U.S. GOVERNMENT PRINTING OFFICE

72–724 PS WASHINGTON : 2001

THE STATE OF THE INTERNATIONAL FINANCIAL

SYSTEM AND IMF REFORM

HEARING

BEFORE THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 22, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–19

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HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

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C O N T E N T S

Page

Hearing held on:

May 22, 2001 ..................................................................................................... 1

Appendix:

May 22, 2001 ..................................................................................................... 37

WITNESS

TUESDAY, MAY 22, 2001

O’Neill, Hon. Paul H., Secretary, U.S. Department of the Treasury .................. 7

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 38

Bereuter, Hon. Doug ........................................................................................ 41

Carson, Hon. Julia ............................................................................................ 44

Ford, Hon. Harold Jr. ....................................................................................... 48

Lee, Hon. Barbara ............................................................................................ 50

Waters, Hon. Maxine ........................................................................................ 54

O’Neill, Hon. Paul H. ....................................................................................... 56

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

O’Neill, Hon. Paul H.:

Analysis of Proposals for 100 Percent Debt Reduction from the

International Financial Institutions for the HIPCs ................................... 62

Exchange Stabilization Fund Report .............................................................. 65

International AIDS Trust Fund Report .......................................................... 93

OECD Tax Havens statement ......................................................................... 60

Written response to questions from Hon. Ken Bentsen ................................ 64

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THE STATE OF THE INTERNATIONAL

FINANCIAL SYSTEM AND IMF REFORM

TUESDAY, MAY 22, 2001

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The committee met, pursuant to call, in room 2128, Rayburn

House Office Building, Hon. Michael G. Oxley, [chairman of the

committee], presiding.

Present: Chairman Oxley; Representatives Leach, Roukema,

Bereuter, Bachus, F. Lucas of Oklahoma, Kelly, Paul, Weldon, Ose,

Biggert, Shays, Miller, Capito, Ferguson, Tiberi, LaFalce, Waters,

Sanders, C. Maloney of New York, Bentsen, J. Maloney of Connecticut, Hooley, Carson, Sherman, Meeks, Lee, Inslee,

Schakowsky, Moore, Jones, Capuano, Hinojosa, K. Lucas of Kentucky, Shows, Crowley, Israel, and Ross.

Chairman OXLEY. This hearing of the Committee on Financial

Services will come to order. Pursuant to the Chair’s prior announcement, I will recognize myself for 5 minutes for an opening

statement, as well as the Ranking Minority Member, and the Chair

and the Ranking Minority Member of the Subcommittee on International Monetary Policy and Trade for 3 minutes each. All Members’ opening statements will be made a part of the record, and it

is so ordered.

Today, the committee is meeting to hear from the Secretary of

the Treasury, Mr. Paul H. O’Neill, on the state of the international

economy. This hearing is mandated by the fiscal year 1999 Foreign

Operations appropriations bill. That law provided for an $18 billion

increase in U.S. funding to the International Monetary Fund. To

ensure that the IMF would effectively use these funds, Congress included as a requirement, authored by Representative Mike Castle

and a Member of our committee, that the Treasury Department report annually on IMF reforms and testify to this committee on the

state of the international financial system.

Earlier this year the committee heard from Federal Reserve

Board Chairman Alan Greenspan, about the conduct of monetary

policy and the state of the domestic economy. Given the interdependence of the U.S. with the rest of the world, economic growth

in the United States is greatly affected by disturbances or crises in

the international economy. For instance, the recent 30 percent drop

in the Turkish lira caused Ohio-based Procter & Gamble to blame

the Turkish economic crisis for a decline in earnings projections for

the second half of 2001.

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Accordingly, the committee welcomes this opportunity to oversee

U.S. international economic policy. An important way the U.S. has

influenced the direction of the international economy is through its

participation in international financial institutions, principally the

IMF and the World Bank. These two institutions, as well as the

General Agreement on Tariffs and Trade, were the result of the

Bretton Woods Conference in 1944 and comprised the Western

world’s response to the Great Depression and World War II.

The IMF’s traditional focus has been on exchange rates and balance of payments and how they effect trade and the stability and

growth of global economy. The World Bank has traditionally focused on providing loans to assist countries in developing their

basic infrastructures. As the international economy has evolved, so

too have the institution’s programs, with the IMF now also providing longer term loans for ‘‘development’’ purposes and the World

Bank providing short-term structural adjustment loans.

Most commentators agree that the Bretton Woods institutions

were successful in reconstructing post-World War II Europe and

Japan, assisting in the economic development of a number of less

developed economies and avoiding international economic depressions. What there is not agreement on is their success in providing

development in poorer countries and combating economic crises in

a more interdependent world.

The last half of the 1990s was marked by recurrent financial crises and a recognition that the economic situation in some of the

world’s poorest countries has gotten worse, not better, despite billions of dollars in development loans. As a consequence, both the

international financial system and the multilateral lending institutions have been the subject of widespread calls for reform.

In that regard the IMF legislation also had a provision, authored

by International Monetary Policy and Trade Subcommittee Chairman Doug Bereuter, calling for the establishment of an advisory

commission to review the need to reform the World Bank, IMF and

other multilateral organizations. This so-called Meltzer Commission issued its report last year and will no doubt be the subject of

review by this committee today and in the future as it conducts its

oversight of the international financial institutions under its jurisdiction.

In addition to U.S. participation in international financial institutions, I am sure the committee will want to hear the Secretary’s

thoughts on how the U.S. should respond to some of the economic

problems in other countries and in other regions of the world. Japan’s economic stagnation, Turkey’s and Argentina’s currency woes,

EU’s interest rate policy and foreign exchange policy may all be

subjects on which the committee will seek guidance from the Secretary today.

In closing, this hearing gives this new committee with its enhanced jurisdiction over the financial services sector a chance to

hear from a new Administration on how best to use these international organizations to encourage trade and economic growth.

From my own perspective, I am supportive of international efforts

to improve trade and economic cooperation among countries. While

some would prefer to take a more isolationist stance and withdraw

U.S. participation and leadership from these institutions, such a

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stance is neither desirable nor conceivable in the 21st Century. A

much more constructive route is to focus on how to best reform and

use these institutions to increase economic prosperity for the

United States and our trading partners.

With that, I welcome you to your first appearance before the

committee, Mr. Secretary, and I look forward to your testimony.

I am now pleased to yield to the Ranking Member, the gentleman from New York, Mr. LaFalce.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 38 in the appendix.]

Mr. LAFALCE. Thank you very much, Mr. Chairman.

Secretary O’Neill, I want to welcome you to your inaugural appearance before our committee. Oversight of the United States interests in the international financial architecture is without doubt

one of the important functions of our committee. So I think it is

appropriate that this topic is the occasion for your first appearance.

Reform of the international financial institutions is a continual

and complex task. For our part this committee and Congress have

provided specific guidelines of reform over the past 3 years, and it

is critical that we achieve good communication between our committee and the Treasury Department in order to ensure that these

guidelines lead to good policy reforms. I hope today’s hearing is

only an initial step in what will be a continuous and cooperative

effort.

I would like to raise a conceptual issue that I believe is nonetheless critical to the reform effort, and that is identifying the proper

mission of the IMF, the development banks, and especially the

World Bank, and I am troubled by the impression that may be left

by some of your remarks, correctly or incorrectly, regarding the nature of World Bank activities. There has already been some confusion and some reading of the tea leaves regarding your recent

statement on this topic, and I look forward to clarifying your views

here today.

As some have interpreted your comments, distributional concerns

should not be a part of the Bank’s mission and the exclusive guiding principle for bank activities should be the promotion or productivity in per capita income growth. If that impression is accurate,

I would be troubled. All should recognize that productivity is central to the long-term success of all economies, rich or poor. And I

note that you rightly point to education as a critical productivity

enhancing investment which the bank should be supporting.

Indeed, in the Reagan era I authored the bill creating the White

House Conference on Productivity, chaired by one of your predecessors, William Simon. The working chairman was Bill Seidman,

the chief White House liaison was Roger Porter. So my concern is

not with emphasizing productivity, but my concern is with any attempted exclusivity of this focus.

Those of us who follow the history of the World Bank recognize

a pattern of policy shifts over the years between so-called growth

policies and policies that emphasize poverty reduction. I think the

McNamara era firmly established the moral imperative of poverty

reduction at the bank. This was followed by a period coinciding

with the Reagan years which ushered in a much more focused,

some say exclusive focus on growth policies, however badly deVerDate 11-MAY-2000 07:49 Sep 27, 2001 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 72724.TXT HBANK1 PsN: HBANK1
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signed. But starting with the tenure of President Bush, the senior,

and continuing through the end of the Clinton Administration, I

believe the Bank has sought a path toward what could ultimately

be an appropriate combination of growth and poverty reduction

policies.

We are not there yet, but I do believe that reform efforts already

under way at the Bank may well succeed in stimulating long-term

growth in developing countries while also providing desperately

needed immediate relief from poverty. Both are necessary, but the

latter is critical, in my view. Growth policies constitute a good longterm anti-poverty strategy, but they are insufficient for meeting

the needs of those trapped at the bottom of the income ladder in

the interim, and the interim could last for generations. The socalled long term can often amount to decades or even lifetimes, and

the bottom of the income ladder often means less than a dollar a

day.

So it is unacceptable to suggest that the World Bank should ignore conditions of desperate poverty while exclusively pursuing

growth policies, the benefits of which may trickle down to the poor,

but only after many, many years.

There are a number of other issues that I am extremely concerned about that I can’t discuss in great length, but in 1988 I included a provision in the omnibus trade bill which called for Treasury to make 6-month reports on the exchange rates and have a policy with respect to exchange rates, which is enshrined in law, and

I worked this out with David Mulford. And we are entering trade

agreements all the time with little regard to the effect of exchange

rates and it is difficult to enter into a trade agreement with a country for free trade when it might be 1-to-1 and all of the sudden

within a month it is not 1-to-1, it is 1-to-3 or 1-to-100.

So we need much more attention on exchange rates, and note the

Treasury has to give us a report every 6 months. The report preceding the Mexican debacle of 1994 did not even mention potential

problems with the peso. So it has got to be a good report though,

too. And so much is going on today around the world, Argentina

and Turkey. I would like a glimpse of your views as to what is

going on there and what we might be able to do.

Thank you very much.

Chairman OXLEY. The gentleman’s time has expired.

The Chair is now pleased to recognize the Chairman of the Subcommittee on International Monetary Policy and Trade, the gentleman from Nebraska, Mr. Bereuter.

Mr. BEREUTER. Thank you, Mr. Chairman. Since my remarks are

lengthy, I would ask unanimous consent to summarize and just

make a point or two.

Chairman OXLEY. Without objection.

Mr. BEREUTER. Thank you, Mr. Chairman, and, Secretary

O’Neill, welcome to the committee. As my colleagues know, we look

forward to a productive working relationship with you and your

key assistants, Assistant Secretaries or Under Secretaries, when

you get them in line that is. And I would tell you that our subcommittee’s agenda includes some work on authorization for the

Export-Import Bank, the Asian Development Fund, something

called the IFED, and then we will move into trying to knock down

5

some of the trade barriers to the export of our financial services

from the various types of institutions. But after that I think the

most challenging, politically and intellectually challenging task before us is a fundamental reexamination of the international institutions architecture.

The IMF in particular is controversial, especially charged now, in

light of the fact that it is an element in the anti-globalization demonstrations and effort around the world. I would like to offer just

a couple of comments about the IMF specifically.

I believe that the IMF and the Treasury Department under the

Clinton Administration was unwilling to admit some of its errors

and misjudgments. During the Asian financial crisis the IMF, with

strong encouragement from key members of the Clinton Administration, employed what I think were counterproductive policies in

both Thailand and South Korea, inappropriately treating them as

the usual fiscal basket cases at the beginning even though their fiscal situation was sound. Perhaps any Administration would have

made that judgment, but it was a very different case, and I think

we need to learn from these errors.

In addition, there were also loans to Russia, which might be better labeled as Yeltsin loans, and which will be shown over time, I

think, to be one of the biggest blunders of the late 20th Century.

However, at the same time we in Congress, I think, need to candidly admit that if we didn’t have an IMF or an institution somewhat like it we would have to create one.

The second area, as the Chairman already mentioned, I have a

particular interest in the recommendations, majority and dissenting views of the Meltzer Commission, which resulted from language I first offered. That commission—and I would like to have

your comments, your views on it today and later from the department.

Looking at the majority and the dissenting views, they recommended that the IMF withdraw from questionable long-term

concessional loans and focus instead on the extension of more manageable short-term, 4- to 8-month, credit areas. Moreover, the Commission recommended that the IMF should lend only to countries

that meet certain prequalification criteria.

I appreciate the independent judgment of the dissenting members of the Commission who contend that limiting the IMF to a set

of prequalification criteria would preclude certain countries which

are central to macroeconomic global financial stability from receiving assistance. For example, if this prequalification criteria would

have been applied to the 1997 Asian financial crisis, global contagion may have been far worse.

They have devoted most of their attention to the IMF and secondarily to the World Bank and not too much to the regional

banks. But with respect to the World Bank, they propose that the

World Bank shift from highly concessional loans to a system of performance-based grants to the poorest countries in the world that

lack reasonable access to funds in the capital market. Furthermore,

the Commission recommended that the World Bank defer to the regional multilateral institutions for lending activity in Asia and in

Latin America.

6

I think the Congress should do a fundamental reexamination of

their recommendations and the dissenting views, and I intend to

in our subcommittee, with the assistance of both sides of the aisle,

engage in that kind of activity as a major part of the subcommittee’s activities for this Congress, and I look forward to your input,

your recommendations in all respects.

[The prepared statement of Hon. Doug Bereuter can be found on

page 41 in the appendix.]

Chairman OXLEY. The gentleman’s time has expired.

The Chair is pleased to recognize the Ranking Member, the gentleman from Vermont, Mr. Sanders.

Mr. SANDERS. Thank you very much, Mr. Chairman.

Welcome, Secretary O’Neill, thanks for being with us. Since its

beginning 55 years ago, the IMF has grown to become the most

powerful financial institution in the world, with effective control

over the economies of some 50 developing nations. But there is a

growing sense among many people, including myself, that the IMF

is not doing the job it was established to do and that it has taken

on new jobs that it is not able to do.

In Asia, for example, the IMF not only failed to warn of the financial crisis, it was largely responsible for creating the crisis in

the first place. It did so by forcing countries to remove restrictions

on capital flows and then made matters worse by requiring governments to raise interest rates and slash budgets, turning a financial

crisis to a full-blown economic depression in Asia, with reverberations throughout the world.

At the same time, the new roles that the IMF has taken on for

itself have led to dismal failures. The IMF’s debt reduction program for the world’s most heavily indebted poor countries, for example, has led to deeper poverty and continual debt for the poorest

people of this world. In many of these countries, where HIV/AIDS,

hunger and unemployment are rampant, it is common for governments to spend far more on debt service than on urgent human

needs, such as health and education.

In addition, by requiring poor countries to export their way out

of financial and economic trouble, the IMF has forced American

workers to compete against rising imports of low wage products.

The IMF’s misguided policies in recent decades are largely responsible for the lack of per capita economic growth in Latin America,

plummeting per capita income in Africa, skyrocketing trade deficits

in the United States, and a decline in real wages for American

workers.

Mr. Secretary, I hope you will agree with me that the IMF is an

institution in desperate need of some structural adjustment of its

own. For example, number one, the IMF and other international financial institutions should open themselves to public scrutiny and

oversight. Where is C-SPAN when we need it? Major decisions,

often impacting the lives of hundreds of millions of people, the

most vulnerable people in this planet, are taken behind closed

doors. In fact, the Congress, to be honest with you, doesn’t even

know the role that our representative in the IMF is playing.

Number two, the IMF should make lenders pick up the tab for

their losses in financial crises. If you want to invest in Asia, that

is fine, but if you lose money there, don’t ask the taxpayers of this

7

country to bail you out. Our conservative friends call this moral

hazard. I call it corporate welfare.

Three, the IMF should stop prescribing ‘‘one size fits all’’ austerity conditions that often lead to economic stagnation and poverty. Instead, the IMF should allow countries to pursue alternative

policies to create stability without austerity; in other words, sustainable economic development.

Fourth, the IMF should stop pretending to be a development institution. Its misguided development attempts have resulted in rising debt and deepening poverty for the poorest countries in the

world. Developing countries need real transfers of resources and

technology, direct investment and development aid, not austerity

policies and more debt.

And last, but not least, the IMF and the World Bank should cancel—and I hope that you will think about this and perhaps agree

with us—should cancel and not just reduce the debt that they have

created among the impoverished countries of the world. The IMF’s

current debt reduction program, according to the recent report by

the U.S. General Accounting Office, is keeping poor countries hopelessly in debt and the IMF forever in charge.

Mr. Secretary, I hope you will join me in calling for these reforms, and I hope that you will join Members of Congress from various political philosophies in working to make these reforms a reality. I thank you for joining us today.

Chairman OXLEY. The gentleman’s time has expired, and we will

now turn to the Secretary for his statement.

Mr. Secretary, welcome to the Financial Services Committee for

your first appearance before our committee and hopefully, not the

last. Thank you.

STATEMENT OF HON. PAUL H. O’NEILL, SECRETARY, U.S.

DEPARTMENT OF THE TREASURY

Mr. O’NEILL. Well, thank you, Mr. Chairman, Mr. LaFalce, the

distinguished Members of this committee. It is a great pleasure to

have this opportunity to be with you today to talk on these important subjects. Since there are so many of us and the time is already

moving on, with your permission, Mr. Chairman, I will simply put

my prepared statement into the record.

Chairman OXLEY. Without objection.

Mr. O’NEILL. Thank you, sir. And maybe just make a few observations and then engage you in the things that you are most interested in talking about.

I believe the institutions we are here to discuss today have been,

and are, and need to be important to the world. Having said that,

I also believe that reform is both desirable and necessary, in the

sense that I think we should expect a great deal from these institutions and from what they accomplish, and I think it is not too difficult to find, both in the experience and the analysis that has been

done of these institutions, shortfalls in what one would describe as

an ideal performance. So it is clear to me that changes are desirable and need to be made.

It would be nice if we could stop the world so that we could do

it all at once. I frankly don’t think that is possible. As evidence,

I would suggest to you that from January 20 we have been necVerDate 11-MAY-2000 07:49 Sep 27, 2001 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 72724.TXT HBANK1 PsN: HBANK1
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essarily engaged with these institutions on matters of the moment,

if you will, with Argentina and Turkey. It is simply not possible to

say we are going to have a complete transformation of the way

these organizations work and implement changes on the fly. This

is not to say that we can’t begin to reform and begin to have an

opinion about directional changes, but perhaps that will come out

in our dialogue in the next couple of hours.

I think these institutions developed over a considerable period of

time and there is an expectation of practice and procedure in the

world. I think, if we simply drew a line and said from this day forward these things will not rule, the relationships any more, that

we would find we would not like the consequence of, in effect, shutting off the lights on policy the way it has been and insisting it

change tomorrow in a sharp and distinct way. So I think for sure

we need reform, and we need change, and we need to do it in a

way that gives people around the world a clear indication that we

are intent on changing the rules of engagement, if you will. But we

need to be deliberate and certain in the changes that we do want

to make. Of course, what we suggest to these institutions, I think

we need to understand, is a voice among several. In most of these

institutions we hold a significant position, but not an absolute controlling position. At the same time, I think those of us in the Administration do understand that what we say to these institutions

we say on behalf of the American people. So it is very important

that this not be an independent view; that is to say, not a view

independent of the view of the Congress and the will that you work

through legislation.

But I do think working together we can help the rest of the world

to attain a living standard at least directionally consistent with

what we have been able to achieve in this country and in a fairly

near term. Mr. Chairman, with that, I would be delighted to begin

responding to questions.

[The prepared statement of Hon. Paul O’Neill can be found on

page 56 in the appendix.]

Chairman OXLEY. Thank you, Mr. Secretary. And let me begin.

First of all, thank you for your remarks and for the prepared statement that I reviewed in regard to the proposal of reforms on the

international front.

Mr. Secretary, I was interested to read this past Sunday an oped piece in The Washington Post in which you were criticized for

remarks made regarding the World Bank anti-poverty programs

and the OECD initiatives concerning international tax and banking

safe havens. I thought it was a rather, shall we say, in your face

kind of an op-ed piece and I thought perhaps since you were testifying today, it would be an appropriate time for you to perhaps reflect on that op-ed piece, assuming you have seen it or certainly

your staff has seen it. I will give you an opportunity to respond.

Mr. O’NEILL. Well, thank you very much. Indeed I did see it. I

suppose from graduate school days I have been a consumer of four

or five newspapers every day. Now that I am here I find I don’t

enjoy them quite as much as I used to. I did see this column, and

frankly, I was surprised that if Mr. Hoagland was going to write

what he did, he didn’t bother to call me to find out if what he was

criticizing me for was fair game or not. With regard to the issue

9

that he raised about the statement that I have issued about the socalled tax haven process with the OECD, in fact, in a nutshell— I would be happy to supply this for the record as well—what I have

said is this, and I believe it is a correct policy for the United States:

we are intent and, in fact, we have a legislative mandate at the

Treasury to ensure that all people who fall under the tax laws of

the United States fully and faithfully pay their obligations under

the tax laws of the United States. In that regard, we have before

my time been associated with the OECD in working to develop an

arrangement so that our country and reciprocal countries can provide information to each other to assure that information on individuals that fall subject to the tax laws of any of the reciprocal

countries can be made available with probable cause. I reaffirmed

and reasserted as strongly as I know how to in the English language that we were committed to that principle and we were committed to working with the OECD to accomplish that purpose with

the countries of the world, not just the members of the OECD.

[The information referred to can be found on page 60 in the

appendix.]

At the same time, I was getting lots of letters from respected

Members of Congress from both the House and Senate, suggesting

to me that the OECD was not only helping with this initiative to

help us fully enforce our tax laws, but that the OECD project was

wandering off the path and getting involved in so-called tax harmonization and trying to interfere in the tax structure judgment of

sovereign nations. I went out of my way again to say as clearly as

I know how to do in the English language that we did not wish to

be associated with any such process.

Those are the two principal issues in the debate in which I tried

try to clarify the U.S. position in writing my opinion and making

it available to the public. Mr. Hoagland, I think, perhaps without

having read what I wrote, chose to characterize my intervention as

somehow creating a difficulty for U.S. foreign policy because I was

now advocating dirty money.

Perhaps all of you who have lived in the public eye, most of you

for a very long time, are accustomed to this. I am not so much accustomed to it. Perhaps I will become accustomed to it.

On the issue of what it is I have said about the World Bank, and

again I think Mr. Hoagland suggested that I was personally attacking Jim Wolfensohn, I must tell you this column appeared on Sunday and I really found it quite humorous to be at dinner at Jim

Wolfensohn’s house on Sunday night so we could have a laugh

about it together. It is true that I have said that I think the IMF

and the MDBs and the World Bank need to reform. These are not

things that I say in the closet or to a selective audience. I have said

it on the public record over and over again, as recently as at Jim’s

house on Sunday night when there was a distinguished group gathered to talk about the reasons why these institutions exist, which

is the existence of 4.8 billion people who live in the world with living standards that I think we are all horrified by. And I said as

directly as I know how in that company that I do believe we need

to raise our standards and expectations of what these institutions

deliver. That was not said in a way to be personally critical of Jim

Wolfensohn and the things he has been trying to accomplish. Quite

10

to the contrary, I think all of the good things that have been accomplished should be credited. On all of the shortfalls, we should

work together, not in a mean-spirited way to find fault with the institutions, because I begin with the presumption that we all want

to do good and it is useful to learn from our mistakes.

I must say there is an awful lot of room to learn, because if you

look at what we have accomplished in terms of raising the standards of living around the world in the last 50 years, we have a very

long way to go. Despite the fact that we have spent hundreds of

billions of dollars or provided hundreds of billions of dollars, there

is woefully little to show for it, at least as I would measure the productivity that one could expect to see from well-deployed money.

So again, I guess I am not too surprised to find people writing

things without what one would consider to be the necessary information, but I take it as part of the badge of having the honor to

do public service again.

Chairman OXLEY. The gentleman from New York, Mr. LaFalce.

Mr. LAFALCE. Thank you very much, Mr. Chairman.

Mr. Secretary, I want to emphasize something that I just didn’t

emphasize enough before at that point. I do want to work with you

in a very cooperative manner, in a very bipartisan manner. I look

forward to that and I think I can speak for, if not all, virtually all

of the Democrats on this committee, too, and we look forward to

getting together with you in the near future to start that process.

Let me just focus in on two areas: First, exchange rates and

then; second, the roles of IMF and the World Bank with respect to

two issues in particular, debt relief and AIDS. But first exchange

rates.

You were the President of Alcoa Aluminum, and if you entered

into a long-term contract with Mexico, would you have taken payment for a 30- or 40- or 50-year period in pesos without regard to

the possible devaluation of the Mexican peso? How would you have

accounted for that, and how would you, please, account for a free

trade agreement, whether it is with Canada or with Mexico or

Israel or Jordan or free trade agreement with the Americas? How

would you account for the potential volatility of exchange rates, because our trade agreements historically have not done that?

Mr. O’NEILL. Well, you are right. This is a subject that first as

President of International Paper and then as CEO of Alcoa for 13

years.

Mr. LAFALCE. I didn’t mention International Paper, because they

closed the plant in my congressional district, Mr. O’Neill.

Mr. O’NEILL. I noticed that.

Mr. LAFALCE. That is J. Stanford Smith.

Mr. O’NEILL. That is right. I noticed that Tonawanda was part

of your district, and I was happy to say that Tonawanda was closed

before I got there. It was not on my watch. But as you know, there

are other great International Paper facilities in the State of New

York.

In any event, how does one deal with this in the private sector?

First of all, you do not make what I would call unbalanced contracts, actual relationships across country boundaries, because you

are aware of the uncertainties and complexities that can develop

over time. But you are quite right to put the time dimension on the

11

question you did. Because in the kinds of businesses that I have

been in, when you go into a country and either buy operating

plants or build operating plants, those are decisions for 50, maybe

even 100, years. So first of all, you do not go in unless you have

a fairly high level of confidence that something like the rule of law

that we know here and enforceable contracts and an ability to keep

corruption out of your immediate activities exist. So there are some

preconditions that intelligent people make before they put assets

on the ground.

Mr. LAFALCE. If that was the case, we never would have gone to

Mexico, because Vincente Fox campaigned on the imperative of

cleaning up the endemic corruption.

Mr. O’NEILL. I was careful to say within the framework of the

work that you do as an individual company. I am one who believes

you can pretty well secure for yourself an ability to work in a corridor of Western values if you insist on it. And I think I can demonstrate to you I was able to do that in Brazil and in Mexico and

in Korea and a lot of other—— Mr. LAFALCE. How would you deal with the exchange rate problems and how do we deal with that in our trade agreements?

Mr. O’NEILL. I guess I think it is not possible to protect, nor

probably is it desirable to protect, all of our individual companies

and factors of production against shifts in the way the world is configured and the risk associated with changing government structures and rulers and presidents and parliament and Congress and

all the rest of that.

Mr. LAFALCE. Should your trade agreements have some escape

hatches?

Mr. O’NEILL. I do not think it is possible to create a safe corridor

for capital that says no matter what you do we are going to ensure

you that sovereign governments, in general, follow fair exchange

rate practices. So no, I don’t think that you can be protected by

your government against exchange rate risk. But there are market

devices that exist out there that those of us in the private sector

use every day, in effect to make sure that for production purposes

we work in the currency of the country so that whatever happens

our production cost, in effect, remains protected against the rest of

the world. Then the other thing you look at if you are good at making money in the worldwide operations, you look at the basic physical competitiveness of what you do, so that no matter what happens in the world you have an anchor that gives you a better position than anyone else in the world, and then you would use derivative contracts to protect your foreign exchange risk.

Mr. LAFALCE. With all due respect, Mr. Secretary, I find that unfortunately quite deficient, because I have too much experience

with trade flows being dependent primarily upon currency fluctuations. You look at the trade we have with Canada and if we are

dealing at 88 cents to the dollar, that is one thing. If we are dealing at 65 cents to the dollar, it is something else. Businesses close

and people lose jobs and if you enter into an agreement on a certain set of assumptions, and that is a certain relationship between

the two currencies, and then there is a 50 percent change or a 5000

percent change, the most basic fundamental element of the bargain

has changed so drastically that you never would have entered into

12

that bargain. And I just don’t think we can enter into trade agreements without considering that question. And nobody, Democrat or

Republican, has come to grips with that issue. And I don’t find

your response thus far adequate.

Chairman OXLEY. The gentleman’s time has expired. The Secretary may respond.

Mr. O’NEILL. As I said to you, I was the Chairman of Alcoa for

13 years and at International Paper for 10. During this time I ran

a company that lived in a world where the yen varied between 270

and 80 and mine was always the most profitable company in the

world, without regard to exchange rate fluctuations between the

yen. If you would like to talk about European countries, yes, it creates pain on a short-term basis if your financial management is not

good at providing derivatives to cover exchange rate risks, but it

is a fairly short phenomenon. If you know what you are doing, you

can make money in a very substantial way in a world that is

fraught with uncertainty and the uncertainty of sovereigns changing and currency rates changing, because sovereigns make big mistakes about the financial structure of their own country.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from Iowa, Mr. Leach.

Mr. LEACH. Thank you, Mr. Chairman.

Welcome, Mr. Secretary. Your written testimony very thoughtfully focuses on IMF reform and I think quite properly it underscores the effort to promote in three words, productivity, transparency and prevention. In that context, particularly of the first

and the third, productivity and prevention, it is arguable that the

greatest issue in the world today, particularly the developing

world, is disease prevention. Here it is relevant to note that the socalled Meltzer Report called for greater attention to the AIDS problem. It also called for a greater grant, as contrasted with lending,

component of the international financial institutions.

Consistent with this reform approach, this Congress, led by this

committee in the last Congress, passed authorizing legislation for

the establishment of an AIDS trust fund and in the last 6 months

there has been an awful lot of international discussions on the subject. In any regard, the legislation that emanated from this committee, which is the law of the land, directed the Secretary of the

Treasury to negotiate the establishment of such funds to be housed

at the World Bank. Could you update this committee on the status

of those negotiations?

Mr. O’NEILL. Well, as I am sure you know, a week or so ago the

President announced the intention to provide $200 million as a beginning for a trust fund arrangement. We are still working out the

details of exactly how this should be housed and administered, and

the details are not quite finished.

Mr. LEACH. I appreciate that. I would only stress that the World

Bank has more experience than many understand, and it has a

mechanism of a 5-to-1 leveraging circumstance, of which the one is

the United States. It seems to hold an awful lot of potential for an

early timeframe addressing the trust funds issue. And I would only

urge, as we have privately discussed, the Treasury put its oar in

as strongly as it can. And I am pleased with the President’s anVerDate 11-MAY-2000 07:49 Sep 27, 2001 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 72724.TXT HBANK1 PsN: HBANK1
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nouncement. We all hope for more, but I hope this is a first step

in that direction.

Thank you.

Chairman OXLEY. Does the gentleman yield back?

Mr. LEACH. Yes, I do.

Chairman OXLEY. The gentleman yields back.

The gentleman from Vermont—he is temporarily gone.

Mrs. Maloney.

Mrs. MALONEY. Welcome, Mr. Secretary. In 1998, the world faced

an Asian contagion so potentially massive that our leaders in this

country feared that our domestic markets could be destabilized if

it spread. Before this committee Secretary Summers said the contagion would put American savings at risk, because of what it

would have meant for the broad pattern of financial markets if it

had not been contained. Obviously, with the explosive growth of investing in this country through mutual funds and retirement plans,

such a situation could impact tens of million of small U.S. investors.

Given the possibility that we could face another situation like

that in the future, I have a question about how the Administration—the policy that you would put forth. Would your Administration actively work with our international partners to fend off such

a crisis or would you stand on the sidelines and leave countries to

fend for themselves? In such a situation do you support only IMF

lending to countries that prequalify for loans under the conditions

developed by the Meltzer Commission?

Mr. O’NEILL. Thank you very much.

Let me begin by saying I think in the world that we lived in

then, and even the one that we live in today, that contagion is an

issue that should concern us. At the time that Secretary Summers

spoke to you I suppose I would have said to you what he did, but

I frankly do not believe that we should accept the notion of contagion as something that God intended for us to have. In fact, I

think the idea of contagion is one that we should work very hard

to develop mechanisms to defeat.

In this sense, if you look today at, let’s say, some locations or nation-states that have had financial problems that have been in the

news—everyone knows something about Turkey and Argentina and

Indonesia. If you look at those three places, and you look at their

geographic relationship to each other, and you look at their international trade with each other, I submit that you would be very

hard-pressed to make a case that they were in any way related to

each other. Yet we have this fashionable notion that if something

happens to the financial condition of one, that it could be difficult

for other countries, like the three that I mention and a host of others. It seems to me we should not accept this proposition that

somehow a weakening financial condition in one difficult place is

accepted as a basis for money to race around the world and be

withdrawn from other markets on the basis of an experience in one

country.

Now, I don’t think it is so easy to solve the problem of potential

contagion. But associated with recognition of the possibility of contagion has come what I would say is too frequent intervention, because, in fact, we have convinced ourselves we did not have a

14

choice; that is to say, if we did not act, that the consequences

would be multiplied like dominoes falling over. That may have

been correct, but by making money available on that theory, I

think we do promote the idea that the Meltzer Commission report

found not a good one, that somehow we have got to intervene everywhere on the spur of the moment in order to protect ourselves

against the consequences of someone falling. I think, as we work,

that we can limit country problems to individual countries, and

that we will, with that, have a much stronger ability to do

preidentification of places that are getting into financial difficulty

and, therefore, be able to intervene on a precautionary basis rather

than standing back and waiting for things to come apart.

So, yes, I think we need to be worried about contagion. I think

in the most desirable of worlds we need to be identifying, unraveling financial conditions and working through the international financial institutions before there is a real problem. And in that regard I think we need to become increasingly insistent about the

fundamental conditions for association with these institutions

which are, as I said earlier, insisting on at least directional activity

toward the rule of law and enforceable contracts and an accelerated

effort to reduce corruption.

Chairman OXLEY. The gentlelady’s time has expired.

The Chair now recognizes the gentleman from Nebraska, Mr. Bereuter.

Mr. BEREUTER. Thank you, Mr. Chairman. I wonder if you would

comments on two things, Mr. Secretary. First of all, it seems to me

we have an international problem of one or a few people having

huge amounts of money which they can move around the world immediately or in very, very short order and that they can manipulate the currency market and the stock markets with devastating

effect, that then the IMF is then asked to come in and pick up the

pieces and it has a contagion effect beyond that.

I remember leading a small delegation in the office of Donald

Tsong, who has a very powerful position of Finance Officer for

Hong Kong. He was badly shaken. He had just in his view taken

on this group of pirates what were attempting to break the peg between the Hong Kong dollar and the U.S. dollar and he was successful because he intervened in the stock market, which was contrary to every ideological bone in his body, but he was sitting on

$80 to $100 billion reserves at the time. A country with small reserves couldn’t handle that situation.

I wonder what you think we need to do to adjust to this reality

that exists today. Does, for example, the Bank for International

Settlements have a role? What do we do?

The second question relates to the Asian financial crisis and how

the IMF responded to Thailand, but particularly also the Republic

of Korea. There it seems to me a major contributing factor was simply bad banking practices, a whole array of things, lack of transparency, crony capitalism, and I am wondering if you think the

IMF did an adequate job of warning about those problems and

those warnings were simply ignored and not given much attention

or if, in fact, the IMF is up to this task, if it should be allocated

in some sort of different fashion, because I think the consequences

15

were severe and they eventually gave those countries fiscal problems that they didn’t otherwise have.

I welcome any kind of comments, or perhaps you need more time

to reflect on this. But any initial comments or proposals to follow

up on will be appreciated.

Mr. O’NEILL. I think we will give you something for the record

in addition to what I will say. I think the IMF is up to doing the

role that it should be doing, which in a way would scale back some

of the breadth of what it is doing now and what it has in the recent

past been trying to do, by becoming much more focused. So I think

the resources can be there to do a job that is doable.

With regard to renegade money, what I would call renegade

money, I would say something else. I think we need to be especially

vigilant of what I would call the presence of substantial amounts

of hot money in places that have financial weakness. What I mean

by that is money that is not invested in the hard, economy on the

ground, because if it is invested in physical assets, it is not so easy

to pull up a smelter or paper mill by its roots and run off with it

whenever you wish.

So I think there are some indicators of danger that one can see.

I think the other thing we need to do is partly related to what I

said about the dangers of contagion. If we can create a satisfactory

way for dealing with the issues of contagion, then we can do a good

job of preidentification of places that have difficulties. Let’s say

that the IMF would recommend to a country these are things that

you need to do in order not to become a crisis country and a country chose to ignore that advice, to solve the contagion problems we

could teach them very valuable lessons by letting so-called hot

money take a bath. I think in places where capital rates of return

are, let’s say, 25 or 30 percent a year, you know that there is a reason for rates to be so much higher than the cost of capital and that

reason is risk. I think the nasty part of what we have done in bailing out some of these countries is that we have, in effect, let people

get away without paying the risk premium that was implied in the

rate of return that they were able to get. We need to figure out a

way that when somebody, in effect, bets the farm on a 25 percent

interest rate environment, if the circumstances suggest they should

lose it all, they should lose it all.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from Vermont, Mr. Sanders.

Mr. SANDERS. Thank you very much, Mr. Chair.

As you know, Mr. Secretary, we don’t have a lot of time and I

apologize for that. I would like to ask you three questions if I could.

Number one, I and many Members of Congress and the public

are concerned about the issue of transparency. And while I can appreciate that in rare circumstances every organization in this world

needs secrecy, the fact of the matter is that the IMF is cloaked in

secrecy. Can you assure the committee that you will do what you

can to open up the IMF so that the citizens of this country and the

world, in fact, can get a better understanding of what that institution does? That is question number one.

Question number two deals with what some call moral hazard,

some call corporate welfare. You are aware that the IMF essentially bailed out many large banks who made unwise investments

16

in Asia. People all over this country are outraged. When they make

bad investments, the United States Government and the IMF do

not bail them out. Will you be prepared to stand up in a very

strong way to say to the banks and financial institutions if you

want to invest poorly, go ahead, but we are not going to bail you

out?

My third question is will you urge the IMF to not just reduce the

debts of the most impoverished countries of the world, but, in fact,

to cancel them? As you know, our country and other industrial

countries have said that the IMF has not. According to a recent report by the GAO, the IMF policies are keeping poor countries hopelessly in debt. The question is will you urge the IMF to cancel, not

just reduce debts?

Those are my three questions, Mr. O’Neill.

Mr. O’NEILL. Thank you.

On the first issue of transparency of the IMF, what I would like

to do is meet with you, or have my staff meet with your staff, and

understand exactly what it is you would like to have for the benefit

of the public that you do not now find available. To the degree that

we can agree that such information ought to be available to the

public so they can understand what these institutions are doing

with our money.

Mr. SANDERS. Thank you. We will take you up on that, and we

will give you a ring. Thank you.

Mr. O’NEILL. To the issue of corporate welfare, what I was saying

earlier to the previous question, was that I want to develop a way

so that people who take a risk of earning 25 percent actually have

an opportunity both to realize that 25 percent and to lose everything if that is what the circumstances of country suggest. I am

certainly not for bailing out investors when they made a free will

decision and it turned out to be wrong. I don’t think that should

be the business of government.

Mr. SANDERS. Good, glad to hear that.

Mr. O’NEILL. On the third issue of debt forgiveness I would say

two things. First of all, I don’t know of a single case, and I don’t

pretend to be 100 percent sure of the history of these institutions,

but I doubt if there is a single case where a country was forced to

take money from these institutions. That means that these loans

that are now being the subject of forgiveness are something that

was agreed between the granting institutions and the countries. So

I think the idea that somehow the IMF and the World Bank and

the MDBs somehow intentionally put countries into a financial tailspin, I don’t know the evidence of that.

Mr. SANDERS. Mr. O’Neill, you are aware that in some cases the

IMF lent money to dictators and really unscrupulous people who

made debts in a very undemocratic way without input from their

people, and now the poor people of these countries are stuck with

these debts that the IMF should not have negotiated with dictators

and corrupt people. I would just mention that.

Mr. O’NEILL. Let me say again what I said about rooting out corruption. If you are a real investor, you don’t knowingly go where

corruption is because it raises the risk premium for your capital.

So I am not one who wants to make a case that we should be—

17

or that our intermediaries, which I consider these institutions to

be—should be knowingly making money in the face of corruption.

Mr. SANDERS. You are aware that that has happened, right?

Mr. O’NEILL. It is certainly true in retrospect, as one looks at the

fact that there have been people that absconded with the money.

There is no doubt about that. I have said on public record, I may

as well say it again here, sending the money that was sent to Russia was beyond belief, but it was sent by the previous Administration and actually at the insistance of the previous Administration

through the IMF to Russia. I am not in favor of doing that kind

of thing.

Now, should we forgive money at a faster rate? I think we should

see how this debt forgiveness program is doing. But given the opportunity, I would say this to you as well, as I begin to examine

these programs and activities in more detail, I ask myself the question, what does all this look like from the point of view of the president of a recipient country? Then I look at what we have been

doing with the so-called HIPC relief and we are saying to the

sovereigns who receive principal and interest relief you must do

this with the proceeds, it makes me wonder very much if we have

really given careful consideration to what it is like to have a responsibility for running the country rather than being at the end

of a direction line where there is no coordination among the different trusts that are being put on people. So, while in some sense

one might say as we give relief through the HIPC activity and we

reduce or eliminate principal payments or interest payments, there

is something very attractive about more investment in education.

But from the financial point of view, it may be the worst thing in

the world to insist that a sovereign now take on new debt obligation as though it were suddenly financially secure, when maybe the

best use of relief from principal and interest is simply to put the

country on a sound enough financial basis so that it may some day

have hopes of being financially solvent.

Chairman OXLEY. The gentleman’s time has expired.

The Chair will announce that there are two votes on the floor of

the House, Mr. Secretary. There are about 31⁄2 minutes left on the

first vote. The hearing will stand in recess.

[Recess.]

Chairman OXLEY. The hearing will come to order.

I now recognize the gentleman from Alabama, Mr. Bachus.

Mr. BACHUS. Thank you.

Secretary O’Neill, last week you testified before the IMF/World

Bank about the banking crisis in Japan, and you pointed to what

we did here during the 1980s, that we wrote off the debt, we punished the wrongdoers, and we made a fresh start.

Mr. O’NEILL. Right.

Mr. BACHUS. I agree with you that is an appropriate thing to do

on many occasions.

I would ask you to look at that analogy with the highly indebted

poor countries. I think you have correctly said that in many cases

going forward, we ought to use grants as opposed to loans. In fact,

in the past I would submit to you that we should have used grants

instead of loans. Because we didn’t, we have created a horrendous

situation in these countries.

18

I am not going to cross-examine you about this, because I am

sure you are aware that millions of people are dying in these countries because funds are being used to repay debt that could be used

for health care, education, sanitation and infrastructure.

I would ask you this: I am aware that President Bush in his second debate said and acknowledged that debt forgiveness is appropriate at times. Are you aware, number one, that the rich countries

of the world have agreed to forgive the bilateral debt, but that we

still have the IMF and the World Bank, and they say they are not

in a position to forgive much of the multilateral debt?

First of all, I would say are you aware of that, that we have a

contrast between the rich countries forgiving debt, yet the

multilaterals not taking that same step?

Mr. O’NEILL. Well, I think it is true that we have some inconsistency even among what rich countries have decided to do. But for

sure there is a difference, say, between the beginning initiative

with the HIPC—and I would characterize it as that, a beginning

initiative—and what some countries have done in a bilateral way,

yes.

Mr. BACHUS. Are you also aware of some of the successes that

we are hearing from Zambia and other countries? There are countries we are hearing of success, the number of children enrolled in

schools and beginning to turn some of these epidemic conditions

around as a result of the debt relief that has been granted?

Mr. O’NEILL. Indeed, I have looked at individual country reports

and examined what has happened to life expectancy figures and attendance of children at school and the presence or absence of safe

water and sanitation conditions and the other things we associate

with economic progress or well-being of human beings. But as I

said in my testimony, I think where you find there is real progress,

the standard of living is going up as measured by the average earning power in the economy. I guess one of the things that I am interested in seeing if we can develop as we go along is, in fact, a very

direct measure of what is happening to the average income of individuals and families in all of these developing places around the

world, so that maybe we begin with that statistic at the top of everything we look at, because it is probably the best summary figure

that tells us whether or not life is really improving in these places.

I suspect you probably have traveled as much or more than I

have around the world. It is really difficult to believe the conditions

that exist in some countries, and, in fact, to see places that lived

under colonialism for a period of time that have actually receded

far behind where they were when the rule of colonialism was lifted,

and to wonder how we cannot only resolve to change these outcomes, but to accomplish a substantial change in direction and

level of standard of living everywhere in the world.

Mr. BACHUS. I would also submit to you in regard to income levels that we are having children go to school for the first time, and

I think there is a lag time, but I think once you start educating

children, there may be a few years before the income rises, but I

think we would all agree in this room that education is essential

to improving living standards, and in many of these countries they

simply lack those schools.

Chairman OXLEY. The gentleman’s time has expired.

19

Mr. BACHUS. Let me simply say this: I would hope that the

Treasury would analyze the pros and cons of the proposals to go

further with debt relief and provide 100 percent debt forgiveness

for these countries. I would ask you, if you have already done so,

to supply some of the information to us. If not, I would hope you

would consider such an analysis.

[The information requested can be found on page 62 in the

appendix.]

Chairman OXLEY. The gentleman from Texas, Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman.

Mr. Secretary, let me say, reading through your testimony, I

don’t have any particular problems with what you say on its face,

but I think when you dig a little deeper, I think it becomes much

more complicated. I used to think I was sort of becoming somewhat

of a rational expectationist, but now I think now irrational behavior is a more realistic economic model, particularly when it comes

to international markets.

Even in your testimony, I think you have some conflicts in how

things have really played out, but I want to give you the benefit

of the doubt, because you are new to the job, and you are going to

have to ride through these things as it is. But I do want to get your

viewpoints on a couple of these things. Your core objectives I agree

with, but then you talk about later on page 3 that conditionality

is sometimes a problem, and you reference Indonesia.

We have had debates on this panel, left-right, right-right, left-left

and in the center, on questions of conditionality and whether or not

the Fund and the Bank and Treasury and the G-7 were too harsh

on countries. But I think there come times when you want to promote sound monetary, fiscal exchange policy that it requires some

pretty tough conditions that have to be imposed. I would concur

that Indonesia has not worked, whereas South Korea has worked

fairly well, and Thailand has worked fairly well.

I would also agree with your comments regarding issues of moral

hazard, and I am all for letting investors lose their money. What

they do with their own money is their own business, as long as it

is legal. But we also have to recognize, I think, that you have questions of capital flows in emerging economies and the impact that

that has. I doubt you would agree with, and I hope you don’t agree

with the idea, of having some sort of capital flows regulation or

capital flows tax. Malaysia, as you know, tried that, and it ended

up being a failed experiment.

The I would like you to comment on those, but the three questions I have for you are this: Your Administration has said that

you don’t want to pursue the same policies that were pursued in

the past in dealing with bailouts. I am curious of how you view

Turkey different, and perhaps Argentina—maybe you don’t want to

comment on that—but, how you view Turkey different from what

South Korea and Thailand were.

Second of all, we had a hearing last week regarding the HIPC

countries, and the GAO reported that it would take 15 years of 6

percent annual real growth for the HIPC countries, the majority of

the HIPC countries, to grow out of the concessional lending program. You talk about the idea of lending to pay debt payments,

which I think is a disastrous policy. What is the Administration’s

20

long-term view on trying to address that, or are we going to just

continue to paper over? This goes back many Administrations.

Finally, what are your views or the Administration’s views on

the issues of dollarization and monetary control boards?

Mr. O’NEILL. OK, good. I don’t think you asked me a question

about conditionality. You were just commenting on what I said in

my testimony. But I do want to make a point about conditionality,

if you don’t mind.

You know, I believe it is fundamental and it is a question of

management principle, if you will. If you have conditionality in any

arrangement that you might have, in a private contract or understanding or in relationships between these international financial

institutions and a country, if you have three conditions, and you

have people to oversee three conditions, and you have measures

that you can use to know whether or not the conditions are being

met, I would suggest to you you are much more likely to actually

accomplish what you want than if you have 300 conditions and

they are very murky and immeasurable. It is in that sense—and

I understand I am drawing polar extremes to make the case—that

I see a need for these institutions to be very careful in the number

of conditions that they put under the umbrella of conditionality,

and include as a general rule only those that are measurable and,

therefore, enforceable and necessary to the broader goal of improving the living condition of a people in the affected country.

Now, on the question of do we handle Turkey differently than

Secretary Rubin or Secretary Summers might have done, I honestly

don’t know. What I can tell you is that what we did in this particular case was to be very clear that we thought the intervention

institutions of choice should be the IMF and the World Bank, and

that these are the institutions that at least in theory we have held

out as the right way for the world to deal with financial crises,

problems, and we ought not to become engaged in bilateral assistance on top of or in lieu of appropriate intervention by the IMF and

the World Bank.

The other thing I think maybe one can say is different from some

of what has gone before is to be very strong in our suggestions to

the institutions that they should expect the political leadership of

Turkey to take a forthright, on the record, very clear position of

ownership of the changes that were going to be made as a condition

for the receipt of assistance, which they agreed to do.

It has been, I think, too frequently the case that the institutions

have dealt with supposedly empowered finance ministers and

maybe with the appearance of the political leadership of the country owning the agreement, but without the reality of that ownership. We were really quite strong in suggesting to the IMF and the

World Bank that they should ensure and insist on the ownership

by the political leadership of changes that needed to be made, and

then—in the case of Turkey for the 15 issues that they decided

they were going to tackle—that they, in fact, take legislative action

where it was needed before money began to flow.

If you read the newspapers of record in the last few weeks, you

will see they have begun to do things that most would have said

were not possible. So, I suppose you were here and you can decide

for yourself better than I whether these are, in fact, different in

21

kind from what Secretaries Rubin and Summers might have done.

They are certainly different from my impression of what has been

done in the past as a general rule.

Chairman OXLEY. The gentleman’s time has expired. Let me indicate the gentleman is almost 3 minutes over. We will have to

move on.

Mr. BENTSEN. If the Secretary could answer the others for the

record, I would appreciate that.

Mr. O’NEILL. I would be happy to do that. Thank you.

[The information requested can be found on page 64 in the

appendix.]

Chairman OXLEY. Without objection.

The gentleman from Texas, Dr. Paul.

Dr. PAUL. Thank you, Mr. Chairman, and welcome, Mr. Secretary.

Mr. O’NEILL. Thank you.

Dr. PAUL. I appreciated most of all your comments in your statement about transparency and accountability, considering that to be

very important, because you say it is essential. Of course, I would

like also to have transparency and accountability in another arm

of the U.S. Government in dealing with international financial systems, and that happens to be with the Exchange Stabilization

Fund. The IMF was set up with funds from the Exchange Stabilization Fund in 1934, and in recent years it has seen to it that

Mexico got $20 billion from the Exchange Stabilization Fund and

$22.6 billion went to Russia.

This is all off budget, it is not appropriated, and there is a question of constitutionality here on whether or not the Treasury Department should be involved in this type of financing at all.

But as far as the taxpayers’ exposure goes, it is greater, I believe,

with the Exchange Stabilization Fund than it is with the funding

that we give to the IMF.

Recently there were some minutes released from a discussion

with the Federal Reserve that occurred in 1995 dealing with the

Mexico City bailout, and in this discussion they recognized that the

Exchange Stabilization Fund could be involved in gold swaps, and

this was recognized as being legal.

The question also came up whether or not there were any other

agreements made, other than the one that was currently pending

with Mexico, and the answer to that was yes, indeed, we had a

swap arrangement with the Bundesbank.

My question to start with is: did that swap arrangement deal

with a gold swap, and does it continue to exist? I would like that

answered in light of the fact that up until August of the year 2000,

the status report on the U.S. Treasury gold always reported that

gold at the West Point Reserves, the amount was 1,710 tons, was

called gold bullion reserves. In September that label changed, and

it changed to custodial gold. During that same period of time, the

Bundesbank also had a reduction of gold that they held by 1,700

tons.

I would like to know what is the connection between these two

events, and what does this all mean? Do we have gold swaps with

Germany, and could we have a little bit of transparency so I can

better understand this process?

22

Mr. O’NEILL. Well, I will tell you, I would not probably be in a

position to answer any of these questions except for the fact that

on Sunday night when I was working through my briefcase, I found

a report that it is my duty to transmit to the Congress providing

the information on the most recent examination of the Exchange

Stabilization Fund. Indeed, this was a fund set up in the Roosevelt

Administration in 1934 for the express purpose of protecting the

American financial system from the vagaries of the rest of the

world’s finance systems. Just as you say, it is empowered to operate in gold and in currencies, and there is a substantial latitude

as to how this arrangement can work.

My memory is that last year there was one transaction. It was

a fairly small transaction involving an agreed intervention vis-a-vis

the yen. It was the only transaction last year. I can assure you,

and we will make sure you get a copy of this report, that I found

the report really quite complete in its documentation of what was

done in the past year.

I don’t know the 1995 circumstance. In fact, the funds in the Exchange Stabilization Fund are marks and yen, and, if I can say it

this way, attributed dollars. But the U.S. Government does still

have gold reserves, and just by coincidence, Chairman Greenspan

and I were talking about those reserves this morning. It turns out,

by his best recollection—I didn’t check, because I assumed that his

recollection is always right—but, he was noting this morning that

the U.S. holdings of gold are some $80 billion, which I observed is

just about the same as Bill Gates’ net worth, for whatever that is

worth.

In any event, we will get you a copy of the Exchange Stabilization Fund report, and if there are additional details you would like

to have, I would work with you to see if we can’t get them for you.

[The information requested can be found on page 65 in the

appendix.]

Dr. PAUL. If I could follow up on this, thank you very much.

Chairman OXLEY. The gentleman’s time has expired.

The gentlelady from California, Ms. Lee.

Ms. LEE. Thank you, Mr. Chairman.

Hello, Mr. Secretary. Let me follow up on a question Congressman Leach asked you with regard to the World Bank AIDS Trust

Fund and my conversation to you about this.

Last year, of course, we passed the World Bank AIDS Trust

Fund. It was signed into law, and it was the responsibility of the

Treasury to coordinate the efforts and to negotiate this Trust Fund.

To date this Trust Fund has not been negotiated. One of the reasons we are very anxious about this is, of course, AIDS is killing

many, many people around the world. Since the passage of the

World Bank AIDS Trust Fund, we have estimated over 1 million

people have died in Africa alone.

What I want to ask you is what is going on in terms of the negotiations? You indicated that the details were not quite finished.

Last week, or the week before last, the President announced his

commitment, $200 million to an international trust fund, but we

don’t know which trust fund he is talking about. This Congress

worked very hard, very diligently to negotiate the principles and

23

authorities and all of the details for the World Bank AIDS Trust

Fund, and to date nothing has happened.

So I would like to hear more from you with regard to the Trust

Fund, which is the law, and what are you doing in terms of enacting that law, or are you trying to get around it by doing something

new?

Mr. O’NEILL. I honestly can’t speak to the question of why the

previous Administration didn’t do anything about this.

Ms. LEE. The previous Administration transferred $20 million only. It should have been $150 million. We were very disappointed

at that dismal amount of money that was transferred.

Mr. O’NEILL. Actually, it is my impression they didn’t move anything. But in the budget we put together in January and into February, we did decide we were going to move $20 million to get

started with this Fund and to make good on the legislation, just

as you say. It has been subsequent to that that the President indicated we are going to now put $200 million into a fund. There is

still work going on at the OMB as to exactly what vehicle should

be used.

Ms. LEE. Why is there a question about which vehicle?

Mr. O’NEILL. Well, there are substantive discussions. Kofi Annan

has suggested that the U.N. has a special capability for running

this kind of activity. So there is a look to see what are the merits

of the different devices one could use to make sure that this money

does the highest value job that is possible in putting money where

it accomplishes the most.

Ms. LEE. Mr. Secretary, these funds should not be mutually exclusive. We passed one fund last year which should be enacted immediately. The Secretary General of the United Nations is also

talking about a fund which hopefully will be enacted immediately.

But the nature of the pandemic is so enormous that we need both

funds. My concern is, once again, Treasury being in the lead to negotiate the fund that was enacted into law, what is the problem

with complying with the law at this point?

Mr. O’NEILL. We are getting it done. I think it is not true that

the Congress appropriated the amount of money authorized.

Ms. LEE. No, we didn’t appropriate it. We authorized it.

Mr. O’NEILL. Right. So we are working on the structure that is

required to respond to this legislation, and we should have it done

fairly soon.

Ms. LEE. It was my understanding also that in the legislation we

wrote a provision that you would report back by April 30th on actually the status of those negotiations.

Mr. O’NEILL. Do we have a report?

The staff says the report is completed. We should get you a copy

today.

[The report requested can be found on page 93 in the appendix.]

Ms. LEE. Today. Thank you.

Let me just ask one more question with regard to this $200 million. Do you know what accounts the President is intending to take

its $200 million from in terms of the Trust Fund which he announced his support for?

Mr. O’NEILL. We talked about this at the National Security

Council. The Department of Health and Human Services is going

24

to be the source of $100 million, and the State Department will be

the source of another $100 million.

Ms. LEE. Mr. Secretary, I would encourage you and urge you, in

fact, to not take money from funds that are needed in terms of infectious disease control, in terms of U.S. peacekeeping, in terms of

any kind of initiatives that don’t need to be robbed. I mean, we

have a surplus in this country, and $200 million is nothing in

terms of new money. So I would just encourage you, whatever fund

that is going in, make a pitch for new money, and also enact the

World Bank AIDS Trust Fund immediately. The pandemic is such

that we need as much money and as many resources as possible

through as many vehicles as possible.

Thank you very much.

Chairman OXLEY. The gentleman from Connecticut, Mr. Shays.

Mr. SHAYS. Mr. Secretary, it is wonderful to have you here. I

want to thank you for your openness. I hope that over time you

don’t become so jaded that you aren’t as open as you have been.

I think in the long run it pays off.

Mr. O’NEILL. Thank you.

Mr. SHAYS. I know you have so many different responsibilities

and so many different areas, but I do want to just focus on debt

to the IMF and Africa. I realize it is a small part of all the things

you focus on, but I have a tremendous amount of regret as a Member of Congress that Congress didn’t get more involved in Africa

years ago, and I didn’t get more involved.

When Secretary of State George Shultz testified before Jesse

Helms’ committee last year, he said, ‘‘People need to live in reality.

There have been a lot of loans made to desperately poor countries

that are never going to get repaid, and a lot of them have been extended by the IMF and the World Bank, and it seems to me these

organizations should realize that reality and write them off just as

if you were running a private bank.’’ So my question to you, Mr. Secretary, is shouldn’t we stop the

IMF and World Bank from making new loans just so they can pay

off their old loans?

Mr. O’NEILL. Well, as I said in my testimony, I believe this: I do

not believe that we should confuse the recipients or ourselves or

our people by calling something a loan when we really intend for

it to be a grant, which is to say we have no hope that the principal

and the interest are ever going to be paid. That is a grant. Frankly,

to me, it is not an acceptable way to do business, to confuse those

terms. That is not to say that from time to time you won’t be disappointed about performance on a loan, but when you look at the

amount of money that we are talking about forgiving, it is a huge

amount of money. If I remember the numbers right, if we went to

80 countries—— Mr. SHAYS. We are talking primarily about 35 countries.

Mr. O’NEILL. Let’s talk about 35. As I understand, my recollection is that full forgiveness is $43 billion. My staff tells me my

memory is good.

Mr. SHAYS. We are not talking about Sudan and Somalia.

Mr. O’NEILL. I am talking about the 35 countries that I am sure you are, the ones that are subject to debt forgiveness, $43 billion.

It is very hard to make a case that anyone could make $43 billion

25

worth of mistakes. So for sure we need to work on letting this

money go. The process that has been put in place is working away.

One thing, I think this is right, is that as we become more direct

in what we are doing with loans and grants, that we not make new

loans when it is fairly certain they won’t ever be paid back either,

so that we put our policy where our heart is and our programs

where our heart is and face the reality when we are giving the

money away that we are really giving it away.

Mr. SHAYS. What tells you, though, that many of these African

nations are going to be continuing to grow their economy? We are

seeing the AIDS epidemic savage certain areas of various countries,

where the kids have no teachers, they are all dead, their middle

class is just dying off in large numbers, five million orphans. I just

don’t see what the IMF sees as the ability of these countries to pay

back debt. So I would love to know what you see. What hope do

you see in Africa for their ability to pay these debts?

Mr. O’NEILL. Well, I think you have to do this one country at a

time. There are different degrees of capability to pay back new

loans if all the old ones are forgiven and the interest is forgiven

on the old ones. I was saying earlier I think we should not look at

these countries through the lens of the IMF as though the IMF existed alone in the world. Intelligent risk-takers would look at these

questions from the point of view of the leadership of the receiving

country, and then they would look at the financial condition of the

receiving country and understand what degree of risk or security

there was with regard to the fiscal situation in the country. Then

they would not just look at the IMF, they would look at the IMF

and look at the U.N. and all of the sources, both public and private,

of funds flowing into a country, and they would not necessarily follow what we have decided to dictate apparently to the IMF that

they must say to countries: when you get principal and interest relief, you must spend the money on these new purposes, which we

know better than you what you need to do.

I think no one could argue that some of the things we are suggesting aren’t desirable, but they certainly don’t have anything to

do with fiscal responsibility or the prospect of ever helping a country get on a good footing so that it can be responsible for itself.

Mr. SHAYS. Fifteen seconds just to respond and say my concern

is the IMF doesn’t want to acknowledge that they made bad loans,

that they then reinforced those bad loans by giving more loans to

pay off the bad loans, and we have been doing it for years and

years and years. That is my concern.

Chairman OXLEY. The gentlelady from California, Ms. Waters.

Ms. WATERS. Thank you very much, Mr. Chairman, for holding

the hearing, and I thank the Secretary for being present here

today.

Mr. Secretary, I sent you a letter February 16th that basically

urged you to support complete debt cancellation for the world’s

poorest countries during the February meeting of the G-7 finance

ministers in Palermo. That letter was signed by 73 Members of

Congress, both Republican and Democratic Members. Unfortunately, until yesterday I had not heard from anybody. I did get a

brief response yesterday, but I am sure that both you and I should

26

have the opportunity to understand a little bit better where you

stand on debt cancellation.

I would like to just ask, I guess there has been a lot of conversation here today about debt relief. I don’t know if you know what

happened last Congress. The Appropriations Committee reported

out $69 million in debt relief. We went to the floor cold with an

amendment. We ended up with $225 million for debt relief from the

U.S. When that ended up in the conference committee, the conference reported out $435 million for complete bilateral debt relief.

Now, this was a result of a lot of hard work by a lot of good people, religious organizations, non-Government organizations, all

under the banner of Jubilee 2000. We worked very hard to get us

to live up to what was a commitment to deal with this issue of debt

relief.

We don’t want to stop here. We want to continue to make a push

for full debt cancellation, but, of course, we know that the United

States would play a most important role. I mean, we are the 800-

pound gorilla at the IMF and the World Bank.

Where do you stand on complete debt cancellation for these poor

countries? Your letter back to me and the other 17 members really

does not discuss that. Could you help me to understand?

Mr. O’NEILL. You know, I have said on the public record, and I

am sorry if you didn’t think my letter really reaches your question,

that I think we should proceed with the program we have in place,

I think we ought to proceed with the process that has been put in

place.

I think if we are really going to entertain the possibility of writing off everything, we need to face up to how many billions of dollars that is. Before we adopt the policy, we need to put it to ourselves whether we are ready to appropriate the money that is required for, let’s say, our 25 percent of all of the IMF debt forgiveness, whether we are prepared to ask the American people to appropriate it at this time. As long as we are at it, we should go beyond the IMF and the World Bank and the MDBs and look at all

the bilateral loans that exist out there and see how we differentiate

all the loan arrangements that we have, either directly or indirectly, through the Federal Government, and see what our taste is

for doing this and on what basis we would do it.

Ms. WATERS. Well, let me just share with you some information

that I have. I am told that to provide complete debt cancellation

to these 22 impoverished countries would cost only $287 million per

year for the IMF and $215 million per year for the World Bank.

To extend complete cancellation to all heavily indebted poor countries would cost an additional $81 million for the IMF and $138

million for the World Bank.

Considering this is a modest amount, considering the fact that Congress appropriated $435 million for debt relief last year alone,

where are you getting your billions information from? Would you

give me your figures again?

Mr. O’NEILL. $43 billion for the 35 countries. I think the difference is that your numbers suggest that we are going to write off

the principal and interest over the life of the loan instead of—if you

are really interested in writing loans off, you write it off. You don’t

continue to carry it on the books as though somehow it only failed

27

to be repaid 1 year at a time. Perhaps that is the difference. From

a financial point of view, if you have got a bad loan, it is all bad.

It is not bad 10 percent. If it is a 10-year loan, it is not bad 10

percent this year and 10 percent next year, and 10 percent, and so

forth, every year until you get through 10 years. It is no good

today, and it is not ever going to be any good. That is what we are

talking about.

I think the difference is a difference between an idea, which I

frankly never heard of before, of amortizing a bad debt rather then

recognizing it as all bad at once. It is a new concept to me, I must

say.

Chairman OXLEY. The gentlelady’s time has expired.

The gentleman from Florida, Dr. Weldon.

Dr. WELDON. Thank you, Mr. Chairman.

Just to follow up on the lady’s question, were you implying that

you think it would be appropriate if the IMF and World Bank are

going to write off these loans, that the Congress appropriate the

money to make the loans good, that that is necessary?

Mr. O’NEILL. Well, in this world where we are probably in all

stages of loan maturation, what I was basically saying is that while

we don’t often think of ourselves as having a balance sheet, we

have, in effect, said to the American people, we participated in a

process where we used your taxpayers’ money to create a loan fund

or to guarantee a loan fund, and the money was then given to

these countries, and by all accounts many of these loans are not

serviceable, they are not ever going to be paid back, the principal

is not going to be paid back, the interest is not going to be paid

back.

So probably I should grant you the point that we wouldn’t in

most of these cases have to actually appropriate the money, but it

is an appropriation of the American people’s money. But if we basically say we have an asset we don’t have, and we write it off to

the tune of $43 billion, at least as a private citizen, I would be pretty interested if my Government held out to me they have an asset

that they have decided they really don’t have. I would like to know

what the balance sheet looks like, as well as the income statement.

Dr. WELDON. Sure, and I certainly support you on that. I have

read your statement, and I support particularly focusing these organizations more appropriately in areas where I think they have

really been more effective in terms of promoting international financial stability and stable currencies. But I just wanted you to

clarify that for me. You are not necessarily suggesting that for the

IMF and World Bank to properly write these off, we would have

to make an appropriation. They can do that, but we would have to

be notified that the balance sheet has contracted substantially.

Mr. O’NEILL. There is a secondary consequence. If you believe, as

I do, that these institutions should stay in business, and we suddenly decide to write off all of these loans and the prospective interest payments, it very much changes the loan position of these

institutions.

Dr. WELDON. Absolutely. I understand that.

Mr. O’NEILL. In fact, one would have to begin appropriating very

substantial amounts of money over time in order for these institutions to even maintain their current level of activity. So I think

28

even the way we keep, frankly, kind of funny books in this country,

we would eventually be in a position where we would have to tell

the American people we are going to have to appropriate substantial amounts of new money in order for the institutions to maintain

their level of activity.

Dr. WELDON. Thank you for clarifying that for me.

I wanted to just quickly get back to an issue that you alluded to

in your response to Mr. Oxley’s question. You were referring to tax

policy, international tax policy, OECD.

Mr. O’NEILL. Right.

Dr. WELDON. I assumed you were alluding to in parts of your response to the Clinton Administration rule regarding U.S. institutions reporting the names and other identifying information on

non-resident aliens.

I was curious, has the Treasury—I know we are still in the comment period on that. I have had some concerns about that rule

being broadly applied in terms of precipitating capital flight. As I

understand it, it is estimated—and I realize it is hard to get a

gauge on something like this, but it is estimated it could be as

much as $1 trillion of foreign investment in U.S. financial institutions.

Have you at the Treasury looked at the implications of capital

flight, in other words, money going elsewhere, should that rule be

fully implemented?

Mr. O’NEILL. We are looking at it. As you say, it is in process,

and we are sensitive to the issue of not creating a disadvantage for

investors who choose to be in the United States. But I think we

also feel a keen responsibility to enforce the law, to enforce the tax

law and other laws of the United States. So it is a constant process

of examining how one can accomplish multiple purposes without

running into oneself. It is not always so easy.

Dr. WELDON. I read your guest editorial in the Washington Times

that dealt with this issue. You referred to the American investor

who goes to the Cayman Islands to escape U.S. capital gains tax.

Would you agree that a preferable approach to that is to lower the

U.S. capital gains tax as opposed to pursuing these people through

administrative and legal actions?

Mr. O’NEILL. Well, you know, I am on the record as saying I

would like to get rid of a whole lot of attributes of our current tax

system. Hopefully, as soon as we are done enacting the tax bill that

is in front of the Congress now and make good on the President’s

pledge that we are finally going to fix Social Security, we can turn

our attention to a simplification that goes far beyond the question

of capital gains and straightening out a tax system.

One thing I have found—it is something in a way even when I

was outside the Government I have been working on, because I am

interested in and long have been interested in issues of public policy—you can be sure if you go to almost any audience I have ever

appeared before in the last 20 years and suggest to them you know

some way and you have some intent of reducing the 9,500 pages

of our Tax Code to, say, 95 pages, people will get up on their chairs

and stomp their feet. I have yet to find anyone who likes the Tax

Code the way it is, and not just for the question of perverse implications of the way capital gains are applied, but for all of the reaVerDate 11-MAY-2000 07:49 Sep 27, 2001 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 72724.TXT HBANK1 PsN: HBANK1
29

sons that offend people and make it more difficult for them to relate to their Government, which we keep piling on.

So I would love to see us make major changes to our tax code.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from New York, Mr. Meeks.

Mr. MEEKS. Thank you, Mr. Chairman.

Just in brief, in response to some of the questions I heard Congresswoman Waters and Congressman Sanders indicate, we talk

about debt relief with reference to Africa, but it is a known fact

that when we gave much of that money to dictatorships and to

other rogue governments, to me it is similar to what we have in

some of our urban cities today, something called predatory lending,

where you lend money out to folks that are not able to pay it back,

you know, but for other reasons, and then they have to pay it back,

so then you take back their house and they put everything in it.

So that should be considered when we are looking at the question

of debt relief, debt forgiveness, as far as to many of the nations in

Africa.

But let me go to my question. I just wanted to put that out. In

last year’s foreign operations conference report, there was language

to eliminate the World Bank and IMF-promoted user fees. I am

sure you are aware the language requires the U.S. to oppose any

World Bank, IMF or regional development bank loan or debt relief

agreement that includes user fees or other charges for primary

education or primary health care.

In the Administration’s fiscal year 2002 budget, they support

striking that language. I want to know, what is your position? Are

you in favor of removing this language?

Mr. O’NEILL. We are trying to simplify the language. We are certainly in full accord with the idea that these restrictions and the

intent of the words is appropriate. We are just trying to do some

simplification.

If I may comment on your earlier question, because it has indeed

come up a few times before about this issue of lending to so-called

dictatorships, you know, there is a fact case that I think is analogous, and it is an engagement I have had with the Russian Finance

Minister in the 4 months I have been here now.

When I first met him in Palermo, the media was reporting that

the Russians were thinking about defaulting on their so-called

Paris Club debt. The reason they were going to, at least what he

said to me in Palermo, was, well, you know, we would like to pay

it, but our Duma, that is to say their legislature, wouldn’t appropriate the money. It caused me to say to him, you know, it is really

an interesting thing. When you make a contractual relationship

with a sovereign state, at least one would like to believe that you

have made a real contractual relationship in the way that we think

about enforceable contracts. So I frankly don’t give a damn about

some part of your government that doesn’t want to pay their fair

owings to the rest of the world. That is your problem. Otherwise,

if we can’t have an understanding of what the rule of law is, I don’t

know how we can deal—I don’t know how any institution, the IMF

or the World Bank, can proceed on a basis that if they make a loan

and the people who were there who made the agreement turn out

30

to be rogues, we forgive the whole country because the rogues took

it all.

It is awfully hard for me to understand how to extend this principal that if the top guys are bad, we forgive the whole country. It

is a very difficult doctrine to me. Not to say I am not sympathetic

to actually wanting to prosecute the devil out of people who absconded with the resources of the people they were charged to lead;

I have lots of sympathy with that. But I worry about the extension

of a doctrine that says, well, the people got ripped off by their leaders; we will keep sending money, because maybe the new leaders

will be better than the old ones.

Mr. MEEKS. Except until some of those situations, some of those

leaders we put there to practice our doctrine, we knew they were

bad, we gave them the money so they could do what they were

doing for the protection at that time against the Russians in the

cold war. So we knew they were bad, we knew they were raping

the country, but we didn’t care, because we had a different goal or

different reason for giving the money. Now that it is over and we

are talking about democracy, and the cold war has ended and we

are talking about promoting democracy elsewhere, and now we

have countries where they have legitimate leaders and elections

and a democratized system, but they can’t go anyplace because of

the debt that was placed on them in the past, they can’t educate

their people, they can’t provide primary health care, so therefore

they are not able to go, so they are smothered. But there is some

responsibility, I think, on us and the IMF and the World Bank to

recognize those factors so we can help promote democracy, as we

say.

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from California, Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Mr. Secretary, I want to thank you. Having read your statement

here, I thought you did a remarkable job. I would like to actually

cite it as a case example for saying a whole bunch with a few

words.

Mr. O’NEILL. Thank you.

Mr. OSE. I wanted to say I appreciated your respect for my time,

and I will try not to waste yours.

Mr. O’NEILL. Thank you.

Mr. OSE. In your remarks as written, you made a couple of

points here which you have reiterated with Congressman Meeks

about the certainty of the judicial systems in the countries into

which the IMF lends money and the ability to recover; the fact that

the multinational development banks ought to spend their resources in areas where they have expertise, which I thought was

a remarkable breath of fresh air; and using results-based performance indicators to actually measure what it is we are getting for

our money.

I want to strike specifically at that last point. I know where you

come from in private business, and I have not been near as successful as you, but I do aspire. In a typical lender-borrower situation, the lender has the control of releasing any money under a

loan. In other words, you can’t get it until you have satisfied that

31

lender. The purpose of that is to ensure the borrower’s performance

to the terms and conditions of the loan.

In many cases, unfortunately, it is apparent that, as it relates to

IMF or World Bank or maybe some of the international development banks, after the fact that the loan funds that had been extended were not used as they were originally agreed upon. In other

words, the conditions and terms were violated, and that those

funds were then diverted to other uses. The thing I keep coming

back to is how do you prevent the diversion?

My question is, are you satisfied by the controls that the IMF

presently uses to ensure that loan funds are used for the intended

purposes, and, if not, do you have any specific suggestions that

could be implemented to improve the accountability over how those

loan funds are used?

Mr. O’NEILL. I think this is an area where we can expect, maybe

even demand, improvement. If you use as an example the case of

what happened in the money that went to Russia, it is almost as

though there were not even the simplest of conventions, for example, second signature requirement, as you suggest, to release funds.

But, of course, I am sure you understand from the line of your

question these are complex matters, and it is not as easy as having

a second signature, say, in the example where maybe an individual

is buying a house and you can go and look and see if the structure

is being actually built. Oftentimes these monies are going into a

world of fungible money where it is difficult to tell what is happening to the overall resources of a country in the financial system,

where, say, you are dumping $5 billion, because there are many,

many tens of billions of dollars in question that are flowing in and

out every day.

But it is possible, I think, to establish certain ratios and levels,

maintenance of levels of balances that one could then be quite certain that monies flowing from the IMF and the World Bank didn’t

simply disappear into the world of fungible money, where the

money from the people of the world got taken away by badly inclined leaders or people who know how to manipulate financial

things.

So, yes, I think it is possible to do better, and as we work with

the IMF and the World Bank, this is an area that we will develop

in more detail with them.

Mr. OSE. Mr. Chairman, I don’t recall, are you going to allow

questions subsequent to the closing of the hearing? Are you going

to leave the record open?

Chairman OXLEY. Yes.

Mr. OSE. If I might, I would be happy to submit it in writing,

and then you can have the appropriate person make specific recommendations.

Mr. O’NEILL. Great. We will do that.

Mr. OSE. Thank you, Mr. Chairman.

Chairman OXLEY. The gentlelady from Ohio.

Mrs. JONES. Thank you, Mr. Chairman.

Good afternoon, Mr. Secretary. I guess I am the last one. But I

want to go back over a few questions that you answered for some

of my colleagues.

32

In response to Congressman Gregory Meeks’ inquiry with regard

to some of the Sub-Saharan countries and debt relief, I don’t want

to paraphrase what you said, but, anyway, you remember what

your response was about—strike that. Let me start over and say,

do you recognize that in many of the African countries where we

entered into agreements with them, that none of the leadership or

anyone in any logical descending order—like our Congress goes

from the 105th to the 106th, 107th, that kind of setup doesn’t exist

in those countries? You recognize that, don’t you?

Mr. O’NEILL. I do.

Mrs. JONES. So, therefore, it is my opinion, one lowly Member of

a 435-Member body, that that is something that ought to be taken

into consideration when you consider whether those loans ought to

be forgiven or not. Specifically we do it in our country all the time,

bankruptcy, people are out from under the debt. Somebody pays it

off, and that group goes and creates another business, and maybe

that business is successful. In many of these countries, there is the

opportunity—for example, many of them are a diamond in the

rough, and they are real diamonds. For us to not take that into

consideration with regard to forgiveness of debt, in my opinion, is

illogical. I don’t want to say it is irresponsible, but illogical.

Would you agree with me on that?

Mr. O’NEILL. I think we need to look at these individual country

situations one at a time, and I really do think it would be valuable

to the Congress to roll up the implications of debt forgiveness

across—both principal and interest forgiveness—across all of these

arrangements that have existed sometimes for 50 years with 18 or

25 different intervention programs, and also look at the experience

we are having with the 22 countries that are now running through

the established process to begin getting debt forgiveness, and then

bring these facts together and talk about what the policy of our

country ought to be not just with regard to the IMF or the World

Bank, but with regard to bilateral loan arrangements.

Mrs. JONES. Maybe multilateral as well.

Mr. O’NEILL. And the multilateral development banks. For sure

I think we should open the scope of this question and bring some

more facts to the table and see how we should proceed.

I think you should have no doubt that I think what we have

begun to do with the HIPC initiative is well-advised and directionally correct. It is really a matter of how fast we should move

and what the scope of our activity should be.

Then I want to say again, because I think this is really an important point, we need to stop thinking about these countries from the

point of view of individual program interventions. The idea of saying to a sovereign country that, because the IMF has forgiven or

the World Bank has forgiven principal and interest on a loan, that

that should then give us the automatic right to force them into yet

more borrowing—even in the private sector—because we have

these wonderful intentions about improving their education system

or their health system. This is a bridge too far in terms of our understanding of what it means to run a country, as distinguished

from sending grants or loans to a country.

Mrs. JONES. I just want to extend it to say, then, so if you don’t

want us to determine what the country should do with the dollars,

33

are you saying, then, that the countries ought to have the ability

to say this is what I would like to do and then receive the dollars?

Or are you saying just leave them out there floating somewhere?

Mr. O’NEILL. No, no, no. I am saying, as I said earlier, that I

think we should have much more limited understanding of what we

mean by conditionality, and as we do conditionality, because indeed

it will come from individual institutions and streams of money,

that we need to do conditionality in the context of a complete country, not as though a program carried with it the right of establishing ever-larger notions of conditionality, which I think are

sometimes inconsistent with each other and unenforceable in any

event.

Mrs. JONES. I would like to echo my colleagues’ concern about

the AIDS issue and the dollars being allocated to assist these countries, because it may come to a situation where there is a grandmother raising 55 children, which makes no sense when we could

come in and help out the countries.

Chairman OXLEY. The gentleman from Texas has been very patient, and I recognize the gentleman for 5 minutes. Then we will

close down.

Mr. BENTSEN. Thank you, Mr. Chairman.

Fascinating testimony, Mr. Secretary. Just a couple of points.

First, I do want to go back a little bit to the question of conditionality with respect to IMF loans or bailouts or whatever we

might call them. I would recommend that you go back and look at

the South Korea package, because I was in South Korea as that

was going through, and I remember sitting—I was with the prior

Chairman, and we sat down with Kim Dae-Jung right before he

was sworn into office, and he was having to face the fact that for

the first time the Koreans were going to have to pass legislation

to allow layoffs by private corporations and look at the idea of establishing an unemployment compensation program, and the markets were looking at how they could engage in more transparency,

all things that we thought were good for them as a form of conditionality, and I still believe that today.

So I think you can draw a lot of comparisons to Turkey and what

you are doing there.

I guess the point I would make is that I am not sure that things

were done all that poorly, given the situation at the time; that we

did what we had to do, given what the impact might be. I think

you are on the right track, quite frankly, with Turkey, but I don’t

think there is a lot of difference.

I want to go to the conditionality with respect to HIPC, because

this is sort of what I was getting at, and I think the GAO report,

which I am sure your staff has looked at, is quite telling.

When we first started the HIPC legislation a couple of years ago,

I was one of the ones that raised the idea we ought to treat this

almost like a bankruptcy and ought to write down the debt, and

we also ought to say that countries that participate in this stay

away from the window, even if it is the soft loan window, for a period of time.

Now, that is going to require a policy on our part, as well as our

partners through the Fund and the Bank, to be willing to step up

34

to the plate, because obviously these countries can’t survive without some capital infusion.

What you are saying is appealing, although I hope that the Administration—and I realize you all are just getting in and you are

trying to figure this out, that this is the direction that you want

to go in, because I do think it is a mistake, and it really is just

a short-term bridge that we are giving them to say, we are going

to wipe your debt off, but you are going to have to come back and

borrow again, and we are going to be in the same problem 5 years

from now, because it is highly unlikely that any of these countries

or any country is going to achieve that level of real growth over

that period of time to get out of there, particularly a lesser developed country. So I hope that is the case.

Finally, I am curious what the Administration’s viewpoint is with

respect to packages like with Turkey and others. If you go back,

there was a lot of criticism of Mexico, a lot of criticism of South

Korea, of Thailand and other Asian countries that conditions included contractionary economic policies in the fiscal area. But I am

curious what the viewpoint of the Administration is as to how you

would otherwise build confidence for currency when your goal is to

try and stabilize the currency and exchange rates.

Mr. O’NEILL. Well, first of all, you know, my own experience with

this and observation of what we have done in the last 50 years

with the very best of intentions is if we don’t have, we ought to

have a lot of humility about how much we actually know and understand about the straight path to improving the standard of living in the world and reducing the level of poverty that exists in the

world, because we have spent, I suppose—around the world we

have probably spent, not just in the U.S., but with everyone—$1

trillion, and I would say we have precious little to show for it.

When you look at where we have taken some fairly strong interventions, I think even with the best of intentions, to help to accelerate the standard of living and economic growth in countries, the

results have been pretty pale tea. So I think we are well advised

to be pretty humble about what we know and how well we are able

to deploy it.

I remember reading, I think, in maybe 1959 or 1961 Walt

Rostow’s ‘‘Five Stages of Economic Growth,’’ and it wasn’t very revealing, it wasn’t very helpful, and there is still nothing much better than what Walt Rostow wrote more than 40 years ago. So I

think we have a long way to go to actually understand how to do

all of this.

Having said that, I do think that we can improve the likely outcomes by insisting on the things that we know are necessary. This

is repetitive, but I don’t think you can find a place where good

growth and reduction in poverty and improvement in the standard

of living exists where there are not a rule of law and enforceable

contracts and at least directionally a reduction in the level of corruption. Those things we know are necessary.

Someone said earlier, and I would stipulate this point, that without education there is probably no hope at all. In that regard, you

know, I said when I was at the Asian Development Bank meeting

a couple of weeks ago, I think what the President has said about

‘‘no child left behind’’ ought to be the mantra for all of us when it

35

also comes to questions of our position on international advancement.

Education needs to be a primary focus. But, again, I think it is

really critical that we not look at nation-states, even from the most

genuine, sincere concern about absence of education, and act as

though the rest of the country didn’t exist, because it does. If they

are ever going to have hope of financial success, there are some

things they need to do. I think it is really quite telling that Russia

had tax rates that were very high, expropriation-level tax rates,

and they were collecting almost no money. When they reduced

their tax to a 14 percent straightforward flat tax, they tripled their

revenue.

So there are some things that we do know that are therapeutic

in moving a nation toward a more governable position. Again, we

need to balance our humility and insist on the fundamentals that

we are pretty sure about.

Chairman OXLEY. The gentleman’s time has expired.

Mr. Secretary, thank you again for your testimony. I share the

opinion of the gentleman from Texas, it is most fascinating.

Without objection, the record for this hearing will remain open

for 30 days to permit Members to submit questions in writing to

the Secretary and have his responses placed in the record.

The hearing is now adjourned.

[Whereupon, at 4:40 p.m., the hearing was adjourned.]

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