AND WORLD BANK

HEARING

before the

JOINT ECONOMIC COMMITT

CONGRESS OF THE UNITED STA

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

April 12, 2000

Printed for the use of the Joint Economic Committe

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JOINT ECONOMIC COMMITTEE

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Cong

SENATE HOUSE OF REPRESE

CONNIE MACK, Florida, Chairman JIM SAXTON, New Jersey, 

WILLIAM V. ROTH, JR., Delaware MARK SANFORD, South Ca

ROBERT F. BENNETT, Utah JOHN DOOLITTLE, Californ

ROD GRAMS, Minnesota TOM CAMPBELL, Californi

SAM BROWNBACK, Kansas JOSEPH R. PITTS, Pennsylv

JEFF SESSIONS, Alabama PAUL RYAN, Wisconsin

CHARLES S. ROBB, Virginia PETE STARK, California

PAUL S. SARBANES, Maryland CAROLYN B. MALONEY, N

EDWARD M. KENNEDY, Massachusetts DAVID MINGE, Minnesota

JEFF BINGAMAN, New Mexico MELVIN L. WATT, North C

SHELLEY S. HYMES, Executive Director

JAMES D. GWARTNEY, Chief Economist

HOWARD ROSEN, Minority Staff Director

(ii)
OPENING STATEMENTS OF MEMBERS

Representative Jim Saxton, Vice Chairman . . . . . . . . . . 

Representative David Minge . . . . . . . . . . . . . . . . . . . . . 

Representative John T. Doolittle ..................

Representative Pete Stark, Ranking Minority Member . 

Representative Mark Sanford . . . . . . . . . . . . . . . . . . . . 

Representative Carolyn B. Maloney . . . . . . . . . . . . . . . 

WITNESSES

Statement of the Honorable Allan Meltzer, Chairman

Financial Institution Advisory Commission (IFIAC

Statement of the Honorable Adam Lerrick, Senior Advis

Statement of the Honorable Charles Calomiris, Member

Statement of the Honorable Jerome Levinson, Member, 

SUBMISSIONS FOR THE RECORD

Prepared Statement of Representative Jim Saxton, Vice 

Representative Saxton’s legislation, The IMF Reform Ac

3750) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Prepared Statement of Representative Pete Stark, Rankin

Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Prepared Statement of Representative John T. Doolittle 

Prepared Statement of Allan Meltzer . . . . . . . . . . . . . . . 

IFIAC Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Prepared Statement of Adam Lerrick . . . . . . . . . . . . . . 

Prepared Statement of Charles Calomiris . . . . . . . . . . . 

Prepared Statement of Jerome Levinson . . . . . . . . . . . . 

Response of Chairman Meltzer to Representative Star

environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Dissenting view printed from the IFIAC website . . . . . 

(iii)
CONGRESS OF THE UN

JOINT ECONOMIC 

WASH

The Committee met, pursuant to notice, at 9:30 a.m

Cannon House Office Building, the Honorable Jim Saxton,

of the Committee, presiding.

Present: Representatives Saxton, Sanford, Doolittl

Maloney, Minge and Watt. 

Staff Present: Christopher Frenze, Robert Keleher

Stephen Thompson, Colleen J. Healy, Howard Rosen, D

and Leah Liston.

OPENING STATEMENT OF

REPRESENTATIVE JIM SAXTON, VICE CH

Representative Saxton. Good morning. It is 

welcome Dr. Meltzer and Dr. Lerrick, Dr. Calomiris, Mr. 

Committee this morning. As most everybody here know

serves as Chairman of the International Financial Institu

Commission (IFIAC), and the other members of the 

associated with the Commission. I would like to comp

taking the time and effort to grapple with some of the mo

challenging issues in economic policy and producing su

report. 

Today we plan to focus on the substantive economi

issues related to the International Monetary Fund (IMF) 

Bank and how they relate to proposals for reform. As on

involved in issues related to reform of the IMF for seve

encouraged by the emerging consensus that has developed 

principles relating to these important issues. The principles 

broad support include: first, the IMF should provide mor

second, the IMF should focus on short-term crisis lending

should scale back development lending; and fourth, the I

interest rate subsidies. 

There is significant agreement on a range of other 

The main question remaining is how to consistently apply 

to IMF reform. Tactical differences in the applications of 
has been achieved on basic principles for IMF reform. 

recently Secretary Summers has called on the IMF to 

lending while deemphasizing development lending and rai

IMF interest rates. This is very encouraging to those of 

who have supported these objectives for quite some 

welcomed Summers' support of IMF reform. As news r

the time, Mr. Summers seemed to borrow heavily from 

critics of the IMF and from the expected recommendation

Commission. 

Our perspective here at the Joint Economic Comm

focused on transparency and the finances of the IMF. Th

are closely related and have important implications for C

former IMF research director recently said, “the Fun

structure of financial provisions has meant that almost nobo

indeed, few inside the Fund, understand how the organ

However, the IMF is a publicly financed institution in 

has a prominent financial and policy-making role. C

important responsibility to monitor how effectively taxp

being used and ensure that adequate safeguards are in pla

this lack of IMF transparency undermines Congress's abi

this oversight responsibility. We have finally managed t

decode the IMF's accounts, but IMF finances r

understandable and do not comply with the transparenc

IMF imposes on others. 

Our Committee findings show that the base of the 

support is much narrower, for example, than officially por

U.S. contributing 26 percent of the IMF's usable resource

countries contributing a full 77 percent of the IMF's us

Over half the IMF membership contributes virtually no usa

Furthermore, in one recent period, 70 percent of the IMF c

by just five borrowers. Russia and Indonesia together 

one-third of the outstanding credit. IMF interest rates are 

4.7 percent, far below the market rates available to IMF 

below the rates available to the most creditworthy natio

U.S. 

Two years ago the Joint Economic Committee also fo

no effective safeguards or accounting controls in place t

loan disbursements. Billions of dollars would be disburs
information and ensure that funds were properly used. G

low public integrity standards in place among many IMF 

cavalier approach fails to take into account the fiduciary r

the Fund to member countries and their taxpayers. After 

embarrassments, and my introduction of legislation m

accounting controls, it is good to see that the IMF is fina

overdue steps to address some of these issues. 

Although most of our research at the Committee has 

IMF, reform of the World Bank is also needed. The over

WorldBank development activities is acknowledged by e

is apparently not viewed as a problem. Not only is the IM

many development activities, but the World Bank has 

bailouts during economic crises. 

A clear distinction between the different missions o

World Bank is urgently needed, and this problem is also a

Meltzer Commission. 

The congressional agenda for reform of the IMF 

Bank is an ambitious and compelling one. However, in 

IMF, the Congress has provided over one-quarter of the us

more than the three next largest contributors all combine

continual assertion of congressional pressure can make 

difference, and this is the intent of the IMF Reform Act 

I recently introduced. Congress is in debt to Chairman M

Commission for providing an excellent blueprint for refo

and World Bank. 

Before we go to the Commission, Dr. Meltzer and o

other Members who may have opening statements? 

Mr. Minge. 

[The prepared statement of Representative Saxton, togeth

Reform Act of 2000 (H.R. 3750) appear in the Subm

Record on page 48.]

Representative Minge. Thank you. I would jus

sure that we have submitted for the record an opening 

Congressman Stark.

Representative Saxton. Without objection. 
Submissions for the Record on page 58.]

Representative Minge. I would also like to just b

I have been corresponding with the Chair of the Jo

Committee concerning the importance of holding a hearing 

of trade issue and the trade deficit that we have in the Un

the problems of a strong dollar, and I hope that this Com

able to move ahead to do that. I think these are two 

considerations for the American economy. In the short t

not appear to be as significant, but in the long term I think 

address them, we are going to reap the consequences. So 

do that, and with that I close my statement. 

Representative Saxton. Thank you, Mr. Minge. 

OPENING STATEMENT OF

REPRESENTATIVE JOHN T. DOOLITT

Representative Doolittle. Thank you, Mr. Cha

forward to hearing the proposals to reform the IMF and th

and I thank you, Mr. Chairman, for performing a valu

focusing attention on this issue. Restructuring and cu

powers of the International Monetary Fund, I think, is cl

considering its role in the recent financial crises across 

The record of the IMF as banker to governments in fi

has not inspired confidence. The IMF egregiously violates 

practices, calling into question its condemnation of the 

systems of loan recipients. Most recently the decision to 

a country that has defaulted on its debt and shows littl

economic reform, demonstrates that the IMF is a poor 

sound banking. Although the circumstances leading to fin

Latin America, Asia, and Russia differ in many respe

thread was a lack of adequate banking supervision, tran

oversight. 

Many countries use the banking system as an 

development strategy. The government chooses industri

it believes will contribute to development. It then directs 

winners, often by encouraging commercial lenders 

industries. This policy undermines the growth of the 

system by preventing banksfrom assessing loan applicatio

of such criteria as likelihood of repayment and available co
officials to funnel funds to politicallyconnected industries 

Overall financial instability increases because loan assess

economic and business criteria including financial viability 

in favor of loans made for political priorities. Such a sy

more bad loans and losses than a banking system based o

practices. 

In exchange for billions in credit to governments aro

the IMF requires countries to implement specific pol

address the cause of the financial instability. Broad fin

reform, especially of commercial banking, has become 

policy prescription. Typically this includes writing off ba

bankrupt institutions, and improving oversight of banki

Would that the IMF followed its own advice. Instea

or denying credit to countries with a record of resisting ec

the IMF eagerly enters into loan after loan. The most 

example of this practice is Russia. Despite over $27 billio

since 1992, the Russian Government has been unwillin

reform the economy. It has defaulted on much of its de

admitted that as much as $50 billion in central bank rese

IMF loan proceeds, was siphoned off for questionable pu

cooperation of Russian officials. 

Russia is the most recent example of decades of 

practices on the part of the IMF. Another is Peru, which 

different arrangements with the IMF between 1971 an

repeated failure to meet many of the reform conditions tha

the loans. In effect, these IMF loans financed destruc

policies that made Peru less able to repay its debt. A thir

$3.4 billion IMF loan to Mexico, only one year after th

initiated the 1982 Latin American debt crisis by default

Despite the IMF's vocal support for sound banking 

actions tell a different story. The IMF exports poor bank

example. It damages the international financialsystem wh

to lend to countries like Russia, a financial black hole. In a

statement, the IMF noted that, quote, markets do not ope

transparency and accountability are lacking and market par

operate under an internationally accepted set of principle

end of quote. The world economy will continue to suffer 

actions fail to match IMF rhetoric. 
Submissions for the Record on page 61.]

Representative Saxton. I thank the gentleman. W

with our witnesses at this point. We appreciate your being 

to express our gratitude for the great job you did, D

Chairman and member of the Commission. 

We want to give you plenty of time to express yo

these important issues. 

So, Dr. Meltzer, if you would like to begin, and than

being here.

STATEMENT OF ALLAN H. MELTZER, CHA

INTERNATIONAL FINANCIAL INSTITUT

ADVISORY COMMISSION

Dr. Meltzer. Thank you, Mr. Chairman. Thank 

opening statement. It is fair to say that the Commission fo

that you established for us, you and your staff, which was 

us, as I say in my statement. 

It is a great pleasure to appear here today t

International Monetary Fund and the international financ

The Joint Economic Committee's leadership and its s

valuable and important work to increase understandin

working. At the very start of the Commission's work, w

JEC staff for the help that they willingly gave. We are g

Mr. Vice Chairman, to the Chairman, the Members of the 

its staff.

Today I will focus mainly on the IMF and the bipar

proposals for reform and change. Two of my colleagues, 

who was a member of the Commission, and Dr. Lerrick, 

a senior advisor to the Chairman, will talk about other asp

will try to cover a full range of issues. 

Our proposals have been publicly available for mor

I am pleased to note that they have attracted consider

including favorable editorials in many leading newspape

abroad. Most writers and commentators have sugg

bipartisan, Majority proposals should serve as the b

discussions of reform. The opportunity for reforms that 

the 50th anniversary of the IMF and the Bank has now 
Commission Report, discussion has not only remained ac

vituperation and personal attack have ended. Discus

substantive and directed at the issues discussed and raised 

I hope that will remain true today. Once we moved 

differences and reasons for differences began to appe

became clear that thoughtful commentators have foun

common ground, as you pointed out in your opening st

I can illustrate some broad agreements by referri

Treasury Secretary Summers' recent statements, namely h

Council on Foreign Relations, his testimony to the H

Committee, and his recent column in the Financial Tim

Secretary Summers' statements of core principles f

for, one, clear delineation of responsibilities between th

multilateral development banks; two, a refocused IMF th

on short-term liquidity lending; three, the establishment o

to strengthen incentives that forestall crises; and, four, di

information to markets. These statements are entirely in a

the Majority Report. 

Secretary Summers would assign the develo

responsibility for, one, targeting financial resources 

countries without accessto private sector financing; and, 

production of global public goods. He asks for reforms th

substantial improvement in the effectiveness of developme

relief forthe heavily indebted countries that implement effe

development strategies. Again, he agrees with the Maj

He agrees, also, that there is costly and wasteful dupl

the World Bank and the regional development banks. Al

not go asfar as the Majority to eliminate that duplication, 

do not seem great. And he agrees fully with the M

Commission on the need to avoid pegged exchange rate

On other issues we appear to be farther apart. I 

understand why he regards our recommendations for pr

IMF lending at a penalty rate as a potential source 

Countries that have not satisfied the conditions woul

superpenalty rate under the Majority proposal. But this di

a point that we failed to emphasize sufficiently. Countrie

powerful incentive to meet the preconditions if not in fiv

quickly as they can. 
have not qualified would face difficulties borrowing in the 

Private lenders would prefer to lend to countries that 

international standards. Some would charge a higher 

would avoid lending to countries that do not meet the fou

for stability. 

The preconditions the Majority chose are not arbitr

extension of the type of standards for bank capital t

countries have now adopted based on the Basel agreeme

based on the WTO's (World Trade Organization) protoco

foreign banks to complete in the country's markets. 

countries have accepted this protocol. The remaining con

reasonable fiscal policy and the timely release of info

maturity distribution of sovereign debt. These s

unobjectionable, but necessary for stability. Experience in 

has shown how much economic and financial stability im

and globally when banks had adequate capital and forei

permitted to compete in Argentina and Brazil. 

While no one can guarantee that all crises would be 

would certainly be reduced in severity, frequency an

financial system and the fiscal system met standards t

possibility of financing overly expansive fiscal policie

would still occur, but financial expansion cannot solve prob

real shocks. The IMF's job is to resolve short-term liqui

Longer-lasting problems and poverty relief that requir

institutional change should be financed by loans from deve

These loans and poverty relief would be available from th

banks under the Commission's proposals. 

Some critics of the Majority Report, including the 

witnesses, claim that the Majority wanted to weaken or d

but instead settled for reducing its role. This is not only inc

misses the point of the Majority Report. 

The world has lived through a series of deep crise

years. The Majority and many others believe there a

reasons for the depth and frequency of these crises: first, 

pegged exchange rates; second, the collapse of weak fina

and third, the long delay between the time a crisis erupts a

IMF or others are ready to help. The delay is cause

negotiation over the conditions that the crisis country mu
conditions. In fact, it rarely meets those conditions. 

The Majority resolved the three problems by rep

conditionality with preconditions that strengthen financi

avoid lengthy negotiation. The Majority also favored an 

exchange rates, a view that Secretary Summers share

moment ago. 

If future crises are less frequent and less virulent, 

would be smaller. It would still have a major role as lend

to developing countries and increased responsibility, 

emphasize increased responsibility,for marshalling informa

its quantity and improving its quality. This role is vital n

principally on markets, not on governments or agencies, to 

to developing countries. Better, more timely information 

financial crises. 

Criticisms of the Majority proposal for the developm

the number of poor people in middle-income countries. 

poor people is an attractive criterion only at first glance. 

that on further reflection, reasonable people, includ

Summers, will agree with the Commission Majority that a 

is the number of people who lack adequate access to res

has many poor people. The Majority wants the develop

continue to give technical assistance and support to Chi

holds more than $150 billion in foreign exchange reserve

private capital inflows that greatly exceed any amounts i

ever likely to receive from the development banks. No le

reallocation of development bank lending from Chin

programs in the poorest countries would permit these agen

aid to the poorest countries without – those countries with

resources. Dr. Lerrick will talk to that more fully in a f

Some have argued that the market would not finance 

or education. The Majority believes this is a misunder

banks' practices. The development banksreceive governm

when they lend. When private lenders have the same g

are not concerned if the loan finances social reform, edu

proposals with high social returns but low monetary ret

Some have pointed to the recycling of loan repayme

of aid. The Majority was aware of the need for addition

poverty and said so. It is important to recognize, how
countries, could borrow in the marketplace when they ho

of 90 percent of the project cost from the development ban

reduce the amounts that the banks would show as outsta

pay as granted under our proposal without lowering the r

available to the poor countries and the programs that coul

There is, in short, little reason to believe that our proposa

the developing countries. The Majority strongly suppo

assistance to the poorest countries if assistance becomes 

through closer performance monitoring, use of grants, and 

proposals. 

I would like to end by raising one issue that is or shou

most important issues for the American people. That 

unspoken by the critics. 

This administration, even more than previous admin

used the international financial institutions as sources of re

funds to support its foreign policy. If it could not make hea

long-term loans through these institutions to Russia, China, 

and other countries whose policies the U.S. wishes to 

administration would have to change policy or ask 

appropriate the funds. Congress could perform better ov

question whether programs are successful and whether t

American people. 

This issue is sometimes described as a foreign pol

Commission Majority is accused of interfering with the con

policy. This accusation is usually made sotto voce. I do 

that characterization. The core issue is the constitutional r

Congress to appropriate funds. Administrations for year

the budget process to support Mobutu, Suharto, Marcos, a

Majority believesfirmly that final decisions about spending 

with the Congress, not the administration acting through th

financial institutions. This reform is most basic becau

legislative responsibilities and constitutional prerogati

sacrificed, are difficult to recover. Thank you, Mr. Cha

[The prepared statement of Dr. Meltzer together with the 

appear in the Submissions for the Record on page 64.]

Representative Saxton. Dr. Meltzer, thank you v

Dr. Lerrick. 
INTERNATIONAL FINANCIAL INSTITUT

ADVISORY COMMISSION

Dr. Lerrick. Good morning, Mr. Chairman. It i

address the Joint Economic Committee. I have worked w

a number of years, particularly on IMF issues. I am plea

the staff is going to address what is considered at the 

frontier, which is the SDR (special drawing rights) departm

inside the Fund understand, as well as outside the Fund. 

of my remarks this morning is going to be the financing o

grants. 

One of the most controversial of the Meltzer Commis

is the change in the format of development aid, the r

traditional subsidized loans by grants for infrastructure an

projects. This is a core issue in the discussion of the effec

Although the concept of grants is familiar, the new model p

Commission is a hybrid variety. 

Grants are a gift, but a gift with strings attached

possible the funding of a program in full, but are paid on

proof of concrete results. They reinforce discipline by 

current copayment by the recipient, and they leverage 

scarce aid resources by drawing upon the capacity an

private sector. Even a decade ago, the capital markets d

what they offer routinely today, sheer size, sophistication 

and the willingness to tolerate the risk which once deterred 

developing world. 

Loud and determined voices have risen in prote

concept, all with one recurring theme: Grants will mean 

the world's poorest. 

Secretary Summers wrote in the Financial Times

dramatically reduce the total amount of resources that ca

bear in these developing economies and require an unwork

delivering such assistance.” World Bank President Wolfen

to Commission Chairman Meltzer deemed grants “unreal

on to write, “In a time of severely constrained foreign ai

highly doubtful that donors would be able to provide a

needed level of funding.” 
misunderstood the economics of grant financing and ha

potential of the private sector. A $100 million World Ban

require $100 million in grants to achieve the same result. 

annual grants replaces $17 of loans for the nations that ne

effective use of the $133 billion in equity resources alread

Bank will generate an annual grant stream of $10.4 billi

$185 billion in aid programs or 78 percent more than is cur

to the poorest nations. Each new appropriation will yield 

its dollar value. 

The first question that has been asked is how do 

loans. The economics of the Commission's grant fina

permits the development banks to leverage resources by dr

vast capacity of the private sector. The only true aid 

development assistance and the only cash requirement of t

in a world of sophisticated financial markets is the small g

that fillsthe gap between what impoverished recipients ca

and the real cost of supplying the service. Under the 

proposal, this ranges from 90 percent of cost to 10 perc

upon the nation's per capita income and capital market 

An example will clarify the grant-loan equivalency. A 

20-year project can be financed through a traditional Worl

subsidized credit. This would require $100 million of aid 

is the traditional approach development banks have tak

Alternatively, the project could guarantee annual payment

upon delivery of results. If the income level and capital m

the recipient country qualify for 50 percent grant aid, th

would enter into a direct contract to pay $6.5 million pe

provider upon delivery of service. The recipient governm

into a similar contract with the provider to pay the remaini

per year. The service provider would utilize the two contr

to obtain private sector funding. The financeable valu

World Bank revenue stream is $59 million. The financea

recipient country revenue stream is $41 million. The 

difference is the different yields that the market would req

contract with the World Bank compared to a contract w

developing country. The private sector will provide the 

million in funding with only a $6.5 million per annum com

World Bank.
development assistance providing $100 million of develop

The key role here is the financing role of the private 

may fear that the private sector will not provide the requ

because most truly poor countries are not creditworthy. T

is eliminated by the structure of the Commission's tools. 

paid directly by the development bank upon indepen

delivery of service for its share of the cost. In the cas

countries with no capital market access, the direct payme

the World Bank will equal 90 percent of total cost. A co

with the World Bank is eminently financeable in the priv

credit risk for the capital markets is therefore that of the se

which will be major international contractors or no

organizations, not the aid recipient. The favorable cost of t

be incorporated into the user fees on the project that is 

As the income level or capital market access of the r

increases, the share of the World Bank payment in total co

the ability to finance the recipient's obligations in the priv

The next question that has come up is where will th

come from? The World Bank has $133 billion in paid-in e

today. Paid-in capital and retained earnings on the Bank

amount to $29 billion, and IDA, its aid arm, holds $104 billi

If this endowment is invested in market investments at a 

percent return, an income of $10.6 billion will be earned a

deducting $200 million in administrative expense to run th

the existing resources in the Bank will generate a stream 

in annual grants in perpetuity. 

The Commission has proposed two development ban

promote institutional reform with subsidized interest rates 

Bank's own cost of financing, and grants covering a port

on infrastructure and social service projects. The extent 

and user fee subsidies varies between 10 and 90 percen

income level and capital market access of the recipient. T

reform loans would be funded through the issuance of deb

Bank's investment portfolio. 

The $10.4 billion annual grant flow would be util

interest subsidy on institutional reform loans and the user 

infrastructure and social service projects. Utilizing the B

of 25 percent of programs devoted to institutional ref
for the worlds poorest countries. This is 78 percent 

current $104 billion maximum under IDA's prevailing syste

credits. The proposed structure has the additional benefit 

Bank's capital at risk to the poorest countries by 55 perce

endowment and grant revenue stream are unaffected b

condition of the recipients. This contrasts with the curren

the funds are totally lent out to the recipients, and if there 

such as proposed under HIPC legislation, or defaults, th

lost. The current level of IBRD non-aid lending can be m

supported by the callable capital of its industrialized m

portion of the Bank's equity and investment portfolio. 

The endowment would start at $50 billion represen

equity capital and undisbursed funds at IDA. As each $

IDA credits is repaid, instead of relending it, it would b

endowment. This would create investment income of $8 

repayment and provide grants that would leverage $140 i

programs. Similarly, each new appropriation would 

endowment and raise total aid programs by 140 percent o

provided.

Any modifications of the assumptions underlyin

including changes in financing rates, investment returns 

schedules, will not alter the basic results significantly. 

From a financial standpoint, the Commission

straightforward. The proposal is making effective 

development funds and of sophisticated financial mark

In the appendix to my written statement, I have provi

of the sources of World Bank income currently. In contra

public statements, its income does not arise from len

Interest rates on loans only cover the Bank's borrow

administrative expense. There is no link between loans to 

countries and transfers to the poorest members. The Ban

is derived from two sources unrelated to its developmen

investment of its equity capital and donor funds and the 

reinvestment of borrowed funds in the market instrumen

very much. 

[The prepared statement of Dr. Lerrick appears in the S

the Record on page 251.]
Dr. Calomiris, you may proceed.

STATEMENT OF CHARLES CALOMIRIS, M

INTERNATIONAL FINANCIAL INSTITUT

ADVISORY COMMISSION

Dr. Calomiris. Thank you, Mr. Chairman. Thank y

me to appear here today. I want to begin by commendi

Joint Economic Committee for having maintained over 

years an open and lively forum for debate on reforming t

development banks.

It was a privilege for me to serve on the Meltzer Co

considered a remarkably broad range of issues, uneart

information pertaining to the financial institutions' actua

made what I think are a set of careful and creative s

reform. 

Others may disagree with us on the details of our rec

but I hope they will agree that our deliberations were a go

as is apparent in the strong bipartisan majority that 

Commission Report. 

In my previous testimony before the House and S

Committees, I outlined theCommission's recommendatio

my words the rationale behind them, and responde

Summers' preliminary reaction to our Report. Given 

common ground between Secretary Summers and the Co

my hope and belief that most or all of the Secretary's do

recommendations will be resolved by a fuller considerati

that underlies those recommendations, and I note tha

excellent presentation here today is a good step in that dir

the grant funding proposals. 

I will not reiterate my previous testimony here today, 

to answer any questions that you or members of the Comm

on these various topics. I do, however, want to emphasize 

today that received less attention in earlier congression

A basic premise of our Report is that the internat

institutions should be transformed into effective economi

To be effective as economic mechanisms, that is, to avoid b

merely as political slush funds for broad foreign policy o
governance standards that ensure that they stay true to 

Some members of the Commission, notably Mr. L

disagreed with the Majority's view on this point. This, 

details of the economic reasoning of the Majority, I beli

heart of the disagreement between the Majority of the Co

our critics. I think it is fair to say that Mr. Levinson in par

multilateral agencies largely as vehicles of broadly def

foreign policy. 

Some observers might be forgiven for concluding fr

remarks that he would use the IMF, WTO and develop

tools to further protectionist interests of America's labor 

however, this is not what Mr. Levinson says motivates his 

I think it would be wrong to question his motives. R

question his central premise, that the IMF and World Bank 

as tools to pressure countries to adopt particular policie

American interests. I think instead that foreign aid sh

function, and in so doing, aid should be subject to congres

consistent with the essential balance of power envi

Constitution. 

The role of the multilateral institutions should be 

different from that of foreign policy. The multilateral ins

improve the world economy in three essential ways: Firs

global public goods, for example, liquidity, the rule of law 

trade relations, and improvements in public health technol

providing solutions to problems of negative externalities a

for example, pollution and economic instability that spills 

borders; and third, by offering an effective means for co

global attack on poverty in the poorest countries. 

These are sufficient challenges for the IMF, the deve

the BIS (Bank for International Settlements) and the W

broad discretionary foreign policy role to that list of chall

counterproductive. It crowds out scarce resources that 

bona fide economic objectives. It distracts the mana

institutions and forces them to depart from clear rules an

makes it hard to establish norms for the conduct of ma

mechanisms to ensure their accountability and thus erodes 

integrity and credibility of the multilaterals. 
as does the IMFs current program under negotiation wit

knowledgeable observer of Ecuador with whom I have s

that Ecuador will adhere to the fiscal or regulatory reform 

the IMF will attach to its proffered loan subsidies. No

regard Ecuador's problem as one of illiquidity. 

Ecuador has been suffering a deepening fiscal cr

years caused by the combination of an unresolved in

struggle, weak banking system regulation and severe eco

Under current circumstances, it is very hard to argue that c

loan subsidies to Ecuador makes sense either as a means o

illiquidity crisis (which doesn't exist) or of spurring ins

Some observers have argued that IMF aid is p

understood as a means of sending political payola to 

Government at a time when the U.S. wishes to ensure co

its military bases there for monitoring drug traffic. I am 

perspective is correct, but if the United States wishes to p

aid to Ecuador because of its value as a strategic mi

monitoring drug trafficking, let that policy be debated in C

our government decide whether to do so. Dragging the 

affair only further weakens that institution's already dama

I emphasize that I am not arguing against foreign aid

a separation between foreign aid broadly defined and the m

international financial institutions. That principle also ex

not think that the development banks, the IMF or the WTO 

member states to adhere to specific rules governing 

economies unless, and I repeat unless, those rules are ne

successful implementation of the narrowly defined econo

of the economic institutions. 

Let me clarify this point. Prudential regulatory stan

are a reasonable requirement for the IMF to impose 

borrowers since that requirement reduces the possibility 

IMF loans. That goal, reducing the abuse of IMF loans

desire to impose bank regulatory standards, motivates the 

recommendations in this area. In this light it is clear why 

labor standards were not an element of our suggested p

requirements for the IMF. Similarly, because we saw 

other multilaterals as confined to providing global public 

alleviation, and solutions to externalities across count
recommend that the World Bank or the WTO encourage 

carrots or sticks the adoption of core labor standards. 

In this regard, I would like to clarify a statement tha

the Commission hearings which Mr. Levinson has repeate

which pertains to U.S. trade policy as well as to the app

conditionality by the multilateral institutions. In my view

imposing core labor standards on other countries thro

protectionist policiesis both disadvantageous to American

It is disadvantageous to us because it raises the cost of 

goods. It is immoral because the effect of those standard

economies would be to prevent poor people, especially u

people, from earning essential income necessary to fe

house themselves. 

Nonetheless, I would not argue and did not argue duri

that the United States should always be willing to trade w

or that countries should be allowed to participate in t

institutions no matter what their domestic policies. F

specifically noted that countries like Nazi Germany were 

of evil, abusive regimes which so violated the basic huma

citizens that it would be unconscionable to trade with t

support them. There may be examples in today's world 

line, but permitting starving 10-year-olds to work should n

to place a country on that black list. 

Mr. Chairman, again, thank you and the Committee 

and for your attention. I look forward to your question

[The prepared statement of Dr. Calomiris appears in the S

the Record on page 261.]

Representative Saxton. Dr. Calomiris, thank you 

Mr. Levinson. 

STATEMENT OF JEROME LEVINSON, ME

INTERNATIONAL FINANCIAL INSTITUT

ADVISORY COMMISSION

Mr. Levinson. Thank you, Mr. Chairman. I do 

opportunity to be here today. Let me begin by saying tha

my statement – and I will not read my statement in its enti

it becomes part of the record, so I will just deal wit

highlights of what has been said today. I refer to th
website. I am informed that it is not and that the Cha

authorized it.

[The dissenting statement in question from the Commis

appears in the Submissions for the Record on page 27

Meltzer’s comments on page 35.]

Dr. Meltzer. That is not correct. It has been ther

Mr. Levinson. I am sorry. People have informed 

staff members of this Committee, that they have not been 

it and it has not been available. So if it is, then I am deligh

that in some way that that is a moot issue. Let's set tha

Now, Professor Calomiris has referred to my empha

in the international economic system and the emphasis up

rights and environmental conditions to be incorporated int

World Trade Organization and to be a subject as well 

conditionality of the World Bank and the IMF. There is 

do support that, and let me take this opportunity to set the 

once and for all. 

Professor Calomiris generously says that some 

conclude that my remarks – that I intend to use the IM

development banks as tools to further the protection

American labor unions. However, he says that he notes 

that intention. We all know that is a standard technique

seed as to what the intention is, and then you disavow b

My father was a Teamster. He also had a chronic h

He was in and out of hospitals. And to this day I can still h

me that without the health plan that he got through the un

have been fiscally destitute. One day he did collapse at wo

of a heart attack; when the drivers who worked with h

house to pay their condolences to my mother, the shop 

union brought a $500 check for burial costs, and my moth

from a life insurance policy which he could not otherwise h

through the union. 

I won a full tuition scholarship to Harvard. I got up 

morning to deliver the Boston Globe and the Harvard 

dorms, but I still could not have done it if I hadn't had 

support from the family. That financial support was poss

the fact that our medical costs were defrayed by the heal
rights, including above all freedomof expression and collec

is a matter of conviction and personal experience. I mak

for my support of that, nor do I make any apologies for my 

AFL-CIO on these issues and my writings in this connect

clear. There is no doubt I support core worker rights. I

personal conviction, personal experience. I work with 

people. I have no apologies to make for that associatio

The heart of the difference between us is precise

equity in the international system conceived as a system. 

and look at the World Trade Organization, we see a m

settlement system for resolution of trade conflict. If 

NAFTA (North Atlantic Free Trade Agreement), we see 

investor rights, which gives the investor in the case of U

bring a suit against a state, namely Mexico or Canada. 

If we look at the multilateral financial institutions, t

and the IMF, we see that they are intervening in the la

what is called labor market flexibility, which is a euphemis

countries to adopt measures which make it easier to fire w

the capacity of trade unions to negotiate on behalf of their 

drive down wages to gain competitive advantage. H

disavow intervention for the purpose of addressing labor 

such as the use of the coercive power of the state to de

right of free association and collective bargaining. Th

political. 

It escapes me as to how intervention for the purpose o

wages and weakening trade unions is not political, but inte

purpose of protecting core worker rights is political. I thin

frankly, is nonsense. 

So the difference between us is that in my sepa

statement and in my statement today, I emphasize this que

of equity in the system, the imbalance in the system. Yo

know from reading the Majority Report that the Commi

testimony on this issue. As I note in my prepared statem

was extensive testimony, but the issue isn't even addressed 

opinion. 

We heard this morning Professor Meltzer say that 

don't meet the preconditions could still borrow at steep p

interest. If you look at page 43 of the Majority Report, th
threat to the global economy, loans would be only to countr

have preconditions that establish financial soundness. 

Now, if you turn to page 44, you will see that – I am 

The new rules should be phased in over a period of thre

If a crisis occurs before the new rules are in place in m

countries should be permitted to borrow at an interest 

penalty rate. The superpenalty rate would give countrie

incentive to adopt the new rules. So the ability to 

superpenalty rate is for the transition period, but once you 

state past the transition period, then we revert to the statem

which says that only countries that meet the preconditions 

financing. 

And this goes to one of the issues that Profes

addressed at the end of his statement, which is the egreg

human rights. Under their criteria, as long as you mee

criteria, you automatically qualify. Professor Calomiris m

that statement in the hearings about egregious abuses on h

being eligible, but that is not part of the Commiss

recommendation. Access to the resources of the IMF are 

you meet the financial criteria. 

At page 44 they say the IMF would not be authoriz

policy reforms. And they go on to say the policies necess

economic performance and end a crisis are well known

East Asia crisis as an example. There are four possible e

the crisis in East Asia in 1997: First, that it was the result 

from the United States authorities, in particular our adminis

capital markets before the countries had institutions in pl

and discriminate among institutions that were borrowing 

intervention is described in exquisite detail, quite frankly, 

article by David Sanger and Nicholas Kristoff of Febr

“How U.S. Wooed Asia to Let Cash Flow In.” If you re

the overwhelming impression is that the origin of the A

pressure to prematurely liberalize capital markets. They 

roster of culprits as follows: Responsibility can be assign

here I am quoting – not only to Washington policymakers

officials and bankers in emerging market countries who cr

to Western bankers and investors who blindly handed t

Western officials who hailed free capital flows and neg
emerging markets in the Asian century, end quote. You 

absent from this roster? Workers. But they are the one

primary price. 

Now let me just conclude by the three other explanat

the red light is on. The other primary explanation is that 

financial crisis, a classic financial panic. That is set fort

Sachs, another member of the Commission, in his article i

Prospect. He says, by making it into a structural issue, sho

as crony capitalism, the IMF worsened the crisis by convi

that something was fundamentally wrong, when what 

classic financial panic. 

The third explanation is the structural issue, and tha

underlies the Majority's recommendation for precond

problem was the crony capitalism, the close relationships 

government and corporate officials, and in that they jo

Fischer, Managing Director of the IMF, in the IMF ana

And the fourth explanation is moral hazard, that 

Mexico led to the bailout and the imprudent lending by t

east Asian countries, which I think is totally without su

The more plausible explanation is that the bank

Western Europe, faced with recessionary conditions in bo

for more profitable outlets, and as occurred in the decad

they placed them where they thought they could get th

return, and, if you will recall, that was the decade of the A

great attraction of the east Asian countries. 

So it is not at all clear, as the Majority says, that the 

origin of the crisis is self-evident to everyone. In the ea

there are at least four explanations, none of which a

mutually exclusive, but if you take one as the primary ex

leads to a different conclusion as to what your remedy is

clear, as the Majority says at page 44, that the policies 

I would just leave the conclusion at this point that the 

difference, then, is they take no account of the legitimacy 

core worker rights and the environment as an integ

international system. They preclude the IMF from addr

policy the underlying conditions that led to the crisis, and t

primary differences lay. I can go into detail as to why wh
leave that aside. 

[The prepared statement of Mr. Levinson appears in the S

the Record on page 267; the IFIAC’s Report appears on 

Representative Saxton. Thank you very much. 

My observations over the past several years have le

that there are at least five issues that I would like to ex

believe are critical to this discussion. They are, first, 

United States in the IMF and the contribution that we ma

terms of the loans, that is, the length of the loans w

described as primarily development loans; third, the subje

interest rates; fourth, the subject of interest rates that are a

to borrowers through the IMF; and fifth, the need for tr

So let me just ask a question about each of those an

respond, and I will do this as quickly as possible, but I thin

issues that really need to be discussed in some depth. 

One of the issues that I raised in 1998 relate

development lending, or the length of the loans, and th

Fund's ability to act as a crisis lender. Both the Treasury 

Commission are on record supporting a deemphasi

development lending. Although there are some differen

much of this development lending activity should be deem

basic premise seems to be accepted, and I think that is 

Could you, Dr. Meltzer, begin by explaining to 

perspective how development lending – what impact devel

has on IMF operations generally?

Dr. Meltzer. Development lending, in my judgmen

in yours, should not be a part of IMF operations. This m

IMF has an important role. That important role is to pr

crises that disrupt international financial markets an

international economy; and second, to provide and disper

Now, development lending – none of those functions 

to be involved in development lending. In the interests of 

and transparency, it is very good to have people be respons

IMF be responsible for its sphere of activities. Develo

would be the responsibility of the World Bank and the 

development banks. We certainly are in favor of develo

provided it is made – as the World Bank's research has sh
money around the world, but to see that we actually have 

lift countries out of poverty. And our criticism of the Wo

while their rhetoric on these issues is superb, their actual ac

are somewhat less than good.

Representative Saxton. Mr. Levinson made, I thin

when he said occasionally individuals and countries hav

urgent need for help, as in the passing of his father. Whe

established, it was established, from my understanding, f

liquidity crisis lending, which is a short-term need that oc

needed right away. Now, does long-term development len

inhibit the IMF's ability to make these shorter-term loa

Dr. Meltzer. In my judgment, no, it does not inhib

more they interfere and become involved in all sorts of o

more that they sacrifice and become a multi-objective in

they have to balance one objective against another. Wha

be doing is doing their job and doing it better than they hav

Representative Saxton. Could the IMF’s multi-ye

programs reduce its available resources and ability to act 

crises? 

Dr. Meltzer. That is one of the ways that the conflic

The IMF has a limited amount of resources. It could 

resources, as you have suggested and your staff, by borro

elected not to do that. So, yes, there is a limit on its reso

more it puts into development aid, the less likely it is goin

more likely it is going to have to come back to the Congre

Parliaments to ask for more money. But in a particular cr

itself with insufficient funds. If we could get their bala

income statements straightened out, we could mak

statements about how much funding they have.

Mr. Levinson. Mr. Chairman, might I intervene 

comment on your comment and—

Representative Saxton. Sure. 

Mr. Levinson. I think you have to put this issue 

what appears to be development lending in some perspe

derived from the oil crisis of the 1970s, the Witteveen faci

that with the oil crisis the perception that the IMF had to m

available on a longer-term basis to the countries than the co
situation. That was the origin of the Witteveen facility in 

to the expansion of the terms of IMF loans. 

The problem of development lending, when it spills 

short-term addressing of the problem that led to the liquid

you into this issue of what was the cause of the crisis. If 

Chairman Meltzer, Professor Calomiris, and Stanley Fisch

staff, that the cause of the crisis in east Asia was p

capitalism, shorthand for the improvident banking systems 

then the IMF says, well, of course, if that is the cause of 

we would be remiss if we didn't address that as part of 

meet the short-term crisis. You would be criticizing us on 

didn't address that. 

If your view is that it was a purely financial panic, a

Sach’s view, or that it primarily was the consequence 

capital liberalization as the Kristoff and Sanger article im

come out with a completely different situation. The IMF d

into structural reform. You can't avoid deciding what is th

analysis of what led to the crisis in the first place. That 

that their proposal leads to, because since it is only – 

funding is only limited to countries which prequalify, yo

from addressing the underlying issues which may have 

into the crisis. 

Dr. Meltzer. May I interrupt just to say, sir, there 

World Bank and the development banks. If there are long

adjustments, we address those issues in great detail in ou

up with a mechanism for dealing with long-term structu

problems and institutional reform. That has nothing 

question about – that just obfuscates what is an important 

is how do we make the world safer, more secure, much 

risks than it is at present. That is one question. The seco

how do we help people out of poverty? There is no rea

two questions have to be joined, and it simply obscures 

them.

Representative Saxton. Isn't it true – and I kno

wants to say something – but isn't it true that, going along 

just said, that when the IMF came to the United State

requested and got $18 billion additional, it then came back 

to sell gold in broad terms? Isn't it true that those activities 
a need for additional funds, and they developed, at least 

need for additional funds because of long-term developmen

didn't previously occur? 

Dr. Meltzer. Yes. There are two separate issues t

to – to oversimplify, but not oversimplify greatly, the grea

resources was, of course, the assistance to Russia and the 

I think people recognized at the time that there might be 

the Chinese banking system that would create also a need 

additional funds. So rather than to meet those issues di

question about aid to Russia, and come to the Congress 

appropriation to assist Russia in its transition, the Adminis

you with the IMF as a source of that money and try to 

fact, or at least to obscure the question about why they n

Now, the money was needed because they are in th

lending business, in the transitional lending business. In my 

I believe, in the judgment of many of the people at the IMF 

should never have been in that business. They didn't know 

the business when they got into it. They avoided for a 

doing the things that were necessary to make the transitio

suggesting to these countries that they impose the rule o

other things. They saw the problem. It is really a clear ca

Levinson is complaining about: They saw the problem in

financial, and it wasn't – as a purely financial problem

problem that the World Bank – if there was going to be a

lender – should have done or was a problem that the G

should have done, but it was not a problem that the IM

handled. It wasn't well equipped to do it, and I believe it 

to get them involved, and it is a mistake to keep them i

Representative Saxton. Dr. Lerrick? 

Dr. Lerrick. Mr. Chairman, very briefly, Mr. Levin

are confusing a relatively straightforward issue. What th

has proposed is the division of responsibility between th

development banks. Now, if you have a crisis, whateve

may be structural or financial, it may be purely from an e

the Fund's job is to provide temporary liquidity during a sh

to 240 days up to one year, let's say, as an arbitrary benc

truly a financial crisis, the Fund's role is to address it by pro

to the system. At the end of three weeks, a month, two m
stabilize and not require additional resources. If it is a st

then the problems will persist. 

What the Fund's job is, isto provide liquidity for a pe

the country can come up with a structural reform progr

long-term financing to enact that program either from the 

markets, such as Colombia did in 1985 without any Fund 

from the development banks through a loan program 

structural reforms and finance them. So the source of the 

affect how the Fund should provide assistance. 

Representative Saxton. We are going to have 

here. That was the first of five questions that I thought I w

in five minutes. Those of you who have not dealt with t

basis as some of us here are getting an idea of how co

these issues are. 

In the sense of fairness, I would like to go to Mr. Sta

more questions. One is relative to the role of the U.S., o

the subsidized interest rates, one is relative to the interest 

borrowers, and, finally, the need for transparency. 

Mr. Stark, it is your turn, sir. 

Representative Stark. Thank you, Mr. Chairman. 

I would rather be out protesting, I think, with my 

Pennsylvania Avenue than listening to this kind of rarifie

But the first statement is that while we have been w

completion of the testimony, our staff went out – and I adm

to being technically challenged, but I am dammed if w

Minority Reports on your webpage. So I challenge you, if 

them, print them out—

Dr. Meltzer. I would be glad to do that. I should p

Mr. Stark, that it is no longer my webpage. It is the prop

Treasury. They assured me that those were put there.

Representative Stark. Well, they have hidden i

with thick fingers like myself can't find it. Any assistanc

us on finding it would add immeasurably to your credib

[A printed copy of the dissenting view from the IFIAC’s w

in the Submissions for the Record on page 279; see also 

comments on page 35.]
Representative Stark. It is either there or not the

Dr. Meltzer. May I just say that one reason it w

getting there was because none of the members of the Mi

send the copies of the report to me. They chose to send th

but not to me. When it was called to my attention—

Representative Stark. I am not here to arbitrate 

Dr. Meltzer. I just want to let you know that I absol

responsibility for that.

Representative Stark. I haven't been troubled 

squabbles for a great number of years, Doctor, and I w

start again. 

I am concerned that the IMF seems to be more c

problems of bankers – which I was once – and not very 

problems of the poor in the world, as seems to be well-

testimony before us this morning. And if indeed it is det

Majority that you ought not to be criticized and ough

decisions about financing various countries based on poli

then I guess it goes down to us. If at some point we can 

do as you would do to some countries – that is cut off the

sounds like a good alternative to me. I am dammed if I 

with all that I hear this morning what you all have don

except help those that don't need any help. That is not 

labor in this vineyard. 

It seems to me the Commission's recommendations

Majority, deal only with banking requirements. And you 

for instance, in environmental protection – that you should 

the production of global goods. Dr. Meltzer, you say it sho

rational protection of environmental resources. I would c

not now, because I have limited time – to give me a mem

environmental protection. I presume that would be emot

kinds, but I would like some examples there. 

[Chairman Meltzer’s written response to Representative 

in the Submissions for the Record on page 278.]

As to labor standards I never was in a union, 

father-in-law who was a Teamster, and if I ever voted aga

he would break my leg. And I seem to recognize t
Calomiris would be tough. Now, my fatherinlaw was on 

Teamsters in Oakland back many years ago, and my wi

they went six or nine months with Hamburger Helper and 

can of tuna four ways. This was when she was in kinder

would never cross a picket line, remembering that. But

Calomiris would have put her to work in kindergarten deliv

doing something like Mr. Levinson did. 

I am just troubled – do you have children, Dr. Cal

Dr. Calomiris. Congressman, I have two daughters

leave them out of the discussion.

Representative Stark. Good. In your academic 

you have a doctorate; I presume it is not an M.D. Do 

Jonathan Swift was? Did you ever read A Modest Propo

did you ever read it? Do you know what it is? 

Dr. Calomiris. Many years ago I think I did read it

Representative Stark. It sounds just like you. Go 

it, and it will bring joy to your hard hearts. Jonathan Sw

the same idea permitting starving 10-year-olds to work. 

you back, you and the Heritage Foundation, back to the 18

ideas may have had some credence. But to bring that ba

free world with people starving, and our fight now is whe

of this wonderful help to China who enslaves children an

Cuba who somehow people have decided is worse than Ch

My question is why we put up with this nonsense fro

the World Bank and why we as a democratic country cont

it. That is my question, Mr. Chairman.

Dr. Meltzer. Are these questions addressed to us 

Representative Stark. To Mr. Levinson to start. H

sense than any of you, and then you can go down the ta

Representative Saxton. If the Chair may, I would 

Dr. Calomiris respond first. 

Dr. Calomiris. Thank you very much. 

Mr. Stark, I have no interest in seeing children, pa

children, work. That is not something that I would like t

certainly embrace proposals that you might want to pro
responsibility to make that unnecessary. However, let 

Representative Stark. How about making it illeg

Dr. Calomiris. Let me make it very clear, that if you 

for them to work, but do not simultaneously do other thi

them to continue to survive, you are behaving immoral

Representative Stark. Bingo. What have you done 

group that you belong to to help any of the poor childre

example?

Dr. Calomiris. We have proposed, sir, substanti

poverty alleviation programs by the development banks

Representative Saxton. Mr. Levinson.

Representative Stark. That is laughable on its fa

Mr. Levinson. It is difficult to know where to beg

with, Mr. Stark, I would not put my name to this Majorit

any circumstances because it is so partial, it is so in

one-sided and so biased that under no circumstances wo

was sorely tempted to vote with three members of the Co

wanted to abolish the institutions altogether, because it is so 

them to move off of it. The culture of the institution is so 

neoclassical economic vision which sees any government 

undesirable, including labor standards. 

What are we talking about with respect to labor stan

talking about the most basic rights, freedom of association 

bargaining so that workers can engage in free trade u

negotiate what is appropriate in their own circumstanc

wages, benefits. It is the labor unions in places like Brazi

in the forefront of agrarian reform and addressing the chi

I know of nobody that has been addressing the child lab

doesn't couple measures to address those issues with c

measures to provide financing for education and for the 

the children can be withdrawn from the labor force wit

detriment. 

It is a false dichotomy to say you are for one or 

Majority simply refuse to address and object to the incorp

core worker rights as they were defined by the AFL-
want no part of that as part of the international econom

Representative Saxton. Thank you very much, M

Dr. Meltzer. I would like to take up the issue wi

first would like to ask you a question, sir. Have you re

Representative Stark. No, I haven't read the Repo

Dr. Meltzer. You can't possibly make some of you

you had read the Report—

Representative Stark. Oh, yes, I could. But all yo

listen to the palaver you have brought here this morning, a

enough. I have never heard such arrogant, insufferable 

Dr. Meltzer. May I respond to your statement? T

up at the very beginning. I had a meeting with Mr. Levins

of that meeting, or as partly as a result of that mee

discussions I had, I met with a member of the Democrati

told me at the time, as Mr. Levinson had told me, that m

Democratic Minority, or certainly large parts of the Demo

would not read the Report, accept the Report, have anyth

the Report if it didn't have core labor standards. I pointed 

Representative Stark. How about environmenta

Representative Saxton. Let him finish, please. 

Dr. Meltzer. Let me just say at that time I told th

now say to you. It is not an arrogant statement, it is a sta

I told them as far as this Commission was concerned, firs

to be within our jurisdiction, but even if we extended our 

was not true that even if I favored core labor standards, i

true of either the Majority or the Democratic Minority ap

Commission that we would approve core labor standards

chance in that Commission at all. 

I explained that at the time to a member of the Min

would be happy to tell you his name, but I don't want to qu

his being here – that that really is the sum and substance 

it had been brought to the Commission, it would have be

The Majority was not in favor of it, neither the Majority a

Republicans nor the Minority appointed by the Democr

So to say that we didn't consider it, we did discuss it

himself talks about the issue. We didn't put it in the Repor
our jurisdiction, and so we simply avoided the issue. Tha

substance of the issue. You may not like that result, but 

earlier when I discussed this issue with other members of 

you are not going to take our Report and enact it into law 

are going to look at it. 

If the Congress wants to discuss core labor standard

is within their prerogatives. That has very little to do wi

reforms. There are pressing financial reforms that need t

need to improve the poverty programs of the world. The W

wonderful rhetoric, but very poor performance.

Representative Stark. No performance and lots 

Representative Saxton. The gentleman's time ha

We are going to move on to Mr. Sanford.

Representative Sanford. I would just say that thisi

spicy for my taste. It feels more like a Judiciary Commi

something as analytical as a Joint Economic Committe

I would want to disassociate myself from the line of 

reasoning of my colleague from California becaus

legitimately we can have strong policy disagreements 

different things, but to pull in a witness's kids and how ma

to me, is very irrelevant. 

First question, Dr. Meltzer, rate of return for World B

any estimates as to the overall rate of return for the Wo

Dr. Meltzer. On its loans? On its loans, it charges 

rate equal to the rate at which it borrows, plus usually a 

premium that it charges for administrative fees. So its ra

it borrows at 6 percent, its rate of return on the loan is 6-

so on.

Representative Sanford. But that could include th

in other words, probably a negative rate of return if you in

restructuring, et cetera? 

Dr. Meltzer. I don't know the answer to that que

guess that the answer is not a negative rate of return ov

Dr. Lerrick. Mr. Sanford, when the World Bank l

just takes its pure borrowing costs. In Dr. Meltzer's exam

bond at 6 percent, and it then adds on a small margin of b
outofpocket expenses. That is the lending rate. 

Now, it does provision for loan losses, but that does 

its lending activities. It comes from its net income, and it

unrelated to its lending activities. For instance, the Worl

billion of equity capital on which it pays no interest or divi

investment of these funds at 6 or 7 percent generates clo

a year in net income. That is how they provision for loa

do have reserves on their balance sheet of a number of bil

Representative Sanford. So, the blended rate – in 

you include the cost of capital from the taxpayer to the Wo

initial setup, the blended, in essence, rate would be neg

Dr. Lerrick. Well, if you include the taxpayers' cos

it would be negative, yes.

Representative Sanford. So I guess what I am 

oftentimes I hear with these types of organizations that, qu

taxpayer nothing. I hear that as almost a consistent re

probably not really true if you look at cost of capital in 

Dr. Lerrick. Mr. Sanford, that is absolutely not tru

at the Commission Report, there is an estimate of t

development banks to the membership each year. It is app

billion per year. 

Dr. Meltzer. About $5 billion to the United State

Representative Sanford. But it is generally throw

Dr. Lerrick. All of the IFIs (International Financi

claim that their costs to the donor country taxpayers 

instance, in the Commission's Report there is an analysis o

of the multilateral development banks is, and the total cos

approximately $22 billion per annum. The share of the co

States is approximately $5 billion per annum.

Mr. Levinson. That is like comparing apples and or

Mr. Sanford.

Representative Sanford. Why do you say that?

Mr. Levinson. Of course, you can get a high rate o

alternatively use some money by looking for commerci

Representative Sanford. Let's come back to tha

down a particular line of thought with that. 
risk profile of whether an IMF or World Bank  if you c

premium that a normal commercial enterprise would 

environment we do have a subsidized rate; is that not c

Dr. Meltzer. That is correct, yes.

Dr. Lerrick. Of approximately 7 percent per ann

Representative Sanford. Where I am going to w

Dr. Lerrick. On interest-bearing loans. On the loan

through IDA which have zero interest in essence the sub

percent per annum.

Representative Sanford. So we have something 

American taxpayer about $5 billion. We have some

taxpayer in America is subsidizing, in essence, developme

of the world to the exclusion of development maybe in th

or their own home State; is that not correct? In other 

subsidize – in other words, you would encourage one to 

Turkey, for instance, as opposed to building the same pla

Tennessee, given the fact that the rate may different via 

loan; is that correct?

Dr. Meltzer. That is correct, they are subsidizing

Representative Sanford. Then my question is wh

of this activity simply be handled through commercial ba

to World Bank and as opposed to the IMF?

Dr. Meltzer. That is the Majority recommendatio

– that is one that has drawn many of the sparks – that th

and other lending be taken out of China and other countr

can borrow in the capital markets and that this aid and assi

principally – in fact, exclusively to countries which are p

borrow on the capital markets. So we do take up that iss

have been severely criticized, Ithink incorrectly, because 

of poor people in the world without resources that we w

Dr. Lerrick. Mr. Sanford, the development 

themselves as lending to countriesthat don't have access t

capital and to projects that are of no interest to the pr

essence saying that the private sector lends 80 percent of w

to 12 countries, whereas the development banks lend to t

fact is that 11 countries account for 70 percent of World 
Brazil, the Philippines, Turkey; the list of usual suspect

countries you are talking about in private sector lending

Representative Sanford. Mr. Levinson, I cut you 

to go down—

Representative Saxton. Your time has actually e

you wrap up in the next minute or so, please.

Representative Sanford. I will let you do so, the l

sir. 

Mr. Levinson. I think that the testimony, if you wil

misleading. They continually refer to World Bank. Firs

that the World Bank divest itself of any operations in Asia 

what you have done then is turn the World Bank into a sup

agency for Africa, then only until the African developmen

over, in which case it then becomes something that deals 

call public goods, solving the problem of malaria and HI

don't know why anyone could believe that the World Ban

any better than the World Health Organization – or that 

coordinating agency for other NGOs, so you really don't 

Bank as an alternative.

Representative Sanford. Your counterpoint to 

what, sir?

Dr. Lerrick. That is a different issue. There a

issues. One is what should each institution have as itsresp

the second issue is where should these institutions as a gr

their money. They are totally separate questions. The C

assigned global public goods and transnational projects to t

That has nothing to do with whether you want the develop

a group, to be sending resources to China and Argentin

Dr. Meltzer. Mr. Chairman, may I interrupt just one 

that the staff has just handed me a copy. I would like to 

Stark's question of my integrity.

Representative Sanford. Let's do that on somebo

I have 30 seconds, and coming back to you—

Dr. Calomiris. I just wanted to clarify, because 

asked why the World Bank should be involved in this 

WHO (World Health Organization). In our deliberation
World Bank would play a role. So we do believe that it d

to play here.

Representative Saxton. We are going to proceed 

Maloney now. 

Before we do that, Dr. Meltzer, would you like to ta

Dr. Meltzer. Yes. I have here – Mr. Frenze just g

of the Report by Mr. Levinson which was downloaded fro

I believe that the location on the Web site is as part of th

Report; that is, that it is there as part of the whole Comm

We have been sent – I must say we sent out something lik

of this Report. So we have not been negligent about tryin

I am really sorry that you question my integrity about t

Representative Stark. I merely questioned my ab

Doctor, and I am —

Representative Saxton. It must be your compute

Dr. Meltzer. If you download the Report and rea

Report, you will find the Minority Report.

[A printed copy of the dissenting view from the IFIAC’s w

in the Submissions for the Record on page 279.]

Representative Saxton. Mrs. Maloney, proceed, 

OPENING STATEMENT OF 

REPRESENTATIVE CAROLYN B. MALO

Representative Maloney. Thank you, Mr. Chairma

on the important issue of international financial institution r

like to begin by saying that I do believe there should be s

the IMF. I agree with my colleagues who said earlier th

honest policy debates and disagreements, but really the 

when there is a financial crisis, it is people that suffer, pa

world's poorest countries. 

As a member of the Banking Committee, earlier in a 

Chairman Leach and Ranking Member LaFalce voted to 

relief for the world's poorest countries at the end of last y

Leach gave a strong statement, and I quote, "Relieving th

of the world's poorest countries is one of the forem

humanitarian, and moral challenges of our time," end q
IMF, but one thing that I urge all of my colleagues in a bip

not to use HIPC (Heavily Indebted Poor Countries) relief 

vehicle for IMF reform. I believe that, as one of the pr

Meltzer Commission Report, that additional debt relief 

poor countries must not be delayed, tied up, or hindered 

efforts to move forward reforms of the IMF and World 

world's wealthiest and most influential Nation, our actio

standard for additional HIPC reform and relief in the co

Secondly, under the debate forinternational financia

some areas there is broad agreement. And all sides, I bel

private capital is the preferred way to address internat

problems, and when situations require the relief or assistan

operation should be transparent and accountable. And th

IFI Commission Report, I want to note, does not mark th

efforts to really reform these entities. The administra

leading the world in its efforts to modernize IFIs. Trea

working to refocus the IMF to lend on shorter maturities

Summers has already stated before the Banking Committ

that the World Bank should focus on lending to proje

otherwise go unfunded by the private sector. So I 

Commission Report and its debate. 

I would like to begin by asking Mr. Levinson and th

would like to comment, can you discuss the dangers that t

the Asian financial crisis, the so-called Asian contagion, p

United States, especially to small investors and mutual fu

like to ask – and I remember it did not turn into a great pro

was tremendous fear in our financial markets during the 

would like to ask if the recommendations of the IFI Comm

enacted in 1998, would the countries that received IMF 

eligible? And what would the impact have been on the ab

and leaders like Larry Summers and others to react t

contagion?

Mr. Levinson. I think the impact would have been m

of the countries who were helped as part of the East Asia

not have been eligible for IMF financing if the 

recommendations had been in place. And with respect 

think Mr. Fischer testified to that and said that the reason 

the IMF intervention was necessary was that otherwise th
decline in the economic development activities of these cou

then have impacted on our own economy and have continu

period of time. 

That, of course, gets to the heart of the issue. So

organized on a completely different set of principles. Th

Japanese model of directed credit. If Korea had not mad

transformation to the kind of criteria that they outline a

preconditions, they wouldn't have been eligible for I

Remember, on page 44 of their Report they say the IM

from negotiating a program with a country in difficulty

prequalify – Brazil, for example, now has imposed some li

banking because they are concerned, about foreign dom

banking sector. They have a strong domestic banking sys

Majority criteria, Brazil would not be eligible. But Braz

weight in the economy that it may have major ripple effe

Latin America. Th criteria are too rigid. 

The other thing Fischer noted – an admittedly extrem

said that Nazi Germany would not be eligible for financi

grounds. Under their criteria, if you qualify under the p

criteria, you are eligible. No other considerations can 

account. 

So it is much too rigid. It is risky in terms of the ef

own domestic economy because it is such a straightjacke

think it would be disastrous.

Dr. Meltzer. May I respond to that briefly?

Representative Saxton. The gentlelady's time has e

Calomiris has been coming out of his seat trying to respon

that Mr. Levinson said.

Representative Maloney. Also, could Dr. Meltze

if he wishes? 

Representative Saxton. The problem is we have 2

before we have to vacate the room, and so I am trying to 

as much subject matter here as quickly as possible.

Dr. Calomiris. I will really try to be fast. Let me tr

your question. The answer has three parts. First of all, ke

we envision a phase-in of five years. The right way to ask 

if I may, is if these recommendations had been passed in 
question that way? Because the point is that if these rec

are to be phased in, then if we had passed these recomm

in 1997, they wouldn't have been phased in for five years, 

have just proceeded more or less as they did. 

Now, if the policies had been put in place in 1992 an

1997, suppose that Korea had qualified. And they might h

the powerful incentives that Dr. Meltzer talked about for tr

Well, then, I think that the liquidity available would have be

the problems in the banking system would have been much 

they didn't qualify? We still then would allow at the discre

then waiving of the prequalification requirement, bu

superpenalty rate, which they could have done. 

Now, here is something that Mr. Levinson missed. 

look at the flows of funds that went to the Asian countries 

the flows that were promised, but the flows that actually w

quite small relative to what was promised. There was v

liquidity assistance provided by the IMF to those countries

rigid fiscal requirements which Mr. Stiglitz and others 

which did affect those economies. 

Under our standards, which would not have requ

melt-down in those countries that the IMF imposed, an

have made funds available on a much larger basis immedia

protection, that those countries would have fared much 

they hadn't prequalified, than they did under the IMF's 

Finally, just to note we never said that every count

should be an IMF member. We were attaching pr

requirements and lending rules to IMF members. I think 

raises an interesting question of who should be allowed t

We never dealt with that question. He never made a re

that we deal with that question that I can remember, and i

it is a reasonable question, and I support his view that the 

be available to Nazi Germany. 

Dr. Meltzer. I will be very brief. I want to th

Maloney, for your interest in these issues. They are very i

from the standpoint of the United States. 

Three major reasons why crises have been deep an

is pegged exchange rates collapse; the second is fin
60 terms that the IMF imposes on these countries. Our R

rid of pegged exchange rates, strengthen the financial sys

rate of lending automatic so that it would come quickly. 

would not have occurred if these things had been in place

has spoken to that, so I won't repeat it. 

Let me say also, bear in mind that countries that d

assistance, that rejected IMF assistance – Malaysia – the

fast and as well as many of the countries that received t

So the assistance came, the big assistance came, bec

became the sink for exports from those countries. That 

policy for the United States to follow at the time, but 

long-run strategy for the U.S. to follow. If we don't deal 

we are going to be in a position of absorbing those export

bail them out. Our Report tries to say, let's get rid of th

then we won't be the sink for exports that no one else is 

Representative Saxton. Thank you very much. 

Let me get back to my line of questioning. I indicated 

first of all, I, as the Chairman and now the Vice Chairm

Committee, have worked with our staff hard and, I migh

trying to bring about certain reforms to the IMF wh

necessary, and I am delighted that it appears there ar

measures that we have been working for that both the Tre

Commission and I tend to agree on. 

We talked about the length of terms of loans during 

of questioning. During this series of questions I would li

the issue that Mr. Sanford brought up, subsidized loans, an

for transparency, and then the role, and the important r

States plays in bringing about these decisions at the IM

First of all, what is the average rate that the IMF 

loans? Dr. Meltzer, what is the current—

Dr. Meltzer. I will let him answer that. 

Dr. Lerrick. Very simply, Mr. Chairman, for the v

IMF loans, leaving aside the special emergency facility wh

new, the IMF takes as its base what they call the SDR 

which is an arithmetic average weighted according to si

economy, of the 3-month Treasury bill rates in the United 

and the U.K. and 3-month interbank and CD rates in Germ
currently?

Dr. Meltzer. That is correct. And now they 

somewhat of a penalty.

Representative Saxton. So if my old clients when 

the real estate business went down to the bank today to bo

30 years to buy a house, how much would they pay her

States?

Dr. Meltzer. Now, over 7 percent.

Representative Saxton. So 4.7 percent is a good r

isn't it?

Dr. Meltzer. Yes, it is.

Representative Saxton. There are two subsid

identify here. Mr. Sanford talked about a subsidized r

subsidy which the United States taxpayer pays in order 

4.7 percent loans to be paid? And is there a subsidy whic

a different way because the market rate of interest on 

countries would be significantly higher than 4.7 perce

Treasury rate is, say, 6 percent, and we are loaning at 4.7 

not a subsidy? And is it also not a subsidy if the market 

say, 15 percent in some risky venture at someplace in the 

are loaning at 4.7 percent, are those not two subsidies wh

and current IMF practices?

Dr. Meltzer. Yes and yes. We treat the loan as a s

whereas many of these loans roll over and over again. S

the short-term rate, but the loan goes on for many years. 

we have some documentation in our Report about how m

I won't trouble you with that. 

Second, of course, there is the risk premium. Tha

subsidy. We absorb the risk premium.

Dr. Lerrick. Mr. Chairman, also two other so

subsidies that you are providing. One is the significant 

reserve position of the United States on which there is no 

all. On most of it you receive the SDR rate after adjustm

is a portion, which is approximately $2.5 billion, on whic

paid at all. In addition, there is a subsidy because the IM
generate provisions for loan losses. 

Unlike a private sector institution or most other finan

the IMF shares the cost of providing provisions for loan 

the borrowers and the lenders. So they are effectively red

below the 4.7 percent base. The SDR rate may be 4.7, bu

going to pay you 4.7 percent. It is going to reduce it t

percent in order to build the provisions for loan losses.

Representative Saxton. Thank you. 

Let me talk about the American taxpayers' right – 

Representatives' rights to understand how the IMF ope

happens to American taxpayers' dollars. I remember hea

Saturday address by President Clinton, and he started by s

like to talk about the IMF. It is not a bowling machine,” 

He was saying that because the American people not o

access to information about the IMF, but unfortunately 

arcane way or secret way in which the IMF operates, 

people, the taxpayers and their Representatives, I mig

terrible time figuring out what the IMF is doing. 

This speaks to the issue of transparency. Yo

recommendations in your Report about transparency. 

Secretary Summers has also made statements about 

Would you comment briefly on this subject?

Dr. Meltzer. Yes. You and your Committee deser

of credit for bringing this issue to the attention of the Amer

staying with it long enough to figure out what some of 

sheets and income statements really look like. Dr. L

worked on that for the Bretton Woods Commission and 

with your Committee. I think that it is absolutely inexc

can't pick up the balance sheet and income statement of th

this is how much money they have, this is how much mo

States providesfor them, this is our share; that they hide b

like 18 percent when you know we are actually paying 2

all of those things should be transparent, observable, a

American public and to the Congressso that people can m

judgments about what is going on.

Mr. Levinson. Mr. Chairman, just to introduce s

balance, it is true that there has been a great deal of critic
much more out with respect to article 4 consultations, sum

is also an international institution, so they have to in man

the consents of the governments who are providin

information with respect to the economy and finances of th

certainly anyone, I think, who knows anything about this w

is a great deal more information now available. 

Secondly, it isn't as if we don't have a represen

institutions. We have an executive director, a treasury. 

can call that representative up and does call her up to 

subject matter. The IMF, it seems to me, is not a myster

union. The difference between a normal credit union and 

instead of taking the members' money and loaning 

members, they have what they call an exchange of 

purchase the currencies. That creates the element of 

difficulty, and it is very difficult to explain, I agree.

Representative Saxton. Thank you. I am going to 

next question. We are going to run out of time here sho

I would just like to comment that we had the U.S. re

the IMF before us, and there were several important que

could not answer. You may have read her testimony. Be

taken us three years to get to some answers. 

We believe, in our society – whether it is in local gov

in New Jersey we have sunshine laws to open the doors, 

in public hearings like this one where we talk about 

taxpayers' money, or whether it is American taxpayers' mo

and decisions being made by an international organizatio

IMF, that the doors ought to be open. That is a pretty simp

we have in this country, and one that we are and I am go

to work for. 

Let me just talk about now the role of the United Stat

at the IMF. This is a very interesting topic. When Karin 

before us, we asked her how decisions were made at th

had been some large number, 2,000 decisions made at 

asked her how many votes had been held, and she said 

were curious and went one step forward and asked, how 

decisions? She said, well, by consensus. I don't know w

I guess they get everybody in the room, and they all just k

heads, and off they go with the decision. 
has 17 percent, contributed 17 percent of the money to th

you define usable money, the United States – that is, 

actually usable at the IMF, the United States contributes 

a full partner contributing 26 percent, it seems to me t

States ought to have significant say, more than a consens

decisions are made at the IMF. 

Would you like to comment on that, Dr. Meltzer? 

Dr. Meltzer. I think in many ways it has a very larg

decisions that are being made, not through the proces

described, but through a different process through which t

the Treasury or his aides talk to the Managing Director o

tell them what it is that the United States wants the IMF 

most of the people in the room nod their head and agree 

is why there is not much voting process that goes on. 

The U.S. has a lot of influence in the IMF, but it use

what I believe is a very poor and unacceptable polic

American people are concerned. That is, they alloc

programs that the American people don't get a chance to v

this as a way of going through the back door and not aski

appropriate money for projects that it wants to have, wh

or Mexico or some other country. That, I think, is th

question and a big part of the differences between those p

our Report and those who don't.

Representative Saxton. So if the United State

contributes all of this money and decided that we wanted – 

legislation or through administrative policy – that we w

shorter-term loans issued to the IMF, that we wanted to 

subsidization of interest rates, that we wanted the IMF to o

and that we wanted to exert the U.S. influence in a more 

we could do that, couldn't we? 

Dr. Meltzer. We would go a long way toward 

reforms, yes, sir. That is my opinion.

Dr. Lerrick. Mr. Chairman, I would like to make 

It is important to understand that there is not a single dec

the international financial institutions that is not mad

agreement and accord of the U.S. Treasury because the 

can stop any other decision from being made. The U.S
there is an issue that is important to the U.S. Treasury wh

agreement with the rest of the membership, is stop all o

from going forward in the institution. 

So your statement that the U.S. should have signific

The U.S. Treasury has more than significant influenc

international financial institutions far beyond its percenta

whether it be 26 percent or 17 percent or 13 percent.

Representative Saxton. That is exercised, is it n

Department of Treasury, that influence? 

Dr. Lerrick. Yes.

Dr. Meltzer. Yes.

Representative Saxton. Now, Secretary Summer

that he thinks it would be a good idea to have shorter-term 

subsidization of rates, and he thought it was a good idea 

policy in the IMF that brings about more transparency. So 

that those things will happen? 

Dr. Meltzer. I light a candle.

Mr. Levinson. I think Dr. Lerrick's statement is r

with respect to the fact that the United States has influen

to add one thing. Any director in any one of these insti

right to demand an up or down record vote in the board. 

decisions by consensus, it is because no director, includin

demanded an up or down record vote in which everyone i

that right exists, and any director can exercise it.

Representative Saxton. The point that I was trying 

United States can make – and the point that Dr. Meltzer a

were trying to make, and I guess Dr. Calomiris would as 

United States has more than significant influence on dec

made, and therefore, if it becomes the policy of this co

changes at the IMF, it is eminently doable.

Mr. Levinson. They still have to convince the o

They certainly have influence, but the Europeans and the 

have a significant voice in these institutions. The developi

also more assertive. So 26 percent is not 51 percent. The

majorities for recommending new articles or quorums a
Lerrick has pointed out.

Representative Saxton. Dr. Calomiris.

Dr. Calomiris. I just wanted to emphasize, too, th

veto or stop something is not necessarily the same as 

completely transform the institution. So I agree with M

Mr. Chairman, if I can have 10 seconds for the re

couple of brief clarifications, I want to point out that con

think the impression was that Mr. Levinson gave early o

did not support and does not support the idea of allow

impose labor market flexibility on other countries. 

emphasize that, that we were not – as I think he suggested 

point. 

If you look on page 39 of the Report, we actually 

want to be clear that it is not a one-sided discussion in 

Mr. Levinson. I never implied – the Commission 

Dr. Calomiris. I just want to be clear that we were 

the continuing practice of the IMF telling countries how to 

markets. 

I also want to agree with him largely on the discussi

crisis, but I want to disagree a little bit. Here I will use m

economist and his as a lawyer to tell him that he d

completely understand the subtleties of the substantial 

exists among the people he mentioned, Joe Stiglitz, Jeff Sac

for example. 

I haven't been able to detect in the analysis of the 

Asian crisis much disagreement. All of us agree th

combination of factors that led to the Asian crisis. All of 

about it extensively. The bottom line and the most import

the Majority’s recommendations take care of all of the el

strengthening domestic financial systems so that the dome

have perverse incentives, which Mr. Stiglitz has emphasi

has emphasized and I would emphasize. That is part o

providing greater liquidity through the IMF to preven

melt-downs, all three people would be in favor of. 

So our proposals do not stand or fall depending on wh

attach to the different explanations of the Asian crisis. 

make that clear.
So far my questions have all centered around point

between the administration, your Commission, and even 

this Committee. Let me ask a question that I am not sure 

agreement on. 

I went to Russia in November, and one of the pri

went was to try to get the members’ of the Russian Duma 

what happened to IMF funds that were loaned to Russia. 

clear to me before, during and after that trip that the IMF 

effective procedures or safeguards in place to verify in

monitor funds after they are disbursed. And I repeatedly t

back in 1998 and 1999 and, of course, again this year 

Russian experience that we had. 

It seems to me to be quite incredible that an institution 

public funds for over half a century would not have effec

controls and safeguards in place to monitor funds that flo

other countries. Would you comment on your perspect

Dr. Meltzer. Yes. It is a deplorable fact that w

goes to the Central Bank of Russia, that the IMF has no 

ability to constrain where that money goes. That is one 

why, in thinking through our World Bank proposals, we tr

with a scheme which the money would not go through the 

but would be paid to the vendors. I think no one who kn

system can say that it is anything but a deplorable system

no real mechanisms in place to control corruption. 

Mr. Levinson. I think that there is a basic concep

Mr. Chairman. The IMF makes the money available to th

It has a negative list, usually, for which the central ban

money will not be used. The central bank can use the mon

its reserves. It can pay for imports. It can make the mon

capital investment or borrowing by domestic banks. T

indelible ink that is put on IMF dollars that you can then 

That is impossible to do. You are dependent upon the—

Representative Saxton. Are you defending the s

Mr. Levinson. No. What I am saying is you h

where unless you are going to specify that the money ca

for imports of a certain nature or some such thing like t

way that you can provide liquidity or balance of paymen
defeats the whole purpose of making the money ava

immediate needs of the country in crisis. 

Dr. Meltzer. If we limit the IMF to short-term lo

development aid through the system of grants that we p

great part of that problem goes away, Mr. Chairman. 

Mr. Levinson. Even the short-term money can't be 

money that goes into the central bank can go into the res

leaves. 

Dr. Meltzer. If we give a country that is in extre

really is the Commission's proposal; that is, it can only b

IMF when no one else is willing to lend, when the marke

then under those circumstances we can be pretty sure tha

going to be used – short-term money is going to b

designated purpose. 

It is true what Mr. Levinson says. We can't tag the d

that they went there, but if they have a balance of payme

are unable to pay their debt, under those circumstances 

liquidity aid because no other bank in the world is willing 

then we can be pretty sure that they are going to use 

makes a marginal difference to them in their ability to 

That really is the purpose of making them a lender of la

Mr. Levinson. You still are not going to be followin

dollars as to whether it was used for debt repayment or 

stayed in the reserves. 

Representative Saxton. What Dr. Meltzer is sayi

will be less propensity to misuse funds if loans are ma

term, unlike last summer when the IMF disclosed that it h

by the Russian Central Bank in previous loans and at 

announced approval of a new series of loans for Russi

went to follow, and it was kind of interesting. Membe

decided it was all American bankers' greed that provided 

or missing funds. So it was very interesting. 

Well, we are essentially out of time. Dr. Meltzer, I 

you one final question about legislation that I have introd

IMF reform. I won't go into all of the aspects of it, but it 

to the subjects that we have been discussing here, the rol

States, the length of terms, subsidization of rates, an
do you think it is generally moving in the right directio

[The bill H.R. 3750, the IMF Reform Act of 2000, 

Submissions for the Record on page 51.]

Dr. Meltzer. I have read the bill and the press rele

and I think it generally moves in the right direction, sir. 

that you have come up with of using our ability to withd

that is, to withdraw our tranches from the Fund, as a way 

the Fund and encouraging them to do things is a step that 

to take hesitantly, but we should not be unwilling to tak

Representative Saxton. Thank you very much. I 

all four panelists for being with us today. Mr. Levinson, 

Dr. Lerrick, Chairman Meltzer. You folks have toiled toge

difference of opinion for a long and arduous task that you 

appreciate all of your points of view, and we appreciate 

you have come out with a work product that we think 

personally moves this process forward very smartly. T

much. 

Dr. Meltzer. Thank you, Mr. Chairman. 

Representative Saxton. The hearing is adjourned

[Whereupon, at 11:40 a.m., the hearing was adjou
PREPARED STATEMENT OF 

REPRESENTATIVE JIM SAXTON, VICE CHAIR

It is a pleasure to welcome Dr. Meltzer and our o

before the Committee this morning. Dr. Meltzer served a

the International Financial Institution Advisory Commissio

members of the panel were also associated with this Comm

like to compliment you for taking the time and effort to gra

of the most complex and challenging issues in econom

producing such an excellent report. Today we plan t

substantive economic and financial issues related to th

Monetary Fund (IMF) and World Bank, and how they rel

for reform. 

 As one who has been involved in issues related to 

IMF for several years, I am encouraged by the emerging 

has developed on basic principles. The principles statin

should provide more transparency, focus on short-term 

scale-back IMF development lending, and end deep 

subsidies, now enjoy broad support. There is significant 

range of other issues as well. 

The main question remaining is how to consisten

concepts of IMF reform. Tactical differences in the appl

principles should not be permitted to distract attention fr

consensus has been achieved on basic principles of IM

For example, recently Secretary Summers has called 

focus on crisis lending, de-emphasize development lendi

least some IMF interest rates. This is very encouraging t

Congress who have supported these objectives for quite 

thus welcomed Summers' embrace of IMF reform. A

noted at the time, Summers seemed to borrow heavily from 

critics of the IMF and from the expected recommendation

Commission. 

Our perspective here at the JEC has focused on tra

the finances of the IMF. These two issues are closely rel

important implications for Congress. As a former IMF re

recently said, "the Fund's jerry-built structure of financial 
understand how the organization works... 

However, the IMF is a publicly financed institution in 

has a prominent financial and policy making role. C

important responsibility to monitor how effectively taxp

being used and ensure that adequate safeguards are in pla

this lack of IMF transparency undermines Congress' abil

this oversight responsibility. We have finally managed t

decode the IMF's accounts, but IMF finances r

understandable and do not comply with the transparenc

IMF imposes on others. 

Our Committee findings show that the base of IMF fi

is much narrower than officially portrayed, with the U.S. 

percent of usable resources, and the G-10 contributing 77 

half the IMF membership contributes virtually no 

Furthermore, in one recent period, 70 percent of IMF cred

just five borrowers. Russia and Indonesia together 

one-third of outstanding credit. IMF interest rates are curr

percent, far below the market rates available to IMF b

below the rates available to the most creditworthy natio

U.S. 

 Two years ago the JEC also found that there we

safeguards or accounting controls in place to mon

disbursements. Billions of dollars would be disbursed by t

effective accounting controls in place to enable the 

information and ensure that funds were properly used. G

low public integrity standards in place among many IMF 

cavalier approach fails to take into account the fiduciary r

the Fund to member countries and their taxpayers. After 

embarrassments, and my introduction of legislation m

accounting controls, it is good to see the IMF finally takin

steps to address some of these issues. 

Although most of our research at the Committee has 

IMF, reform of the World Bank is also needed. The over

WorldBank development activities is acknowledged by e

is apparently not viewed as a problem. Not only is the IM

many development activities, but the World Bank has 

bailouts during economic crises. 
World Bank is urgently needed, and this problem also is a

Meltzer Commission Report. The World Bank should foc

helping the poorest in nations that have no alternative so

and should do so mostly through grants, not loans, as th

recommends. We should reduce the burden of debt 

nations, not perpetuate this problem with more lending fro

World Bank. 

The Congressional agenda for reform of the IMF 

Bank is as ambitious as it is compelling. However, in the c

the Congress has provided over one-quarter of the usable r

than the three next largest contributors combined. Over ti

assertion of Congressional pressure can make a tremend

and this is the intent of the IMF Reform Act of 2000

recently introduced. Congress is in debt to Chairman M

Commission for providing an excellent blueprint for refo

and World Bank.