secretary Summers, it's a fine speech. It's inspiring. I
think it's well-considered. There are, you know, differences in solutions, but
certainly when the American people ask us or when the American people -- if
people want to know why this is our concern, why it's in our national interest
to participate in these institutions, I think your speech, as well as anything
I've ever read, answers that question.
And I'd like to quote just two or
three sentences from that speech. But certainly I would think that it hasn't
been -- your speech hasn't been published or publicized as much as it should.
And it ought to be required reading for anyone that's interested in the
international financial institutions.
You say, "The United States has
much to fear from states that are too weak" -- or "has more to fear from states
that are too weak than states that are too strong. In such a world, the
promotion of successful development serves America's core interest. More global
prosperity promotes peace. More global prosperity promotes human freedom. More
global prosperity produces better trading partners. More global prosperity helps
us to meet the profound challenges of protecting the global environment."
REP. LEACH: Without objection, that statement will be placed in the
record.
REP. BACHUS: Thank you. And I'm going to introduce the entire
speech into the record, if I could.
REP. LEACH: Yes, it will --
REP. BACHUS: And I want to also quote two other --
REP. LEACH:
Oh, continue.
REP. BACHUS: (Reading) "In this new global economy, the
power of open markets and market-based incentives are larger and clearer than
ever before. And the failings of a more centralized means of coordinating
economic activity have become that much more apparent. The promotion of open
markets and the institutions and policies that are needed for markets to
function" -- well, I'll skip part of it. But, "Globally, the message has been
repeated again and again that successful national economic development depends,
above all, on the promotion of open markets and the institutions and policies
that are needed for markets to function well. Respect for people and for the
environment" -- this is something else -- "are central to successful economic
policies."
And let me just close by reading the final paragraph of your
speech.
"The greatest source of squalor and inequity in the global
economy today is not integration, but exclusion -- a failure to grow and
integrate that keeps large populations trapped on the bottom rung. If we are
serious about preventing a global race to the bottom, we must be serious about
helping those at the bottom to rise up. U.S. support for strong and effective
international development institutions can and must play a crucial role in our
efforts to achieve this."
A very good speech, Mr. Secretary, and I
commend you. And I introduce the --
REP. LEACH: Thank you for bringing
that to our attention.
SEC. SUMMERS: Thank you very, very much.
REP. LEACH: Let me just briefly conclude by saying this committee has
worked cooperatively with the Treasury. In fact, we believe we perhaps have
bolstered the Treasury a bit on several issues. I would only underscore that the
initiative of this committee on the AIDS World Bank trust fund is something we
take exceptionally seriously. I realize it is not in the administration budget,
but there is a very decent chance it will come to the floor in the near future,
a very decent chance that this Congress is going to act forthrightly on this
issue. And I look forward to excellent cooperation between your institution and
this committee on this issue.
SEC. SUMMERS: Absolutely, Mr. Chairman.
REP. LEACH: Thank you. Let me thank you for testimony. This panel is
recessed.
END
LOAD-DATE: March 24, 2000
