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HIPC DEBT RELIEF: WHICH WAY FORWARD?

HEARING

BEFORE THE

SUBCOMMITTEE ON 

DOMESTIC AND INTERNATIONAL 

MONETARY POLICY, TRADE AND TECHNOLOGY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

APRIL 20, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–79

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE AND

TECHNOLOGY

PETER T. KING, New York, Chairman

JUDY BIGGERT, Illinois, Vice Chair 

JAMES A. LEACH, Iowa 

MICHAEL N. CASTLE, Delaware 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

DOUG OSE, California 

JOHN B. SHADEGG, Arizona 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

TIM MURPHY, Pennsylvania 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

CAROLYN B. MALONEY, New York 

BERNARD SANDERS, Vermont 

MELVIN L. WATT, North Carolina 

MAXINE WATERS, California 

BARBARA LEE, California 

PAUL E. KANJORSKI, Pennsylvania 

BRAD SHERMAN, California 

DARLENE HOOLEY, Oregon 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

RAHM EMANUEL, Illinois 

CHRIS BELL, Texas 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 20, 2004 ................................................................................................... 1

Appendix: 

April 20, 2004 ................................................................................................... 31

WITNESSES 

TUESDAY, APRIL 20, 2004

Flood, Gerald, Counselor, Office of International Justice and Peace, United 

States Conference of Catholic Bishops ............................................................... 11

Hart, Thomas H., Director, Government Relations, DATA (Debt, AIDS and 

Trade for Africa) ................................................................................................... 8

Melito, Thomas, Acting Director, International Affairs and Trade, General 

Accounting Office ................................................................................................. 7

APPENDIX 

Prepared statements: 

Biggert, Hon. Judy ........................................................................................... 32

Oxley, Hon. Michael G. .................................................................................... 34

Bachus, Hon. Spencer ...................................................................................... 36

King, Hon. Peter ............................................................................................... 39

Lee, Hon. Barbara ............................................................................................ 41

Waters, Hon. Maxine ........................................................................................ 43

Flood, Gerald ..................................................................................................... 45

Hart, Thomas H. ............................................................................................... 54

Melito, Thomas ................................................................................................. 79

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Melito, Thomas: 

Written response to questions from Hon. Judy Biggert ................................ 98

(1)

HIPC DEBT RELIEF: WHICH WAY FORWARD? 

Tuesday, April 20, 2004

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL

MONETARY POLICY, TRADE, AND TECHNOLOGY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:30 p.m., in Room 

2128, Rayburn House Office Building, Hon. Judy Biggert [Vice 

Chair of the subcommittee] Presiding. 

Present: Representatives Biggert, Feeney, Oxley, Maloney, 

Frank, and Bell. 

Mrs. BIGGERT. [presiding] The Subcommittee on Domestic and 

International Monetary Policy will come to order. It is my pleasure 

to have witnesses here today and to welcome all of you to today’s 

hearing on HIPC, or highly indebted poor countries, debt relief. We 

are here today to hear testimony and encourage discussion of a report released last week by the General Accounting Office concerning the possible cost of the enhanced HIPC program. The Financial Services Committee under the leadership of Chairman 

Oxley and Ranking Member Frank requested this report so that 

the members of this committee could have a better sense of the 

possible costs of the enhanced HIPC initiative. 

I might add that you might have noticed that I am not Chairman 

Peter King; I am the Vice Chair, Judy Biggert. Mr. King will have 

an opening statement for the record but he could not be here today. 

[The prepared statement of Hon. Peter T. King can be found on 

page 39 in the appendix.] 

The GAO report presents some very troubling estimates. It indicates that if HIPC countries are to benefit long term from their 

debt forgiveness, they are likely to need between now and the year 

2020 significant continued assistance from the international lending community. In particular, the GAO estimates that an additional $153 billion will be needed in development assistance and 

another $215 billion will be needed to, and I quote, ‘‘fund export 

earnings shortfalls.’’ This would all be in addition to an expected 

$8 billion in debt relief likely to be needed when countries reach 

their completion point and the topping-up portion of the HIPC debt 

relief program is triggered. The grand total is $375 billion through 

2020. 

The GAO also tells us that these are conservative estimates that 

could easily rise. Of course the estimate is a global number. If the 

past is any guide, the United States could be called upon to contribute a portion of the estimate, about 12 percent. This may be a 

2

small portion, but it represents a large number, $52 billion over the 

next 18 years. If the GAO numbers are on the mark, this would 

probably work out to $2.8 billion per year to U.S. taxpayers. I probably am not the only Member of Congress that would question the 

wisdom of allocating that kind of funding for the next 18 years 

without further serious discussion and consideration. 

This GAO report will generate serious discussion. There will be 

questions about its assumptions and methodology. People rightly 

will point out that there exists no formal commitment from the 

multilateral lending banks or donor countries to make up for export earnings shortfalls. People rightly will point out the difficulty 

of accurately estimating development assistance needed by the 

HIPC countries for the next 18 years, especially if one assumes 

business as usual with no change in lending practices. 

Finally, people will question whether it is appropriate or correct 

to assume that export earnings and HIPC country exposure to export and commodity price volatility will remain more or less the 

same. 

I come from Chicago where commodities markets for years have 

helped our farmers hedge exposure to the same kind of commodity 

price volatility that complicates development assistance. I understand that the World Bank is exploring how to make better use of 

the commodities derivatives markets to help poor countries reduce 

the exposure their economies and export sectors have to price volatility. I also understand the World Bank is looking at how in the 

future it might approach lending decisions differently in order to 

prevent a linear accrual of debt burdens. 

And so I welcome this GAO report for the questions it raises. It 

gives Congress and other policymakers a sense of how expensive it 

could be if current lending and business practices in the development community do not change. It provides us with a concrete 

sense of the magnitude of the task at hand. It also provides a good 

basis for development experts to debate how further development 

assistance should be conducted in the future. And it raises additional questions that are not limited to the following: Does it make 

sense to continue lending to poor countries in all circumstances? 

What limits on lending should occur? What is the appropriate role 

of grants? Is it fair to refer to new grants as debt relief? How can 

developed donor countries facilitate policy changes and enhance access to modern financial hedging instruments that can help support 

countries’ development choices? And finally, what can debt relief 

reasonably be expected to achieve and is it asking too much for 

debt relief to resolve broader development problems? 

Debt relief under the HIPC program already has begun to improve lives in impoverished countries. I look forward to hearing 

from our witnesses about what specific progress has been made. I 

also look forward to a spirited discussion of how to facilitate 

progress within HIPC countries. We want to learn from the failures 

of development lending in the past and explore the availability of 

new approaches that can help countries develop more responsibly 

in the future. I personally am not convinced that providing billions 

of dollars to support export shortfalls is a good use of anyone’s resources, especially when other alternatives might exist to help 

countries develop more efficiently functioning markets. 

3

The GAO report makes clear that a failure to identify a delineation between debt relief, property reduction, and development assistance goals will be costly for U.S. taxpayers and people all over 

the world. 

With that, I will recognize the Ranking Member, Mrs. Maloney 

from New York, for an opening statement. 

[The prepared statement of Hon. Judy Biggert can be found on 

page 32 in the appendix.] 

Mrs. MALONEY. I will defer to the ranking leader, Mr. Frank, if 

you would like to open and I will follow you. 

Mr. FRANK. I thank my colleague. I appreciate the chairman of 

the full committee’s accommodating us by having this hearing. We 

tend when we have hearings to focus on problems and criticisms 

in areas where we can do better, which is appropriate, but sometimes the underlying reality gets lost. The underlying reality has 

been that this has been quite successful. 

I appreciate the fact that two witnesses from the NGO sector, 

who are both representative of organizations that did a great deal 

to get us here, recognize this. There are some real concrete improvements for some of the poorest people in the world that came 

out of the HIPC. 

Secondly, I don’t want the HIPC criticized for what it was not in- tended to do. Particularly the $375 billion figure is a figure well 

within reason but not to carry out—and the GAO didn’t suggest 

that—the specific goals of the HIPC, of the highly indebted poor 

countries. The fact is, a very small amount is needed in relative 

terms for that. The 375 is a very worthy goal, but it is not the case 

that if we don’t get $375 billion—and I think the world could afford 

it over that 30-year period—that somehow this would be a failure. 

The next point I want to make is—and let’s be very clear when 

we talk about debt relief—we are not talking in any realistic sense 

about letting people who incur debts in any morally relevant sense 

out from under. The debtors here are countries, and in almost 

every case the residents of the countries were the victims of those 

who incurred the debts. This is not a case of individuals going out 

and spending recklessly, and now saying I don’t want to pay my 

debts. As a matter of fact, many of us in the West have more responsibility for these debts than the people who are now bearing 

their burden, because it was in many cases the governments in the 

West, seeking in some cases to pursue geostrategic goals, who 

helped these countries incur the debt. That ought to be very clear. 

This is not one of those cases where we are letting people off a 

hook that they got themselves onto. 

We have some of the poorest people in the world who have been 

twice victimized by bad governance; one, by the abuses they suffered during the period of those governments being in power, and 

secondly by the long-lasting burden of the debts those governments 

incurred from which the people in the countries very often got no 

benefit. 

We are in the process of trying to reduce that debt. That does 

not solve all the problems. I am concerned about what seems to be 

an instinct to be negative far beyond what is required. The Department of Treasury put out a report in October of 2003, comments 

on proposed modifications to the enhanced heavily indebted poor 

4

countries. It responded in part to legislation that has been suggested by some of the organizations, the gentleman from New Jersey (Mr. Smith) and I and others worked on to try and talk about 

going further. I was particularly disturbed on page 8 to read the 

following quote from the Treasury’s report: As highlighted in the 

World Bank’s operations evaluation department’s evaluation of the 

HIPC program, continued focus on HIPC and debt relief has been 

a distraction in terms of the greater emphasis needed on well-defined economic growth strategies in these countries. The OED report stressed that HIPC debt relief is not a panacea, and that given 

institutional capacity constraints in the HIPCs, debt relief is not an 

efficient way of achieving desired social sector outcomes. 

Those comments are inaccurate, they are damaging, and I do not 

regard them as having been made in good faith. 

It is true that the OED report stressed that debt relief is not a 

panacea. I am prepared to ascribe to the general statement that 

nothing is a panacea. I have never seen a panacea. Maybe they 

exist somewhere. The role of panaceas is to be a stick with which 

people can beat things that they are in favor of and can think of 

nothing substantively bad to say about them. 

Of course it is not a panacea. No one ever said it was. It is helpful, as we will hear again from some of these witnesses. 

While there are some points of improvement here, I very much 

regret the negative spirit in which Treasury writes these comments. When I saw that, I was troubled and went and got the 

World Bank’s report. That simply does not accurately convey what 

the World Bank’s report said, and I would hope that the Treasury 

would be willing to correct that. 

Just a couple of last points. One debate where I do agree with 

Treasury and with this administration, we had a year ago—I hope 

it is over by now, I think the witnesses are on the right side—for 

some reason when the administration proposed that we substitute 

grants for loans to poor countries, some of my ideological allies, not 

used to ever agreeing with this administration, objected. I think 

the sides got switched there and people got—it is like those old 

comedy routines where people are saying yes, no, yes, no; and 

somebody says no and the other guy switches to yes. 

Of course grants are better than loans. Improvident grants aren’t 

good. Improvident loans aren’t good. But everything else being 

equal, grants make more sense than loans when you are trying to 

keep people from getting into debt. I think we should be moving 

more in that direction, both with the multilateral institutions and 

bilateral institutions. 

Finally, I agree, and Mr. Hart makes this point: We ought to be 

going beyond that with regard to debt relief, and in particular I believe we should be working with the multilateral institutions, particularly the World Bank and the IMF, to get them to give the 

same degree of debt relief that was given bilaterally. After all, the 

multilaterals are in fact the sum of the bilaterals. They are not 

independent entities that make their own money. They get money 

from elsewhere. 

Particularly with regard to the IMF—and I want to pursue this, 

and I would ask people to join me—they did some monetization of 

their gold and were able to pay for some debt relief. They can go 

5

further. I don’t know if we can get 100 percent. It is harder with 

the World Bank than the IMF to come up with a funding source, 

but there is no reason why the IMF should not now be pressed to 

go back into this process of monetizing some of their gold which is 

undervalued and use some of those proceeds to give greater debt 

relief. That is one of the specifics that comes out of this for me. 

Madam Chair, I thank you and I thank the Ranking Member of 

the subcommittee for her recognizing me. 

Mrs. BIGGERT. I thank the gentleman. 

The gentleman from Ohio, the Chairman of the Committee on Financial Services, is recognized for an opening statement. 

Mr. OXLEY. Thank you, Madam Chairwoman. Thank you for 

chairing this hearing today on an important issue for the global 

community. Last year, Ranking Member Frank and I requested 

that the GAO analyze financing issues associated with the initiative led by President Bush, at the Group of Eight level, to enhance 

debt relief for the most indebted countries in the world. We also 

asked the GAO to identify options for providing additional relief to 

help countries achieve debt targets, debt sustainability and lower 

debt service burdens. 

Providing humanitarian relief to the world’s poorest nations is a 

duty of the United States and developed nations around the globe. 

The question is not whether to provide humanitarian aid but how 

to use the taxpayers’ money most effectively in our quest to lift 

these nations from the depths of poverty. 

I look forward to receiving the GAO’s testimony this afternoon as 

well as the reaction to the report from two leading organizations, 

DATA and the Catholic Conference. The HIPC initiative has already had a positive impact on the lives of real people around the 

globe. Our witnesses will provide some details on how funds within 

HIPC countries have been reallocated away from debt service and 

towards funding education and inoculation programs. I also understand that the process within HIPC countries for identifying how 

these funds should be allocated is strengthening democracy and 

civil society participation in government decision-making. 

While there is a long way to go in many of these countries towards full democracy, these are encouraging first steps. However, 

HIPC debt relief is a limited tool. It seeks merely to decrease debt 

service burdens for the poorest countries on the planet. It identifies 

as goals, but not commitments, broader ideals such as reducing 

poverty and increasing export earnings within these countries. 

Today’s GAO report is controversial because it attempts to estimate the costs that could be associated with achieving these broader goals. The estimates in this report are sobering. GAO estimates 

that the cost of achieving both debt relief and economic growth targets in HIPC countries could be at least $375 billion between now 

and 2020 in present value terms. Even if the U.S. portion of this 

amount is as small as 20 percent, this is still a serious amount of 

money that will cause policymakers to consider carefully and strategically development assistance strategies. 

I welcome this report because it will require policymakers and 

development experts alike to devote renewed attention to distinguishing debt relief from development assistance. It also identifies 

the possible cost of continuing to do business as usual in the multiVerDate 0ct 09 2002 11:51 Jul 21, 2004 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\DOCS\94515.TXT FIN1 PsN: MICAH
6

lateral development banks. By assuming that business practices in 

the banks do not change and by assuming that export growth in 

HIPC countries will not be materially enhanced in the future, the 

GAO report shines a spotlight on the need for donor countries, development banks, and HIPC countries to renew efforts to find new 

ways of delivering development assistance, so that in the future 

poor countries do not amass crushing debt burdens. 

I am encouraged that the World Bank is already thinking in 

these terms. In a February 2004 report on debt sustainability in 

low-income countries, it explores the possibility of countries using 

market mechanisms such as derivatives markets to hedge their exposure to commodity market volatility. It is actively considering a 

new framework for lending to low-income countries that would 

limit the amount of debt a country could acquire. These are encouraging developments. As we discuss HIPC countries’ need to expand 

and diversify their export sectors, I would also like to underscore 

the importance of reviving the Doha round of trade talks. Reduced 

trade barriers will provide all countries with opportunities for 

growth and development. 

I look forward to today’s testimony and continued efforts to enhance the effectiveness of international development assistance. I 

yield back the balance of my time. 

Mrs. BIGGERT. The gentleman yields back. 

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

on page 34 in the appendix.] 

The gentlewoman from New York (Mrs. Maloney) is recognized 

for 5 minutes for an opening statement. 

Mrs. MALONEY. Thank you very much. In the interest of time, I 

will request unanimous consent to place my comments in the 

record and merely state that I am looking forward to the panelists’ 

statements on the new GAO report of the HIPC program. 

We do know that where debt relief has been accomplished, it has 

been very successful. I have a series of examples in my statement 

that show where it has truly helped return children to school and 

helped to vaccinate children in Tanzania, Uganda, Mozambique, 

and others where debt relief savings were used to really provide essential services and education and health care to some of the 

world’s poorest people. 

I support this program. I look forward to the testimony. I will 

place my 5-minute statement into the record. Thank you. 

Mrs. BIGGERT. Without objection, all members’ opening statements will be made a part of the record. Are there further statements? 

Then we will proceed to the witnesses. Today we have Mr. Tom 

Melito, Acting Director, International Affairs and Trade, United 

States General Accounting Office. Welcome. 

Mr. Thomas H. Hart, Director, Government Relations, DATA—

Debt, AIDS and Trade for Africa. Thank you for coming. 

And Mr. Gerald Flood, Counselor, Office of International Justice 

and Peace, United States Conference of Catholic Bishops. 

I am sure that most of you probably know the drill. Without objection, your written statements will be made a part of the record 

and you will each be recognized for a 5-minute summary of your 

7

testimony. Then we will ask questions with a 5-minute limit which 

we will try and stick to. 

Mrs. BIGGERT. I will first recognize Mr. Melito for your testimony. 

STATEMENT OF THOMAS MELITO, ACTING DIRECTOR, INTERNATIONAL AFFAIRS AND TRADE, UNITED STATES GENERAL 

ACCOUNTING OFFICE 

Mr. MELITO. Madam Chairwoman and members of the subcommittee, thank you for the opportunity to be here today to discuss GAO’s assessment of funding challenges related to heavily indebted poor countries, or the HIPC initiative. The HIPC initiative 

is a joint bilateral and multilateral effort to provide debt relief to 

poor countries to help them achieve long-term growth and debt sustainability. 

Our recently released report has two main findings. First, the 

three key multilateral development banks we analyzed, the World 

Bank, African Development Bank, and Inter-American Development Bank, face a funding shortfall of $7.8 billion in present-value 

terms under the HIPC initiative. We estimate that the United 

States could be asked to contribute an additional $1.8 billion to 

close this financing shortfall. 

Second, we estimate that the 27 countries that have qualified for 

debt relief may need more than $375 billion from donors to ultimately achieve their economic growth and debt relief targets by the 

year 2020. The United States may be asked to contribute about $52 

billion of this assistance. 

Let me briefly provide some background on the HIPC initiative 

and then describe in greater detail the results of our work. The 

World Bank and IMF have classified 42 countries as heavily indebted and poor. Three-quarters of these are in Africa. The current 

cost for this initiative is about $41 billion in present-value terms. 

This will be funded almost equally between bilateral and multilateral creditors. A major goal of the HIPC initiative is to provide recipient countries with a permanent exit from unsustainable debt 

burdens. 

I will now turn to our main findings: 

First, regarding the financing issues for the current initiative, 

the three banks we analyzed face a funding shortfall of $7.8 billion 

in present-value terms. The World Bank has the largest shortfall 

at $6 billion. Despite significant assistance from donor governments, the African Development Bank has a financing gap of about 

$1.2 billion. The World Bank and the AFDB have not determined 

how they will close their financing gaps. The Inter-American Development Bank is fully funding its HIPC obligation by reducing its 

future lending by $600 million beginning in the year 2009. We estimate that the United States could be asked to give an additional 

$1.8 billion to close the $7.8 billion shortfall. 

However, the total estimated funding gap is understated, because 

the World Bank does not include costs for four countries for which 

data are considered unreliable. In addition, all three banks do not 

include estimates for topping up, the additional relief that may be 

provided due to factors such as a weakening in countries’ economic 

8

circumstances. The World Bank and IMF project that this additional relief could cost from $877 million to $2.3 billion. 

Let me now turn to our second finding, addressing countries’ 

long-term economic growth and debt sustainability. The 27 countries that have qualified for debt relief may need more than $375 

billion in present-value terms to help them achieve their economic 

growth and debt relief targets by the year 2020. This amount consists of three components: first, $153 billion in expected development assistance; second, $215 billion to cover lower export earnings; and, third, at least $8 billion to reach debt targets. 

The World Bank and IMF project that these countries will need $153 billion in development assistance after HIPC. However, this 

is an underestimate because it assumes that countries will achieve 

overly optimistic export growth rates. Under more realistic historical rates, we found that 23 of the 27 countries are likely to experience higher debt burdens and lower export earnings. This will lead 

to an estimated $215 billion shortfall over 18 years. These shortfalls are due to weather and natural disasters, lack of access to foreign markets, or declining commodity prices, all factors outside 

these countries’ control. If countries are to achieve economic growth 

rates consistent with their development goals, donors would need 

to fund the $215 billion. Otherwise, countries would grow more 

slowly, undermining progress toward poverty reduction. Finally, we estimate that countries will need at least nearly $8 

billion to achieve their debt targets, both those under the existing 

initiative and those the committee asked us to examine. Based on 

its historical share of bilateral and multilateral assistance, the 

United States may be asked to contribute about $52 billion, or 14 

percent of the $375 billion in additional assistance. 

Madam Chairwoman, this concludes my prepared statement. I 

would be happy to answer any questions you or other members of 

the subcommittee may have. Thank you. 

Mrs. BIGGERT. Thank you very much. 

[The prepared statement of Thomas Melito can be found on page 

79 in the appendix.] 

Mrs. BIGGERT. Next, Mr. Hart, if you will proceed. 

STATEMENT OF THOMAS H. HART, DIRECTOR, GOVERNMENT 

RELATIONS, DATA, (DEBT, AIDS AND TRADE FOR AFRICA) 

Mr. HART. Thank you, Madam Chairwoman. Mrs. Maloney, Mr. 

Frank, and other members of the subcommittee, I would like to 

talk briefly about what has been achieved by the HIPC debt relief 

program, which has been significant; how it can be improved and 

how debt relief compares to other forms of assistance, which is a 

lot of ground to cover in a short amount of time, and I hopefully 

can react briefly to the GAO report at the end. I will be happy to 

answer any questions you might have as well. 

First, let me say what a real pleasure it is to address this subcommittee on this critical issue. While DATA, which stands for 

Debt, AIDS, Trade, Africa, is a relatively new organization, many 

of the people who helped found DATA started their work during 

the Jubilee 2000 campaign. The best known of whom, of course, is 

Bono from U2, who is the co-founder of our organization. But also 

some of the most influential people in the debt campaign are actuVerDate 0ct 09 2002 11:51 Jul 21, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\DOCS\94515.TXT FIN1 PsN: MICAH
9

ally members of the U.S. House Financial Services Committee. I 

would like to thank Mr. Leach, Mr. Bachus, Mr. Frank, Ms. Waters, as well as many others of this committee, who created the essential authorizing legislation as well as the political momentum to 

approve the HIPC initiative and get it funded here in the United 

States, which then had the impact of triggering the international 

agreement among the other donors. Over the last 4 years, Congress has provided approximately $860 

million to the enhanced HIPC initiative, canceling both U.S. bilateral debt and contributing to writing off multilateral debt. And I 

am delighted to report that the results of this program have been 

substantial. Twenty-seven of the poorest countries in the world 

have now qualified, almost all of which are in sub-Saharan Africa. 

These countries will see their debt reduced by two-thirds, cutting 

$52 billion in debt stock. 

Other donors, in addition to the United States, have provided $30 billion to finance this initiative. A new process has emerged in 

which poor country governments must engage with their civil societies to determine poverty reduction priorities for their country and 

have increased ownership and transparency within their governments. For development advocates like DATA, very importantly, 

more than $1 billion annually in debt service is now staying in 

these 27 countries to fight poverty. 

And just a couple of brief examples: Uganda has used savings 

from debt relief to more than double school enrollment to 94 percent, which has contributed to that country’s remarkable decline in 

HIV/AIDS rates. Mozambique has vaccinated children against tetanus, whooping cough, and diphtheria as well as built and electrified schools. And Cameroon has used debt savings to launch a 

national HIV/AIDS plan for prevention, education, testing and 

mother-to-child transmission. 

So, being the Financial Services Committee, what kind of return 

on this investment have you got? For an investment of less than 

$1 billion over the course of several years, the U.S. has leveraged 

$30 billion of donations from other donors and canceled $50 billion 

of debt stock, a significant clearing of the books of decades-old debt. 

It also has freed up $1 billion a year in debt service which is now 

building schools, clean water wells, and AIDS prevention programs. 

That said, of course, the program could be improved. The debt 

service relief has been rather uneven among the 27 countries, some 

receiving 5 percent debt service to revenue, others up to 34 percent. 

We are hoping that we can even out some of the benefits in the 

program. 

Secondly, 27 countries is wonderful, but not enough. There are 

many countries who could benefit from debt relief. As we have seen 

recently in Iraq, any reconstruction and development package 

should include debt relief as a way of easing financial pressure on 

a burdened country. 

And thirdly, even though these countries have saved $1 billion 

annually in debt service, they are still paying $2.5 billion annually, 

mostly to the World Bank and IMF. These are critically needed resources for putting girls in school and fighting AIDS. 

So it is with some of these improvements in mind that Mr. 

Frank, along with his colleague Mr. Smith from New Jersey here 

10

in the House, and in the Senate, Senator Santorum and Senator 

Biden, drafted legislation to try to address some of these concerns. 

Very quickly, it proposed a simple change to the HIPC program. Instead of using 150 percent debt stock to export, which is the measure the current HIPC initiative uses to measure debt, it proposes 

to change so that no country spends more annually in debt service 

than 10 percent of its general revenues, or, in the case of a country 

with a high AIDS burden, 5 percent. That would more closely link 

debt relief to a country’s ability to pay and limit some of the volatility that changing exports have had on debt sustainability. It 

would increase the amount of money these countries have for poverty reduction by over $430 million, a 50 percent increase in the 

benefit to these poor countries for only a minimal cost. 

This proposal was actually passed into law last year with the 

Global AIDS Act, but the Administration has not yet implemented 

its provisions. I hope one of the outcomes of this hearing will be 

to encourage the Administration to do so. 

In my last minute of time, I want to relate how debt relief works 

as part of a development package. Of course debt relief, as Mr. 

Frank noted, is not a panacea. It never was designed to be. Poor 

countries need additional aid and much better trade terms with 

rich countries, something that speaks to the GAO’s very large gap 

in export financing that they have in their report. But debt relief 

under HIPC does have several features that make it an effective 

form of assistance. 

(1)It coordinates donors. Like any bankruptcy, all the donors 

have to move together and that eases the burden of paperwork, financing, and accountability that poor countries have to deal with. 

(2)It promotes country ownership. The HIPC initiative, as I mentioned earlier, asks members of civil society to design a poverty reduction plan, creating better consultation by the countries themselves as well as highlighting country priorities rather than donor 

priorities. 

(3)Debt relief gives untied aid, meaning the countries make their 

spending decisions themselves. 

(4)And, as noted, debt relief leverages far greater sums because 

it coordinates the donors together. As noted, every U.S. taxpayer 

dollar is leveraged 30 times by other donors. 

Very, very briefly on GAO, Tom is an old friend so he will know 

the spirit in which I say this, but this was GAO’s shock-and-awe 

strategy. Even though this was a report intended to address some 

of the challenges of debt relief, he ends up bringing in export financing and development assistance as a way of achieving certain 

growth goals. While DATA firmly supports a robust and comprehensive development financing package for the poorest countries, to somehow imply that the debt relief programs shoulder that 

burden is simply not going to happen. 

One of the factors that I have pointed out, the largest gap in financing here that the GAO points out is in export financing. I 

know this will be a controversial suggestion to Congress, particularly during an election year, but instead of actually costing the 

U.S. taxpayer money, we could in some respects solve this problem 

by saving taxpayer money. U.S. farm subsidies contribute dramatically to Africa and other poor countries’ inability to export their 

11

goods to the Western world. We spend billions of dollars subsidizing our farm products, which make them very, very cheap and 

make it very difficult for poor countries to compete globally. In 

many instances also those products are actually dumped on markets in poor countries. Therefore, that export gap could be closed 

by other means other than U.S. taxpayer dollars. 

The shortfall in debt relief that is mentioned, the $8 billion, 

could largely be addressed. It is partially being addressed currently—there is a $650 million shortfall, of which the United States 

has agreed to provide $150 million, half of which has already been 

appropriated by Congress. The other half has been requested for 

2005. It is a very small amount. The second part of that shortfall 

is largely to the World Bank. This is because to date, the World 

Bank has taken its substantial annual profits and transferred some 

of those profits to the HIPC initiative. It has done that to date and 

is now proposing to stop doing that. That is the reason why the 

shortfall exists. 

I hope some of these issues can be considered as the committee 

moves forward. Thank you very much. 

Mrs. BIGGERT. Thank you very much. 

[The prepared statement of Thomas H. Hart can be found on 

page 54 in the appendix.] 

Mrs. BIGGERT. Mr. Flood, you are next. 

STATEMENT OF GERALD FLOOD, COUNSELOR, OFFICE OF 

INTERNATIONAL JUSTICE AND PEACE, UNITED STATES CONFERENCE OF CATHOLIC BISHOPS 

Mr. FLOOD. Thank you, Madam Chairman. Madam Chairman, 

members of the subcommittee, on behalf of the United States Conference of Catholic Bishops, I would like to thank the members for 

the opportunity to testify here today. Debt relief for poor countries 

has been a high priority for the Bishops Conference and of the relief and development agency, Catholic Relief Services, for many 

years. In my testimony, I will be focusing on a number of issues 

at a level of technical detail which the Bishops would not normally 

address and on which they therefore would not have a position, as 

I think you can understand. Thus I am offering my testimony primarily as a former development agency official who has worked on 

debt and related issues with both the World Bank and the Bishops 

Conference for many years. 

First I would like to reiterate what Tom Hart said and just to 

acknowledge my great appreciation and gratitude for the leadership and the long and faithful support provided by many members 

of this committee in favor of debt relief for heavily indebted poor 

countries, particularly Mr. Leach, Mr. Bachus, Ms. Waters and Mr. 

Frank. 

In my written testimony, I discuss six areas where the HIPC program and related activities seem to be producing good results for 

the beneficiaries, including, among others, substantial increases in 

expenditures for poverty reduction, prudence in new borrowing and 

improved processes for tracking poverty reduction expenditures. 

Time won’t permit me to go into each one of these, but what I 

would like to do is just highlight one of them and then as is our 

12

wont, as suggested by Mr. Frank, to go into some of the deficiencies 

for the program as I see them, but briefly. 

The first point I want to make on the positive side is that the 

poverty reduction strategy process, or the PRSP which was introduced as an integral part of the HIPC debt reduction program, has 

facilitated an active, unprecedented role for civil society groups in 

monitoring of expenditures for poverty reduction. Catholic Relief 

Services reports impressive examples of civil society participation 

in a number of countries including Bolivia, Uganda, Malawi and 

Zambia. They have formed active and effective debt monitoring organizations which actually examine and track how debt relief expenditures are being spent in their countries. This shows that in 

many countries the procedures instituted under the HIPC program 

are helping to strengthen democratic processes in places where historically weak governance has often led to serious neglect of the 

needs of the large majority of the very poor and vulnerable citizens. 

On the other side of the ledger, although the program is in its 

fifth year of completion, only 11—and I understand yesterday that 

number is up to 12—of the 27 beneficiary countries have reached 

their completion point. This is the point at which they become irrevocably entitled to full debt relief. Zambia is a case in point. My 

understanding is that the completion point is being held up because pressures to increase salaries led to an overshooting of the 

wage bill target agreed with the IMF. This is a very complex issue. 

A recent World Bank report analyzed the wage bill problem. It says 

that low remuneration in the public sector is a major factor contributing to problems of poor productivity, motivation, recruitment and 

retention. At the same time, the wage bill in Zambia has remained 

large relative to overall government expenditures, thereby crowding out operational expenditures. 

The World Bank report outlines a broad strategy for addressing 

the issue. But the challenge is an enormous one: how to make 

wages sufficiently remunerative to attract and retain qualified staff 

while at the same time minimizing the cost. In the meantime, Zambia continues to be plagued by a heavy burden of past debt. In fact, 

the fiscal bind which Zambia finds itself in can be attributed in 

large measure to its heavy debt service obligations. According to 

the latest projections, Zambia’s debt service will be an extremely 

high 31 percent of government revenues in 2004. The delay in 

granting full debt relief is restricting the ability of HIPC countries 

to create the kind of fiscal space so important for moving ahead to 

address in a more effective way the human needs of their people. 

The IMF and World Bank should reexamine the conditions for 

reaching the completion point, particularly those that are unrelated 

to assuring that the debt relief savings will reach the poor. 

Tom Hart has already covered the next several points and I don’t 

want to waste the committee’s time by repeating things which I am 

in full agreement with. I just want to thank very much Representatives Chris Smith and Barney Frank, and Senators Santorum and 

Biden for their leadership in introducing the bill which is now the 

new legislation which Tom Hart discussed. 

So let me talk briefly about the GAO report. This report makes 

a very important point, which is that even if the HIPC program is 

fully financed, substantial additional external assistance will be reVerDate 0ct 09 2002 11:51 Jul 21, 2004 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\94515.TXT FIN1 PsN: MICAH
13

quired to enable HIPC countries to achieve growth and poverty reduction targets. Debt relief is not—a well used word—panacea. 

Even if the existing debt of HIPC countries is reduced to zero tomorrow, it will not end poverty. The problem is too complex and 

deep seated for that. It must be addressed first and foremost by the 

countries themselves, with their governments and people working 

together on a variety of fronts for the common good. But they are 

too poor to do it alone. They need additional aid and support from 

the wealthier countries. 

There are questions of course that arise with respect to the numbers that are used in GAO’s report, but let me make one additional 

point and that is that the GAO scenario assumes that the export 

shortfall they project will be made up entirely by aid. This overlooks an important element of the development agenda—external 

trade, as Tom Hart indicated. Developing countries can achieve important benefits by more open trade provided that it is also fair 

trade. The World Bank estimates that trade barriers in Europe, the 

United States, and Japan cost poor nations more than $100 billion 

a year. 

One final point. The GAO estimates that almost all the 27 HIPC 

countries could achieve debt sustainability if multilateral creditors 

converted an average of one-third of their new loans to grants. In 

fact, in a statement by President Bush in 2001, he said that IDA 

should convert about half of its loans into grants. The Bishops Conference supported the expansion of IDA’s grant authority in IDA 

13. But they also emphasized the importance of donors beginning 

to make contributions very soon to offset the loss of reflows of loan 

payments to IDA which constitute close to 40 percent of their resources for new lending. Otherwise, the necessary contributions 

would mount quickly to unfeasible levels and cause IDA to sharply 

cut back its assistance to the world’s poorest countries. This will 

be an important issue in the negotiations of IDA 14 which have 

just begun. Thank you. 

Mrs. BIGGERT. Thank you very much. 

[The prepared statement of Gerald Flood can be found on page 

45 in the appendix.] 

Mrs. BIGGERT. We will now proceed with the questions. I will recognize myself for 5 minutes. 

Mr. Melito, your report identifies a range of development and export support lending that will be needed between now and 2020 for 

HIPC countries to meet the targets identified in their PRSP. Do 

your estimates take into account the impact that programs such as 

the Millennium Challenge Account, the Global Fund for HIV/AIDS, 

TB and Malaria, the USAID, and UNCTAD will have in helping to 

meet some of the development needs you identify in your report? 

Mr. MELITO. In our report, we are using World Bank and IMF’s 

20-year projections which make the assumption, which we follow, 

that these countries are on a reform program that is supported by 

the donors, which would include bilaterals such as the United 

States as well as multilaterals. We hold that assumption constant. 

So U.N. reforms, World Bank reforms, U.S. reforms, would all be 

assumed to be followed. This would then result in high GDP 

growth rates, which we hold constant. So yes. 

Mrs. BIGGERT. So yes? 

14

Mr. MELITO. We are assuming those sources of financing are 

there and the reforms that those particular programs are looking 

for are being followed. 

Mrs. BIGGERT. Have you actually taken into account the monetary amount, or is that just that these reforms will raise the quality of the health, for example, of the people of those countries? 

Mr. MELITO. Once again we have used the World Bank and 

IMF’s breakdown of development assistance, which doesn’t go into 

great detail. It has information on different multilaterals, how 

much the World Bank will provide, how much the other MDBs will 

provide. It also has very general numbers on the bilaterals. It 

doesn’t break it down to how much is actually the U.S. share, and 

certainly not within the U.S. Share how much would come from 

MCA versus regular development assistance. We abstract from 

that. We are just taking the total numbers they provide us. 

Mrs. BIGGERT. For example, with the Millennium Challenge Account, what would you say about that? 

Mr. MELITO. That would be one of many possible sources of financing which could be used to help the HIPC countries as well as 

other HIPC countries as we move forward. But it is not, in the case 

of financing HIPCs, different from any of the other sources. It is 

one of many possible options. 

Mrs. BIGGERT. How about, then, the Global Fund for AIDS? We 

put so much money into this program. I am trying to just figure 

out if you would say, well, so much money is going to go to this? 

Mr. MELITO. It is a very difficult thing to project out 20 years. 

We tried to put a lot of caveats in the report. We are actually, for 

the most part, piggybacking on the World Bank and IMF’s projections, just changing some key assumptions and seeing what the impact of those assumptions are. They are the ones who estimated 

how much development assistance would come to the countries. We 

don’t actually change that number. We leave that number as it is. 

So when we say that $153 billion is expected in development assistance, that is the World Bank and IMF’s number. That is not our 

number. That number is about equally distributed between multilateral assistance of about $75 billion and about $78 billion for bilateral assistance. But they don’t actually break it down and say 

how much is coming from the global fund, how much is coming 

from MCA or anything else. And that is certainly not within the 

scope of what we did. So we left that as is. 

Mrs. BIGGERT. How do you determine the rate of growth each 

year, how much of this is going to factor in for the years to reach 

2010? 

Mr. MELITO. The DSA has a number of optimistic growth rates. 

We made a choice to keep the optimistic GDP growth rates constant, because those are the rates which are geared towards poverty reduction, with the notion that these countries will be expected to strictly follow the reform programs which will contribute 

to their ability to grow, and in exchange for following reform programs, donors would provide them assistance. 

We also, though, looked at the fundamental—we considered—

weakness in one of their growth rates which is on the export side. 

We think it is important to highlight that. While we find that there 

is a $215 billion export shortfall, we still calculate that these counVerDate 0ct 09 2002 11:51 Jul 21, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\DOCS\94515.TXT FIN1 PsN: MICAH
15

tries are going to raise quite a bit of revenue from exports. It is 

not that we are wiping out their export revenues. It is just that we 

bring a more realistic historical perspective and our estimate is 

about 40 percent of what the World Bank and IMF estimate. But 

we have reasons to suspect the export levels. We are being hopeful 

on the GDP side for the value estimated. 

Mrs. BIGGERT. There has been recent research that has begun to 

quantify how improvements in public health can drive economic 

growth. With some of the written testimony and testimony today 

on how inoculation and other health initiatives have been supported by the HIPC initiative and these other administration priorities, how can one assume that export growth in the future will be 

consistent with the historical experience? 

Mr. MELITO. The reason we are concerned about the export 

growth rates is that a lot of the vulnerabilities come from factors 

outside these countries’ control. As we mentioned in our statement, 

they rely heavily on a few primary commodities, agriculture products like coffee or cocoa, minerals like copper. Over the last 20 

years, the prices of these items have actually gone down over that 

time in real terms. They have wide fluctuations which also hurt 

these countries. These countries also have large weather extremes, 

other natural disasters. So on the export side, they really have very 

little that they can sell, and what they are selling has been going 

down in price. For them to have good outcomes in exports, they 

need to diversify their exports and probably moving into manufacturing, which would be an important development goal, but it takes 

a long time for them to reach that point. 

Mrs. BIGGERT. Thank you. I recognize the gentlewoman from 

New York. 

Mrs. MALONEY. I would yield to the Ranking Member of the full 

committee. 

Mr. FRANK. I thank the gentlewoman. 

Mr. Melito, one thing that I think may have caused some confusion, when you talked about the $375 billion, which of course $8 

billion of that is for the HIPC—we ought to be clear—the HIPC. 

To carry out what we started a few years ago cost $8 billion. So 

the overwhelming majority of that is to get to very, very good outcomes. We might say that $368 billion is the price of a panacea 

which we claimed we were doing there. But even there I think it 

may mislead some people unless we are very explicit about something. 

As I understand what you are saying, that is not $375 billion 

more than is currently planned. That includes $153 billion that is 

assumed foreign aid going forward. So even at that, it is a $215 billion increment, currently planned amount, over this period, is that 

correct? 

Mr. MELITO. That is so. We are explicit about that in the report. 

Mr. FRANK. I understand that. I don’t mean to impugn your pride 

of authorship. But some people might wait for the movie and not 

read every word in the report, so I wanted to get that out. So we 

are talking not about $375 billion additional but $215 billion additional to reach the point where they are all in very good shape. I 

would love to get there, but I don’t want to scare people. 

16

The only other thing I would ask about were exports. You are 

right, exports are uneven but not with regard to agricultural commodities but with regard to, you mentioned copper and other 

things. We are currently in a situation where with sanctions of the 

Chinese vacuum cleaner, some of those things are going up. Do you 

assume that is going to end soon? In fact, while export prices for 

raw materials might have been going down a while ago, currently 

my reading is that a lot of them are going up because China is putting such upward pressure on them. Do you have any response on 

that? 

Mr. MELITO. Even over the last 20 years, there have been periods 

of growth, but the overall trend has been downward. Certainly 

some of the commodities may be turning around. 

Mr. FRANK. If the Chinese continue this? 

Mr. MELITO. Overall demand worldwide may be going up but 

they are still vulnerable. 

Mr. FRANK. I agree. In fact, that also leads me to the last point 

I want to make on this. That is, I have been struck, as we have 

debated free trade over the years, that some of us who have been 

concerned about the impact that unrestricted trade without any 

labor or environmental rights would have on particularly some of 

the industrial workers who have been accused of being protectionists. In fact, as I think this report makes clear, the greatest negative impact any public policy in America has on our ability to help 

poor people is America’s agriculture policy. It is restrictive, it is 

subsidized, and I find it odd that people who are strong proponents 

of our agricultural policy, which I generally vote against, which 

costs tens of billions of dollars and is quite restrictive, are somehow 

allowed to call themselves free traders. 

I gather with regard to export growth that significantly increasing the amount of agricultural product we allow to come into the 

United States would be very helpful. Is that correct? 

Mr. MELITO. It is generally outside the scope of this report, but 

we do highlight that the ability to sell their products will obviously 

decrease this shortfall. 

Mr. FRANK. Would you say that agricultural products are a large 

part of what these particular countries would be able to sell? 

Mr. MELITO. Their primary commodities are generally agricultural or metals. 

Mr. FRANK. Thank you. I think that is kind of an illogical point 

here. The most protectionist, the aspect of American economic policy that falls hardest on these countries is our restriction on agriculture. 

I guess finally I would say this. You don’t seem to be too optimistic about the impact of various free trade agreements that the 

United States might be signing with these countries. Have you 

taken that into account? Suppose the President and Mr. Zoellick’s 

trade agenda were put through. Would that increase your optimism 

about their exports? 

Mr. MELITO. Certainly to the extent that markets would open, 

that would increase their ability to achieve high growth. 

Mr. FRANK. But there is nothing in there. You wouldn’t bet on 

it? 

17

Let me ask Mr. Flood with whom I generally agree, this one 

point—and I did want to note that I think some of our liberal 

friends were just wrong in their resistance to going to more grants, 

although it does mean that you have to take advantage of the 

reflows. But one point that was raised by Treasury and some others, and I know I supported this amendment with Mr. Smith but 

we did, I think, give Treasury an alternative. We said either do 

this or come up with an alternative. I share your disappointment 

that Treasury basically just blew us off and sent back a report 

which I think unfairly denigrates the HIPC and mischaracterizes 

what the World Bank said. But there is the moral hazard thing. 

There is the perverse incentive thing. How do we respond to that? 

I must say I am impressed with that. Namely, that if you tell people that we will make sure that their debt isn’t more than a certain 

percentage of their revenue, to some extent that gives them an incentive to kind of push up their debt and reduce their revenue. Are 

there ways that we can achieve the goal of reducing the burden of 

debt and avoid those negative incentives, Mr. Flood? 

Mr. FLOOD. I have never really understood that point too well, 

because we have a situation where a country is paying, let’s say, 

30 percent of its revenue currently in debt service. Under the legislative proposal that was passed, the country would then go to a situation where it is paying perhaps 5 percent of its revenues in debt 

service. Therefore, it is in effect in a position where it makes more 

sense to go out and raise revenues because fewer of its revenues 

are going to have to be used up in providing funds for debt service. 

Mr. FRANK. What about if they are closer to the margins where 

an increase might have a negative impact? 

Mr. FLOOD. I think that the other thing is that this is a retrospective program. It is not a prospective program. What we are 

talking about is getting rid of old debt. 

Mr. FRANK. I know that it has been suggested that one of the 

things you do is to have these be only as applied to the past but 

that future either debt or revenue would somehow be excluded 

from the calculation, Mr. Hart? 

I am sorry. Go ahead, Mr. Flood. 

Mr. FLOOD. I was going to say that I think in going forward, I 

don’t think that the countries can expect to have repeats of HIPC 

every few years, which it seems to me would create quite a moral 

hazard, that they wouldn’t in effect be responsible for the debt 

service of future lending because somebody’s going to always come 

around and forgive it. But if you went to a grant system, which I 

think is really a very good alternative, it will avoid that problem. 

Mr. FRANK. Mr. Hart? 

Mr. HART. I was going to respond to the first part of your question, which is that Treasury has argued that somehow when you 

have a debt service-to-revenue formula you are somehow depressing—that you are creating an incentive not to collect revenues. And 

it was in response to that that you and your colleagues who passed 

the legislation gave Treasury the flexibility to design another 

mechanism which achieved similar results, including tying it to 

GDP, which has been an example that Nancy Birdsall from the 

Center For Global Development has recommended. That option is 

there for Treasury to pursue. 

18

Mr. FRANK. Let me say to Treasury that I would renew our request that they give us more on this than they have. I think there 

is a great deal of interest. 

Just a last point on this, if I could, Madam Chair, and I thank 

you for the indulgence. Unfortunately reflective of—I don’t know—

a lot of things, we are more sparsely attended today than if we 

were talking about richer people. 

Mr. FRANK. I can see how we can get the IMF to finance greater 

debt relief. I think we need to do some more work on how we get 

the World Bank to do that, because it seems we ought to be going 

forward on that. 

There was one suggestion that they raise the interest rate on 

sort of middle-income countries. I do not think that works. I do not 

think you want to make Mexico pay for Uganda. That is not a good 

idea. 

But any off-the-top-of-your-head suggestions about what we can 

do with the World Bank? And that would be my last question. 

Mr. HART. Just briefly, ask the World Bank to do what it has 

been doing for the last 5 years. As part of the enhanced HIPC 

framework, the World Bank agreed to take net profits it earns from 

interest on income—between $1.5 billion and $2 billion a year, in 

net profits. They then transfer that to their pension plan and to 

other accounts. One of those accounts that they transfer profits to 

is the HIPC trust fund. 

They have been giving between $200 million and $300 million a 

year as their part of contributing to writing off this HIPC debt. 

They have agreed to do that until 2005. 

Between 2006 and 2020, they have not agreed to do so, thus creating that massive shortfall in funding that GAO referred to. 

Mr. FRANK. So they just agree to continue this forward if they 

could do that, and it would not cause shortfalls in the other accounts? 

Mr. HART. It would at least substantially reduce that shortfall. 

Mr. FRANK. Mr. Flood? 

Mr. FLOOD. No, I just wanted to say that even when they are contributing $240 million to the HIPC trust fund out of their revenues, they are still able to increase their general reserves by $2.4 

billion. I mean they have a lot of leeway in there. 

Even with the continuation of the current level of contributions 

to the HIPC, there will be still a gap, and I think that really the 

$240 which they are currently doing has to be considered the minimum as to what they can contribute going forward. 

Mr. FRANK. So that would not get us to further debt? That is just 

to finish up on HIPC? 

Mr. FLOOD. That is right. 

Mr. FRANK. We have to work on that. 

Mrs. BIGGERT. Thank you. 

It appears that the gentleman from Massachusetts would be in 

favor of another hearing at some point. 

Mr. FRANK. Yes, I would be. 

Mrs. BIGGERT. To include Treasury and perhaps the World Bank. 

Mr. FRANK. Yes, although, we did not ask Treasury. I do not 

mean to be critical of Treasury, because they have been cooperative. We had not asked them to come here. 

19

But yes, I think because the World Bank will not testify, but 

they could sit and listen, and maybe they are already doing that. 

Yes, I thank the vice chair. If we could get Treasury to come 

back, or to come—it is not their fault today, we did not ask them—

but if they were to come and address this, that would be helpful. 

And maybe the American ED, the American executive director of 

the Bank, could accompany Treasury. 

Mrs. BIGGERT. The gentleman from Florida is recognized for 5 

minutes. 

Mr. FEENEY. Thank you very much, Madam Chairman. 

I happen to be a new Member of Congress and, of course, a new 

Member of the Committee. And this is my first experience with 

HIPC, so I hope you will give me the grade 1 through 5 and not 

the advanced level. 

I want to ask first, Mr. Melito from the GAO, with respect to 

your study, you named the donor nations that are eligible for 

HIPC. You also I think we probably admit, as some of the folks on 

the other side tried to point out earlier, that there are huge variables when you start estimating the burdens that these countries 

are going to have, all sorts of things, not just gross domestic product increases but the value of specific resources, whether it be oil 

or gold or commodities or products, all sorts of political decisions 

that are made, not just by that Nation, but by the world community. I think we very much understand that. 

One of the things I would be interested in knowing is, historically, how some of these poor debtor nations got into the condition 

they are in the first place. One of the things that I would be specifically interested in, since it is something we have an impact on, is 

what their history has been over the last 3, 4, 5 decades in terms 

of receiving foreign aid. What have we done with our foreign aid 

dollars to actually help these folks acquire the types of governments and policies that will lead them to economic prosperity? 

I note that one of the key goals of HIPC is not just to relieve 

debt. I mean, that is the symptom that we are attacking, but it is 

to eliminate or reduce poverty and promote economic growth. And 

I guess sort of the tongue-in-cheek proposal from somebody who 

has been very disappointed in a 50-year history of financial aid 

from America and other nations and how little it has actually impacted the quality of life of people there, I guess sort of the tonguein-cheek proposal is, have we thought about translating the Wealth 

of Nations by Adam Smith into all of the different languages available and providing it to the finance ministers and advisers and economic professors in each of these countries? 

Because my view of this is pretty simple. Our policies are not designed to promote not just free trade but low taxation, low regulation, the rule of law, property rights, both for real and intellectual, 

that no amount of aid is going to be enough to keep these countries 

out of deep trouble. So if I could—and I will end early, Mr. Melito, 

because then I would like to have the other panelists if I could, 

who are advocates for aid—I would sort of like you to address your 

response to my monologue here, to how we know when we are succeeding. 

We really are trying to remodel what I have described as a massive failure of foreign aid from America for the last 4 or 5 decades. 

20

By the way, the only exception is maybe some short- or even longterm intelligence or military with strategic advantages. If we are 

going to buy or bribe countries to be our friends for a while, that 

would be a different discussion. 

But to the extent our goal is economic growth and reduction of 

poverty, I have been totally disappointed in the results that foreign 

countries have gotten from our aid and that our taxpayers have 

gotten as well. 

Some of the things, Mr. Hart, that you point out that are huge 

successes—and I do not mean to diminish the importance of any 

of these—but I would like you to tie the ultimate goals of HIPC 

programs, eliminating and reducing poverty and promoting economic growth. You have twice as many people in schools in Uganda. Are they teaching the right things to twice as many students? 

You are measuring inputs there, and I am more concerned if we 

are measuring outputs. 

I think that, finally, and then I will end, if you can tell me how 

you are measuring—and by the way, you talked about disease control and AIDS. Africa is three-quarters of the nations involved 

here. Famines come and go in Africa in a tragic way, not every decade, but every year. Even when the famine is eliminated, poverty 

is not, and economic prosperity never, ever results on the African 

continent. And that is a sad fact of life. 

Finally, Mr. Flood, you have suggested that Malawai and Zambia 

are examples of where HIPC may be making a difference, but this 

is more of a suggestion on your part. Do you have any empirical 

evidence that you can give us to that effect? 

So with that, thank you very much. 

Mr. MELITO. I will just briefly talk a little bit about history and 

let my colleagues deal with the effectiveness. 

The causes for these countries getting these debt problems is actually an ongoing issue of overly optimistic export growth rates. 

Back in the 1970s, these countries received a lot of commercial debt 

or debt from governments, including the United States, at commercial rates, on the notion that they would be growing rapidly. Well, 

they did not, and in the 1980s, they ended up having very high levels of debt which they could not pay. 

That debt got slowly converted over time from bilateral to multilateral debt, as they went to the concessional windows. But this 

problem has been existing for a couple of decades, and failure to 

reach high export growth rates would be one of the main causes of 

this debt, going back since the 1970s. 

Mr. HART. Thank you, Congressman. 

There is a lot of, many parts to your question, and I am not sure 

I will do justice to all of them. Let my try. 

First of all, I do not think it would be correct to say that the last 

40 years of development aid have been a categorical failure. Life 

expectancy rates in the developing world from World War II to the 

1990s was actually increasing, which is a real output, to use your 

word, of direct assistance. Then HIV/AIDS began to take its toll, 

particularly in Africa, and we have seen life expectancy decline. 

That is not to say that I disagree with everything you are saying. 

I do actually agree. I think we could do a lot better with our development assistance. I think, actually beginning with debt relief 5 

21

years ago, began a trend toward several things that have improved 

U.S. assistance and indeed the global fight against poverty. One is 

that donors are acting better in concert with one another. That 

does, in fact, have a real impact on these countries. 

I think also the ability of countries to leverage money from one 

another increases the impact of assistance. 

I think in no small measure the success, political success, of debt 

relief and the results that we have begun to see, at least the input 

that we have begun to see in these countries with debt relief, have 

helped lay the groundwork for the substantial increase in assistance for HIV/AIDS. Beginning with Mr. Helms in the Senate who 

was a long-time critic of U.S. aid, his support for debt relief and 

then HIV/AIDS helped begin to turn the corner. 

And I think that also has led to the Millennium Challenge Account, which, in my view, is an historic rethinking of the way we 

do development assistance—focusing large amounts of resources on 

well-governed countries, countries fighting corruption and promoting democracy. And we are firm supporters of that program and 

look forward greatly to the Administration implementing this program with haste, because we do think that we will begin to really 

see the results that we are all hoping for, as well as revealing the 

credibility of aid with the American public and with policymakers. 

Mr. FLOOD. In terms of aid effectiveness, I think that, for one 

thing, we do not often really appreciate some of the smaller improvements that are actually happening on the ground at the micro 

level that do not get built up and put into the global statistics. Because I remember when I was working for the World Bank in Nigeria, I visited a rural community. What was going on there is amazing, even though it will never appear in any statistics anywhere, 

in terms of what was happening with a group of maybe 500 people, 

something like that. 

They had, through technical assistance, introduced new varieties 

of cassava, a basic commodity for them, and they had doubled the 

output of the cassava in a few years time. They had new water 

supply systems, and these were, of course, wells, simple, just wells 

in the middle of a town. Before, the mothers would have to travel 

for miles to get water out of a river which was usually polluted. 

And now, they did not have to travel so far. They could spend their 

time on more productive ventures, and the water that they had 

was pure. It did not cause them to get sick all the time. 

These sorts of things do not always show up in the statistics. 

They take a long time to filter up and to spread, and maybe impact 

on, the global economy of that particular country. 

Malawai and Zambia—I have not been there, so I cannot give 

you a very precise answer. But what I can tell you is that one of 

the problems with aid deliveries in the past has been the question 

of ownership. Too often the countries did not really feel that they 

owned the activities that were being financed by the external donors because too much of the time they were the donors’ preferences and priorities and not the local people’s preferences. 

I think an important thing about the Malawai and Zambia experience is that civil society is having a major role which they did not 

so much have in the past. They are really influencing the shape of 

22

the programs, and more than that, they are able to monitor what 

happens. 

Now, even in the HIPC program, it is too early to have any solid 

measures of outputs. You are really stuck, for the time being anyway, mostly with input measures, but the input measures are good. 

I mean, the fact that so many more school children are attending 

primary school in Uganda, I think that is a major accomplishment. 

All the donors that I am aware of, they have programs for teacher 

training, for improving the curriculum. 

In Nigeria, we financed 1 million textbooks, which were geared 

to the local environment, for example, to primary school children. 

So the input side, I think, is important, and I am confident that 

we are going to see some good output measures, output coming out 

of all of this. 

Now, again, I think the development agencies also are improving 

their techniques for measuring outputs, and I think that is a positive sign. 

Mrs. BIGGERT. The gentlewoman from New York, Mrs. Maloney, 

is recognized for 5 minutes. 

Mrs. MALONEY. I have a question for Tom Hart on the ability to 

pay. 

Last year, in the Global Aids Act of 2003, the United States committed to seek deeper multilateral debt relief. The current enhanced Heavily Indebted Poor Countries Initiative sets 150 percent 

debt-to-export ratio as the index of debt sustainability. 

Secondly, the Administration has yet to implement the 10 percent of fiscal revenue measure of ability to pay. So Mr. Hart, and 

GAO, Mr. Flood, if you would like to comment, can you elaborate 

on these two measures of ability to pay and, more broadly, in your 

opinion, has the Administration, the Government, complied with 

the mandate in the Global Aids Act to seek deeper debt relief? 

Mr. Hart? 

Mr. HART. Thank you. I can answer the last question fairly 

quickly, which is, not yet. And again, this hearing, I hope, will spur 

the Administration to consider the recommendation the Congress 

gave them in the AIDS law, building upon the enhanced HIPC 

framework, in beginning to seek deeper relief for these qualified 

countries. 

The primary motivation of this legislation is to change, as you 

said, from 150 debt stock-to-export ratio, which is really in the 

weeds, and I apologize. Very quickly, the reason for that is, I mean, 

it is an arbitrary level. All of these numbers are fairly arbitrary. 

But one assumes that you would need exports, hard currency, in 

order to pay off international debt. So the notion was, great, we 

need to earn money from exports and that will be somehow related 

to our ability to write off international debts. 

The problem with that measure, of course, is not only is it too 

high, but exports, as GAO has mentioned, are incredibly susceptible to shocks and commodity prices change. Uganda, which was 

our star performer under the enhanced HIPC framework, for a 

time actually became unsustainable under their debt portfolio because coffee prices went through the cellar. So no matter how well 

you are doing, your debt sustainability is overly affected by this. 

23

So the notion in the legislation was to more directly apply debt 

relief or to relate debt relief to a country’s ability to pay. These 

countries were spending 25, 30, 40 percent of their government 

budgets on interest on their debts. We were saying, no, that is a 

silly investment of this poor country’s money. They should be 

spending it on putting their girls in school and digging clean water 

wells. So that is what this legislation tries to do. 

As I mentioned earlier to Mr. Frank’s point, the legislation actually does give the Treasury the flexibility to design another similar 

type mechanism if that one is flawed in some way. 

Mr. MELITO. I would just like to add that, how to measure the 

sustainability has been a challenge since the initiative was created. 

There are weaknesses in every measure they have suggested, but 

the World Bank and IMF are actually looking at trying to address 

all of these concerns. Whether or not something will emerge remains to be seen, but they do recognize that there is no perfect 

measure. 

Mr. FLOOD. I was just only going to add the fact that there is 

a real concern about the countries particularly that are suffering 

from HIV/AIDS. They really need to maximize the amount of their 

domestic resources they can use to fight that terrible scourge. That 

is part of the motivation behind the new legislation. 

Mrs. MALONEY. I would like to ask a question about Iraqi debt, 

and even though they are not a HIPC country, there is a lot of effort and focus on Iraq. And I really applaud the Administration’s 

efforts in Iraq for debt relief. 

But I am concerned that by gaining only partial debt relief, and 

I have legislation in with Congressman Leach that would really 

erase all of these debts, with IMF and the World Bank taking the 

leadership role in that by reducing and erasing their debt first. But 

I am concerned that by gaining only partial debt relief, the value 

of outstanding debt may actually increase as the chance that countries might be paid for some of their debt increases. And I am concerned because I do not believe the Iraqi people should be saddled 

with Saddam’s debts, particularly when they were odious debts 

spent for arms and palaces. 

And certainly, I do not think that the American people should be 

sending aid for reconstruction to Iraq that may end up paying for 

debts that were incurred by the former regime. 

Can you, Mr. Hart, address whether you believe the value of 

Iraqi debt outstanding may increase as partial debt relief is accomplished? And again, GAO, Mr. Flood, if you would like to comment? 

Mr. HART. Well, let me handicap myself by saying I am not intimately familiar with the Iraqi debt case. But of course, you are describing a scenario which seems plausible, which is that as the 

Iraqi debt is lowered—and this is true for HIPC countries as well—

what remains becomes more payable. Therefore, the discount value 

of that debt shrinks. You are more likely to have to end up paying 

off the face value than you were before. 

Now, I do think the Iraqi debt case presents an interesting example, of course, and lessons to be learned as we look at other debt 

relief for other countries, which is that, indeed, when Saddam took 

on all of these debts and now he is gone from power, the country 

is left burdened with the debt. And that is, in fact, the case with 

24

many of these African countries, many of these HIPCs. Dictators 

long ago have been replaced in some cases, and in many cases, surprisingly, by multi-party democracies, but being sovereign nations, 

they absorb the history left behind by corrupt dictators. 

One of the notions of Jubilee 2000 and this enhanced HIPC initiative was the idea of providing a clean slate, giving them a fresh 

start, indeed for some of the very reasons that you cited. 

Mrs. MALONEY. Just very briefly, I would like to ask GAO, why 

in the world did you intertwine the two issues? The HIPC program 

is directly focused on poverty alleviation. Helping countries to get 

a level of sustained economic growth is a larger, far more complex 

question. Why did you combine the two when that really is not 

what the HIPC program is, and the amount, as Mr. Frank mentioned, is astronomically larger when you put the two together? So 

I am just curious about your thinking on that. 

Mr. MELITO. Sure. If you agree with the assumption that the export growth rates are overly optimistic—and most people do, and 

even the World Bank itself is agreeing that their growth rates are 

too optimistic—you then have to come up with an alternative set 

of rates. And we chose to use historical, and maybe something a 

little higher would be what someone else would use. But if you use 

lower rates, you suddenly find very large gaps emerge in the 

amount of resources these countries have available. Some of it is 

exports; some of it is debt. 

If we were myopic about the issue and just reported how much 

their debt component was, we would be missing most of the story. 

And we were concerned about how to present the story, and I think 

we were very careful in how we wrote the report in making those 

different components clearly distinct of each other. 

But if we just reported the $8 billion without reporting the export shortfall, I think we would be susceptible in a legitimate sense 

of missing the whole story or missing a big part of the story, so we 

had to report them both. 

Mrs. MALONEY. Thank you very much. 

I ask unanimous consent to place in the record the opening statement of Barbara Lee. 

[The following information can be found on page 41 in the appendix.] 

Mrs. BIGGERT. Without objection, so ordered. 

Now, the gentleman from Texas, Mr. Bell. 

Mr. BELL. Thank you, Madam Chair. 

I would like to thank the panel for your testimony here today. 

I just have a couple of questions. First, for Mr. Melito, and it is 

really a follow-up to something you were discussing with Congressman Frank regarding the situation involving China. You pointed 

out that all of these projections are somewhat difficult. But looking 

at China and realizing that its bubble could burst at some point 

and its demand for developing world exports could be greatly diminished, is there any way for you to tell us here today how that 

might impact some of the projections in your report? 

Mr. MELITO. I want to be quite clear that we actually do not look 

at that level of detail, although those are one of a number of factors 

which create the vulnerability which these countries face in export 

growth. There are many reasons, including potentially a particular 

25

market that was open to them now closing. China right now has 

been increasing its demand for certain commodities, and we do not 

know if that will sustain overtime. 

Mr. BELL. So it would be fair to say, any situation like that 

would impact and could impact your numbers? 

Mr. MELITO. When we used 20 years of historical rates, we wanted to basically cover good years and bad years. If you look at the 

history of these countries, there are a number of years for many 

of these countries, 3, 4 years in a row where they had very rapid 

growth. If you just cut off the story there, you might say the problem is solved. But often those periods of rapid growth are followed 

by periods of large declines that persisted. 

There are always circumstances. You point to a market that 

opened up to them or something, but then something else changed. 

We considered 20 years forward, which is what we did, and the 

most representative is to go 20 years back. 

Mr. BELL. I see. 

Mr. Hart, in your report that you gave us, you point out, on page 

7, after talking about the debt legislation, despite debt legislation 

being law for nearly a year, the Administration does not pursue negotiations with international partners to implement its provisions. 

I am sure you find that a little bit alarming, and probably, the best 

folks to address this question to would be representatives of the 

Administration, but we do not have that opportunity today. 

So I am just curious if you have been able to receive any information on that particular topic as to why the Administration has 

not pursued any negotiations. 

Mr. HART. There are reasons, and yes, we have spoken with 

them about this. And their reasons are varied, including a general 

sense, that at the boards of the Bank and the Fund, there is not 

support for going further. Actually, DATA is an organization that 

works not only here in the United States but in London and other 

capitals around the world. And the sense to improve the HIPC initiative actually is fairly strong, from our perspective. 

Fundamental to their critique is, as I mentioned earlier, a feeling 

that tying debt relief to revenues is a disincentive to collect taxes. 

If you have smaller revenues, then you owe less debt. 

Our response to that has been, as Mr. Flood indicated, there is 

actually no evidence to suggest that that is what has happened, 

that that sort of reverse incentive would take place. But in response, the legislation described actually does try to address that 

and say, come up with another measure that would avoid that disincentive to collect revenues. 

Third, and I think most importantly, and it is cited both in 

Treasury’s report and in GAO’s testimony, is the funding gap of the 

current initiative. They are hesitant to try to increase the relief of 

the current initiative until it has been fully paid for. And that is 

an understandable position. However, I believe the way that both 

GAO and the Administration have presented the shortfall case 

overstates the problem, and I do not mean that lightly. I mean that 

the Administration, with the donor community has already taken 

strides to meet that gap and, as I testified earlier, the World Bank, 

if the World Bank will continue to do what it has already been 

doing, that gap will be substantially reduced. 

26

I think, as a final point, I would just like to advocate for the legislation. It was quite expensive to get rid of a lot of the debt stock 

that was not being serviced. We got rid of this huge amount of debt 

stock at a cost $30 billion, to which the United States contributed 

$1 billion. 

And we have just begun to get at some of the debt that was being 

serviced, thus relieving resources on the ground for building 

schools and wells. Every dollar that we put in from now on, because these countries are actually paying this debt back, actually 

generates benefits on the ground. So the return for the countries 

now is amplified if we take it an incremental step further. 

Mr. BELL. I just have one last question, and I will begin with Mr. 

Flood. And I guess this is really one of the major questions that 

needs to be resolved and is somewhat of a follow-up to what Mr. 

Feeney was saying. 

I certainly understand the need for this debt relief and am fully 

supportive of it. But I think we all fear becoming a precedent or 

an example and that countries will look on future borrowing as 

somewhat artificial borrowing, that at some point, there will be 

enough political pressure brought to bear in the United States and 

across the globe to forget the debt, and it just becomes a recurring 

situation. 

I am just curious what recommendations you all have to keep 

that from happening and keep that from becoming the situation. 

Mr. FLOOD. Well, there are many, many aspects to that. I think 

one is that the countries have to continue to try to address better 

their development problems. I think that we see evidence through 

this HIPC program of some advances in that direction. I mean the 

basic challenge is for the countries themselves to strengthen their 

economies in a way in which they can develop their creditworthiness to continue to be able to borrow. 

On the moral hazard issue, I think that there are several ways 

to address that, but I think that the best one for these very, very 

poor countries is to consider a larger percentage of grant financing. 

I think they are going to have to have that. It would be nice if we 

could say, it should all be grants, but I do not think the donors are 

that generous, that the entire amount that they need would be able 

to be provided through the grant process. 

One thing that is encouraging, again in the HIPC program, is 

that the expected levels of post-HIPC borrowing by these countries 

has been quite modest. I mean, any kind of reckless borrowing has 

not occurred since the HIPC program. As a matter of fact, the 

Bank did the funding projections as to what they anticipate a prudent level of borrowing for these countries would be, and the numbers show that they are borrowing actually less than that right 

now. 

So there is more prudence. I think there ought to be a larger percentage of grant financing in what they receive. The poorest countries are going to, obviously, need more, relatively speaking, than 

the more—well, they are not wealthy, that is not the right word—

but higher-income poor countries, if we can call it that, would require. 

Mr. HART. Just briefly, to amplify that I completely agree. It is 

not DATA’s nor would I assume the Catholic Bishop’s intention to 

27

be here again in Jubilee 2050, to keep coming back because we 

have gotten ourselves into this problem again. 

I have to say that the Administration ought to be applauded for 

their initiative in trying to convert some of these loans to grants. 

It makes absolute sense, and we have supported it. And it is trying, 

in fact, to address that prospective problem, trying to avoid getting 

back into it. 

What we have not sufficiently dealt with are the problems of the 

past. We are still cleaning up some of that mess and have some 

work to do. They are complementary ideas meant to keep the poorest countries from being burdened by an unsustainable debt level. 

Mr. MELITO. As we discuss in our report, the mix of the optimum 

level of grants for each country results in basically the loans they 

do take being ones that they should be able to repay. So it does 

provide an open and honest bookkeeping process, so they get grants 

in those areas where they cannot pay and loans for the resources 

they can repay. 

Mr. BELL. Mr. Hart, I think it is completely fair to say that it 

is not Mr. Flood’s intent to be here in 2050 discussing this same 

subject. 

Mr. FLOOD. Oh, but I beg to differ. 

Mrs. BIGGERT. Thank you very much. 

We will have another round, I guess. 

Let me ask again, Mr. Melito, recent World Bank research suggests that debt thresholds are dynamic, and specifically, they indicate that countries that advance and improve their policies and institutions will be able to sustain higher levels of debt. 

Do you agree with this analysis? And is this concept included in 

the report’s projections, or do the GAO projections assume that all 

countries’ official sector debt is equal? 

Mr. MELITO. The report uses the agreed-upon measure for HIPC, 

which is the 150 percent debt-to-export ratio, which my colleagues 

discussed previously. 

But as I mentioned earlier, there are other possible measures, 

and the World Bank and IMF are exploring those measures, but 

they are not policy yet. If they actually ever change the initiative, 

we would probably in future work integrate that, but it is not the 

policy yet. 

Mrs. BIGGERT. Okay. Then the World Bank this year published 

research providing a substantially different assessment of projected 

debt-to-export ratios through 2023. I am sorry we do not all have 

a graph that shows the difference between the historical and the 

baseline that they use, and it really does show what Mr. Flood was 

just talking about, where it goes down while the historic goes way 

up by 2023. 

So that methodology that they show rejects the reliance on historical data alone being appropriate to project the future debt service burdens. Are you aware of this methodology? 

Mr. MELITO. Sure. They have, in recent years, the last couple of 

years especially, been doing sensitivity analyses where they have 

been trying to look at alternative rates lower than optimistic levels, 

and I am familiar with that. We could debate, and it is reasonable 

to debate what would be a reasonable proxy for the future. 

28

We have done our own analysis on the previous 10 years. Well, 

if you use the previous 10 years, the average would be 4.5 percent 

compared to 3.5 percent for 20 years, still substantially below what 

they project. They project over 7.5 percent, about 7.7 percent. 

If you use the most recent 10 years, you would reduce the burden to around $150 billion instead of $215 billion, and that would be 

a nice, substantial change. 

But the point is, their reliance on overly optimistic data creates 

the impression there is no problem. They provide debt relief at the 

completion point. They then show us these 20-year projections, and 

countries look like they have no problems moving forward. 

Well, we think it would be much more realistic if they actually 

used lower growth rates and showed that HIPC, while it is very 

important and it has done a lot of good work, it is probably not 

going to provide a permanent exit from debt problems. 

Mrs. BIGGERT. Well, would you say that methodology might provide the Treasury with more flexibility? 

Mr. MELITO. This should be something that the Treasury and the 

donors debate. I mean, it seems arcane on the surface what growth 

rates should be used, but there are policy implications. And it 

would probably be useful if the boards of the Fund and the Bank 

actually put this on their agenda to decide for future projections for 

HIPC countries. We should adopt some standard or maybe report 

two or three, a low estimate and a medium estimate and a high 

estimate. But their official projections only use what I consider a 

very high estimate. 

Mrs. BIGGERT. If I might, I would submit the question for the 

record and perhaps you could give the GAO views on the merits of 

using the historical projections to assess HIPC needs relative to the 

World Bank methodology. 

[The following information can be found on page 98 in the appendix.] 

Mr. MELITO. Sure. 

Mrs. BIGGERT. Then my next question is that I understand that 

the World Bank is exploring innovative use of financial instruments and other methods for helping HIPC countries hedge their 

exposure to the commodity price risk and thus stabilize their export sector. 

What are your views on using the hedging instruments to decrease exposure to commodity price volatility? 

Mr. MELITO. That is not something that we looked at, and I really would like to look very closely at it before I could comment on 

that. 

It does seem like it would be difficult limiting it to poor countries 

because you would normally want to involve the private sector, and 

I do not know exactly how they would involve the private sector in 

these transactions. But if they have a paper about this, we could 

review it and potentially make comments. 

Mrs. BIGGERT. And assuming that these instruments could be 

used for hedging, I would suppose then that estimates in the GAO 

report would need to be adjusted? 

Mr. MELITO. Well, again, the paper would be theoretical. I would 

like to see their plan and then ascertain whether it is feasible to 

implement such a plan. 

29

Mrs. BIGGERT. Okay. Thank you. I see everybody has left me. 

Would you like to comment on that Mr. Hart or Mr. Flood? 

Mr. HART. I do not think I have a specific reaction to your questions. They are largely theoretical and ones that I do not have a 

good answer to. 

But I would like to just comment briefly again on GAO’s report. 

Actually, I have very little argument with the assumptions that 

they have made about growth rates. The World Bank and IMF, as 

stated earlier, agree that those are optimistic. 

I guess what I would challenge is the way that it is presented 

to the Committee, as though $375 billion is needed to make debt 

relief successful. That is not the question; that is neither the purpose of the HIPC debt initiative, nor do I think that necessarily 

helps the Congress or this Committee grapple with the issues of 

HIPC that are before it. 

It also, I would just reiterate, counts money we are already 

spending. It also is an 18-year figure and global figure, not just the 

U.S. share. 

In my written testimony, I went through the calculation—and I 

believe you said in your opening statement—that could roughly 

translate into $2.8 billion for the United States. 

Well, if you look at the global AIDS initiative, the Millennium 

Challenge Account, existing bilateral development and multilateral 

development assistance that we give, as well as export financing to 

poor countries, we give a lot more than $2.8 billion already. So 

what this analysis does not, nor could it, provide is an assessment 

of what actions Congress might take and really the state of health 

of the HIPC initiative moving forward. 

Mrs. BIGGERT. Thank you. That really goes back to my first question, which was, were these other factors really accounted for in 

this report? And the answer I guess was, yes, and yet I cannot figure out how that figures in, looking at that number. 

Mr. HART. Well, I do not want to answer on behalf of GAO, but 

my understanding of their analysis is they took the World Bank estimate that the global community would provide. Fair enough. That 

seems logical. It does not assess what the United States actually 

has given or plans to give in development assistance moving forward. 

Mrs. BIGGERT. All right. Thank you. 

Mr. Flood, do you have any comments? 

Mr. FLOOD. No. It is just that I think as I recall—and this may 

have changed, I have not been in the Bank for quite a few years—

but what they used to do is to estimate a reasonable growth rate 

for these countries. In some respects it would have a certain optimism in it so that one could know that we were talking about countries that were on an upward path, moving towards a higher level 

of development. And then they would determine what are the financial implications of that in order to achieve that particular 

growth rate. And then they would fill the amount in, and that is 

where you get your numbers. 

It comes out of starting with a growth rate which you think is 

realistic based on various parameters, and then you fill in the financing plan that is required to get there. 

30

I am not at all an expert in this area, but I would say that I am 

pleased to see that the World Bank, in response to this GAO report, admits that their export projections have been too optimistic 

in the past. I think that is an important point, that they recognize 

that fact. 

I think that perhaps just extrapolating from the past is too pessimistic. I remain more optimistic that the countries will be able to 

move forward to a situation where, through export diversification 

and other measures, plus some support from the outside on trade 

measures, that they will be able to reduce their export volatility 

more than is implied by just the historical rate of growth of exports. 

Mrs. BIGGERT. Okay. In the past then, the Department of Treasury underscored the importance of distinguishing between debt relief, which would be defined as to include only decreased debt service burdens and broader development goals. Would such a distinction imply that the majority of the estimated costs presented in the 

GAO report would not be appropriate when considering debt relief? 

Mr. FLOOD. Well, I think that what I got out of it all is that one 

has to say that debt relief is only one part of the total picture, and 

it is important, but far from sufficient. 

You have to look at a lot of other types of assistance, changes in 

policies as a whole, a large number of different issues which must 

be taken into account in order to project out what the total package 

is that is required. But clearly, there are different types of instruments, different items on the agenda which have different financial 

implications that go well beyond what you can ever expect from a 

debt relief program. 

Mrs. BIGGERT. Thank you. 

Well, seeing that no other questions or questioners—I will note 

that some Members may have additional questions for this panel 

which they may wish to submit in writing. 

Without objection, the hearing will remain open for 30 days for 

Members to submit written questions to these witnesses and place 

their responses in the record. 

Mrs. BIGGERT. I thank you all for being here, your time and your 

expertise and being part of this panel. 

With that, this hearing is adjourned. 

[Whereupon, at 4:10 p.m., the subcommittee was adjourned.] 

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A P P E N D I X

April 20, 2004

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