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[Senate Hearing 109-913]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 109-913
 
                    MULTILATERAL DEVELOPMENT BANKS:
                        PROMOTING EFFECTIVENESS
                        AND FIGHTING CORRUPTION

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 28, 2006

                               __________

       Printed for the use of the Committee on Foreign Relations

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

  

                            C O N T E N T S

                              ----------                              
                                                                   Page
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................

                                                                      1

Easterly, Dr. William, Professor of Economics, New York 
  University.....................................................    26

    Prepared statement...........................................    29

Lerrick, Dr. Adam Director, the Gailliot Center for Public 
  Policy, Carnegie Mellon University.............................    39

    Prepared statement...........................................    41

Levine, Dr. Ruth E., Director of Programs, Center for Global 
  Development....................................................    33

    Prepared statement...........................................    35

Lowery, Hon. Clay, Assistant Secretary For International Affairs, 
  Department of the Treasury, Washington, DC.....................     3

    Prepared statement...........................................     5

Perry, Hon. Cynthia Shepard, U.S. Executive Director, the African 
  Development Bank, Washington, DC...............................    10

    Prepared statement...........................................    13

                                 (iii)

                    MULTILATERAL DEVELOPMENT BANKS:
                     PROMOTING EFFECTIVENESS AND
                           FIGHTING CORRUPTION

                              ----------                              

                        TUESDAY, MARCH 28, 2006,

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:34 a.m. in room 
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar 
[chairman] presiding.
    Present: Senators Lugar and Martinez.

          OPENING STATEMENT OF HON. RICHARD G. LUGAR,
                   U.S. SENATOR FROM INDIANA

    Chairman Lugar. This meeting of the Senate Foreign 
Relations Committee is called to order. The Foreign Relations 
Committee meets to continue our review of the United States 
policy toward the multilateral development banks, the MDBs. 
This is the fifth in a series of hearings on the MDBs that 
began in 2004. Those earlier hearings contributed to this 
committee's understanding of both the value of the MDBs' work 
and problems with their operations that were in need of 
correction.
    In 2005, building on these hearings, I introduced Senate 
Bill 1129, the Development Bank Reform and Authorization Act. 
Through the cooperation of many Members of Congress, most of 
the provisions of this bill were enacted into law in November 
2005. With passage of this legislation Congress made a strong 
statement that it recognizes the critical role of the MDBs in 
achieving developmental goals around the world, but also that 
the operations of these banks must be transparent, efficient, 
and free of corruption.
    The legislation authorizes funds for three of the MDBs and 
contains provisions designed to ensure greater transparency and 
accountability in the banks' operations. It requires the 
Secretary of the Treasury and the United States Executive 
Directors to the MDBs to support clear and public anti-
corruption procedures that are coordinated all across the MDBs. 
Among many provisions, it promotes staff financial disclosure 
procedures, whistle blower protections and the establishment of 
independent ethics and auditing offices. It also encourages 
transparent budget processes for countries that receive budget 
support from the MDBs, and additional disclosure requirements 
for natural resource extraction projects.
    The need for oversight did not end with the passage of the 
MDB reform legislation, which is why we're here today. The 
United States has strong national security and humanitarian 
interests in alleviating poverty and promoting progress around 
the world. The MDBs can help leverage the resources that we 
devote to advancing international development. Since 1960, the 
United States has provided more than $42 billion in direct 
contributions to the MDBs. In addition, the United States has 
provided more than $1.7 billion for debt relief.
    The United States Government must work hard to ensure that 
this money is spent efficiently, both because of our 
responsibility to American taxpayers and because inefficiency 
and corruption undermine the basic humanitarian and foreign 
policy objectives of our participation in MDB financing.
    World bank economists Craig Burnside and David Dollar 
asserted in the American Economic Review that, and I quote, 
``in the presence of poor policies . . . aid has no positive 
effect on growth,'' end of quote. Similarly, the World Bank Web 
site identifies corruption as quote, ``the single greatest 
obstacle to economic and social development.'' Corruption 
associated with MDB loans not only squanders development funds 
and enriches dishonest officials and contractors, it leaves 
impoverished nations with the burden of the resulting debts.
    At the World Bank, President Paul Wolfowitz has continued 
and expanded the anti-corruption policies initiated by his 
predecessor, James Wolfensohn. President Wolfowitz has 
reportedly suspended loans in Argentina, Bangladesh, Chad, 
India, Kenya, and perhaps others because of corruption 
concerns. Although some of these actions may stimulate 
controversy, nations receiving World Bank loans must do 
everything in their power to provide confidence that loans and 
the projects that they fund are free of corruption.
    In Chad, for example, the World Bank has set up a model 
revenue management program to ensure that money generated by 
the Chad/Cameroon oil pipeline would be spent for the good of 
the people. But after the oil pipeline had been built, the 
government of Chad unilaterally reneged on its commitment to 
work under these anti-corruption procedures. The government 
also withdrew its pledge to direct the bulk of the revenue to 
health, education, and rural development. The World Bank had 
little choice but to suspend lending to Chad.
    The importance of getting loans right from the start is 
demonstrated by the case of the Congo. Recently the World Bank 
and the International Monetary Fund agreed to grant debt relief 
to the Republic of Congo, a country that has flouted past anti-
corruption conditions. According to Global Witness, there is 
evidence that hundreds of millions of dollars are unaccounted 
for in Congo's budget. Congo is receiving debt relief despite 
earning billions from oil sales in 2005.
    I'm optimistic about the G-8 agreement for 100 percent debt 
relief for highly indebted poor countries that implement 
policies to foster growth and to reduce poverty. The cycle of 
indebtedness of these poor countries must end. But we will not 
fully achieve this important goal unless we establish an anti-
corruption culture throughout the international lending 
process.
    Everyone involved must understand that the history of the 
MDBs includes well documented and unacceptable cases of waste, 
fraud, and abuse. We know that billions of dollars that could 
have helped some of the poorest people in the world have been 
siphoned off or squandered. We all wish this was not so, but 
such facts place extra burdens on both the banks and the 
nations receiving the loans. And those of us in Congress who 
care about international development and like-minded people 
around the world must shine a light on these programs, not to 
undercut their missions, but rather to ensure that these 
missions succeed.
    We are living in an era when threats posed by terrorism, 
weapons proliferation, international communicable diseases, 
increasing competition for energy supplies and other factors 
have enlightened many of the world's people to the need to 
ensure that poor nations are not left behind. But these same 
threats also place competing demands on national budgets. If 
development projects are transparent, productive, and 
efficiently run, I believe they will enjoy broad support. If 
they are not, they are likely to fare poorly when placed in 
competition with domestic priorities or more tangible security 
related expenditures.
    Today we are pleased to be joined by two distinguished 
panels. First we will hear from Mr. Clay Lowery, Assistant 
Secretary of the Treasury for International Affairs, and 
Ambassador Cynthia Perry, U.S. Executive Director to the 
African Development Bank. They will testify regarding U.S. 
efforts to support the anti-corruption strategies of the 
development banks. On the second panel, we will hear from Dr. 
William Easterly of New York University, Dr. Ruth Levine from 
the Center for Global Development, and Dr. Adam Lerrick from 
Carnegie Mellon University. We welcome our expert witnesses, 
and we look forward to their insights.
    Let me mention before I ask them to commence their 
testimony that I want to acknowledge the presence of a large 
group of State Department Foreign Service Officers who are here 
in this hearing today. They're in the midst, I'm advised, of a 
year-long economics training program at the Foreign Service 
Institute. I understand that they've been studying the works of 
some of our witnesses today and therefore will be acute 
observers. We're delighted that they are here because they will 
be in the field soon making a difference.
    I welcome both of you. You are good friends of the 
committee. Let me say that your full statements will be made a 
part of the record, so you need not ask for permission that 
that occur. I'll ask you to proceed with a summary or the full 
text as you may wish. And then we will have questions from our 
committee members. Secretary Lowery?

    STATEMENT OF HON. CLAY LOWERY, ASSISTANT SECRETARY FOR 
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY, WASHINGTON, 
                               DC

    Mr. Lowery. Thank you sir. Chairman Lugar and Senator 
Martinez I want to thank you very much for the opportunity to 
testify today on the critical imperative facing us at the 
multilateral development banks, and that's the fight against 
corruption. I'm very pleased to be joined at the table by 
Ambassador Perry, the U.S. Executive Director at the African 
Development Bank, who will address the African Banks' efforts 
to combat this affliction.
    The administration has one fundamental policy goal for the 
multilateral development banks, and that is to help poor 
countries reduce poverty by increasing economic growth. The 
world has made major gains against poverty in recent decades. 
In the past 40 years, life expectancy in developing countries 
has increased by over a quarter. In the last 30 years, 
illiteracy has fallen by half, and in the last 20 years over 
400 people have been lifted out of absolute poverty.
    While these statistics are impressive, I posit that many 
more tens of millions of people would have been lifted out of 
poverty if it wasn't for corruption. In other words, corruption 
still remains one of the major impediments to meeting the 
challenge of extreme poverty.
    Corruption nefariously compromises development by 
squandering resources vital to combating illiteracy, disease, 
high infant mortality, and a polluted environment. Corruption, 
in and of itself, is immoral, illegal, and intolerable. In 
short, stealing from the poorest people is appalling. Fighting 
corruption and building strong governance and accountability 
structures in developing countries has been a top priority from 
the first day of the Bush administration, and we know that has 
been a top priority for you, Mr. Chairman, and the whole 
committee.
    We see two great challenges. First, we must attack the 
corruption around the world that keeps nations poor. President 
Bush has launched a series of initiatives to tackle this 
problem head on, from crafting the Monterrey Consensus on 
Financing for Development, creating the Millennium Challenge 
Account, working to build a consensus to provide debt relief to 
the poorest countries, launching anti-corruption initiatives to 
the G-8, to taking on money laundering, terrorist financing, 
and searching out and returning the stolen assets from 
kleptocrats around the world.
    The second challenge is reforming the MDBs to root out any 
corruption within the institutions themselves and to make them 
effective instruments for attacking corruption in borrowing 
nations. As we continue to advance our comprehensive reform 
agenda at the MDBs to address these challenges, we have a 
strong new ally at the World Bank in its new President, Paul 
Wolfowitz. He has made fighting corruption in all areas of the 
World Bank's engagement one of his primary goals since coming 
to the Bank. His leadership, together with this committee's, 
has put even more wind in our sails.
    This committee has held a series of hearings over the last 
few years about progress, or the lack thereof, in fighting 
corruption in and through the multilateral development banks. 
The legislation enacted last year reflects our agenda in both 
fighting corruption and enhancing development results. In our 
view, the core of this agenda is to provide the right 
incentives to individuals, countries, and institutions, build 
the capacity and structures to have strong checks and balances, 
and hold those individuals, countries, and institutions 
accountable for their actions.
    Examples of progress in advancing this agenda include 
something that you mentioned in your statement from the 
Burnside and Dollar study, which is rewarding performance. In 
the mid-1990s, the World Bank provided roughly 40 percent more 
of--on a per capita basis, to the best performers than it did 
to the worst performers. Today that number is approaching 400 
percent. In terms of establishing controls, in just the past 
couple of months the Inter-American Development Bank has 
adopted an ethics code requiring senior management to disclose 
financial assets and income. This ethics code, I just was 
speaking with the President of the IDB this morning, has been 
just put on their Web site. While the Asian Development Bank 
has implemented measures to protect the identity of whistle 
blowers.
    Holding countries accountable, you mentioned President 
Wolfowitz's leadership on this front. I'm not going to repeat 
what you've already said.
    The job of fighting corruption, however, is far from 
finished. For example, we must do more to break the incentive 
structure of rewarding loan volume as opposed to project 
performance. We must continue to harmonize procurement 
standards and procedures. The MDBs must release more project 
documents earlier and we must establish more robust fiduciary 
standards at institutions like the Global Environmental 
Facility.
    Mr. Chairman, there is no easy fix or answer to corruption 
and it remains a very serious impediment to growth, poverty 
reduction, and improved living standards in the world's poorest 
countries. While we have made progress in focusing the MDBs on 
the fight against corruption, we are still a long way from 
victory. As I testify before you today I find reason for 
optimism in the recent leadership taken by President Wolfowitz 
and the other multilateral development banks' heads who just 
recently created a task force across their institutions to 
intensify efforts to tackle the problem of corruption, both 
systematically and systemically.
    We will continue our intense efforts to push this agenda 
and look forward to our continuing cooperation and dialogue 
with Congress on the best way to achieve concrete results. I 
can assure you that we will continue to pursue the cause 
tirelessly. Thank you for your time and I look forward to 
answering any questions you may have.

    [The prepared statement of Mr. Lowery follows:]
    Prepared Statement of Hon. Clay Lowery, Assistant Secretary for 
           International Affairs, Department of the Treasury
    Chairman Lugar, Senator Biden, members of the committee, I'm 
pleased to testify today on a critical imperative facing us at the 
multilateral development banks (MDBs). The administration has one 
fundamental policy goal for the MDBs--to use programs, projects, and 
advice to assist countries in reducing poverty by increasing economic 
growth. There is no issue that undermines that goal more than that of 
corruption. Corruption compromises development like no other 
impediment, resulting in squandered resources and ineffective efforts 
to combat illiteracy, disease, high infant mortality, and a polluted 
environment. This has been a top priority from the first day of the 
Bush administration, and we know it has been a top priority for you, 
Mr. Chairman, and your whole committee.
    We see two great challenges. First, we must attack the corruption 
around the world that keeps nations poor. President Bush has launched a 
series of initiatives to tackle this problem--from crafting the 
Monterrey Consensus on Financing for Development, to creating the 
Millennium Challenge Account, to launching anti-corruption initiatives 
through the G8, to taking on money laundering, terrorist financing, and 
searching out and returning the stolen assets from the kleptocrats of 
the world.
    The second challenge is reforming the MDBs to root out any 
corruption within the institutions themselves and to make them 
effective instruments for attacking corruption in borrowing nations.
    We are advancing a comprehensive reform agenda at the MDBs to 
address both of these challenges. And we have a strong new ally at the 
World Bank in its new President, Paul Wolfowitz. He has made fighting 
corruption in all areas of the World Bank's engagement one of his 
primary goals since coming to the Bank. Examples of this commitment 
thus far include:

   Chad where the Bank has suspended disbursements in response 
        to the government's recent unilateral amendments to the 
        Petroleum Revenue Management Law, which was negotiated with the 
        World Bank to improve transparency and ensure allocation of oil 
        revenues to priority sectors such as health and education;

   India where the Bank has held up consideration of a health 
        project due to concerns about procurement irregularities and 
        has suspended disbursements of approximately $400 million for 
        transportation projects due to safeguard violations;

   Republic of Congo, where concerns about allegations of 
        corruption in the state-owned oil company resulted in President 
        Wolfowitz's insisting on the significant strengthening of 
        conditions for debt relief under the HIPC initiative;

   Uzbekistan where consideration of the Country Assistance 
        Strategy has been delayed due to good governance concerns;

   The Bank's Department of Institutional Integrity (INT), 
        which President Wolfowitz has reinvigorated and restructured to 
        make its authority clear and its operations more effective.

    The United States supports President Wolfowitz's leadership on 
corruption and his progress to date. We also sought and continue to 
support the recent commitment of all MDB Heads to harmonize their 
strategies in the fight on corruption. But the job is far from 
finished, and we will continue to work with all the MDBs to advance the 
anti-corruption agenda as our highest priority.
 progress made and the u.s. plan to further the anti-corruption agenda
    Only 10 years ago did the discussion of corruption begin in earnest 
at the MDBs, thanks in large measure to James Wolfensohn, former 
president of the World Bank. But U.S. leadership also played an 
important role in focusing the discussion and providing support for 
efforts on anti-corruption reform. The result is that each MDB has 
recognized the importance of fighting corruption and, with varying 
degrees of success, has taken on reforms at both the country and the 
institutional level.
    Fighting corruption is not easy, however, even in the United 
States, where there are high fiduciary standards, well developed legal 
systems, and a relatively open and transparent society that demands 
accountability. For countries where institutions and standards are 
weak, where the political system is neither accountable nor 
transparent, and where individuals may have been beaten down and become 
resigned to corruption as a way of life, fighting this scourge is an 
extremely daunting challenge. Although the MDBs have developed and 
mobilized a variety of tools to focus on the quality of public-sector 
institutions, the World Bank's Review of Development Effectiveness for 
2004 indicates that there is ``little evidence that governance is 
improving and corruption decreasing.'' Because of corruption's 
pervasive nature, deep institutional changes are necessary across the 
multilateral development banks in order to make real progress in the 
fight.
    That is why we appreciate the added attention to these efforts that 
this committee has provided in recent years. We fully support the 
implementation of the policy goals laid out in the fiscal year 2006 
appropriations legislation, and in particular--we endorse the aim of 
the legislation to improve transparency of operations, link project 
results to staff performance, strengthen procurement standards, and 
enhance coordination across the MDBs on definitions of fraud and 
corruption and cross-debarment procedures. These are important, 
necessary, and logical steps in eliminating corruption. In support of 
these goals, each U.S. Executive Director has developed an action plan 
for implementation, including time lines.
    To make inroads on corruption, there must be a system of mutual 
accountability in place. To strengthen the system of accountability, 
the most critical areas of focus for the anti-corruption campaign 
involve four key policy objectives: strengthening institutional 
transparency and accountability, promoting good governance in recipient 
countries, improving fiduciary safeguards, and advancing the results 
agenda.
             institutional transparency and accountability
    To protect against internal corruption, it is essential to ensure 
that each MDB has its own house in order. This committee has held a 
series of hearings over the last few years about progress--or the lack 
thereof--in fighting corruption in these institutions. Instead of 
recapping all of that, I thought it would be most valuable to highlight 
where, with strong backing from the United States, the MDBs have made 
specific progress in the areas related to the legislation you passed 
last year, with particular emphasis on the areas of harmonizing anti-
corruption and procurement efforts, strengthening whistleblower 
protections, increasing transparency, and building internal mechanisms 
to ensure accountability.
    In order to strengthen the operations of the internal investigative 
function in each institution, the MDBs must move forward to standardize 
their definition of corruption and to ensure that compliance and 
enforcement actions taken by one institution are supported by all 
others. To this end, we welcome the recent announcement by the Heads of 
MDBs to establish a task force to develop a uniform Framework for 
Preventing and Combating Fraud and Corruption for agreement by the 
September World Bank Annual Meeting. This is the first step in 
harmonizing the MDB response to corruption. A working group will 
continue to refine these definitions and work toward harmonizing other 
aspects of the sanctioning of fraud and corruption at the MDBs. In 
fact, the Inter-American Development Bank (IDB) has already adopted the 
current definitions agreed to by the working group, including a common 
cross-debarment policy.
    The MDB's whistleblower policies also bear reviewing, as it is 
critical that employees feel they can report abuse without reprisal. We 
see the strengthened INT operations at the World Bank as one way of 
supporting whistleblower protections, but all the MDBs need to 
continually update their whistleblower policies to reflect best 
practices in the public and private sectors. The Asian Development 
Bank, for example, has recently implemented measures to protect the 
identity of whistleblowers, including secure phone lines, emails, faxes 
and confidentiality procedures and is planning further enhancements.
    Another way to improve accountability is through increasing 
transparency of operations at the MDBs. The U.S. insistence on 
institutional transparency over the last several years has led to 
revised disclosure policies at virtually all the development 
institutions. Just last month, for example, the Board of Directors at 
the International Finance Corporation (IFC) approved a new policy that 
includes the presumption of disclosure of non-proprietary information 
about IFC activities and the release of Board minutes.
    Internal audit departments can play a key role in strengthening the 
accountability of the institutions themselves. We are encouraged that 
the World Bank's Internal Audit Department (IAD) is implementing a 
strong audit work program. IAD, reporting regularly both to President 
Wolfowitz and the Board's Audit Committee, is making significant 
contributions to risk management of the World Bank Group and to 
increasing the efficiency and effectiveness of the Group's operations. 
It is important that internal audit function in all the MDBs be given 
appropriate status by management and be provided adequate staff and 
resources to conduct audits and to follow up to ensure the 
implementation of recommendations. The progress to date at all 
institutions is commendable, and it is encouraging that the MDBs are 
taking action on these issues, thanks in no small part to the advocacy 
of the U.S. Government on these issues.
                 good governance in recipient countries
    In order to make inroads on corruption at the country-level, 
however, the MDBs need to help countries improve accountability by 
increasing country capacity and advocating good governance. This is an 
area in which the MDBs have committed significant resources, but 
unfortunately projects focusing on governance have had mixed success. 
To really be effective in the fight on corruption, the MDBs need to 
continue their work on building governance and institutional capacity, 
but with a better eye to ensuring ownership and results.
    Assistance to help countries build successful and accountable 
public-sector institutions continues to be substantial, with the World 
Bank alone providing over $2.83 billion in fiscal year 2005. When 
adding sectors of law and justice, the assistance to improving 
governance and building capacity equates to roughly 25 percent of total 
commitments of both IBRD and IDA in 2005. Spending on governance 
projects increased by one-third at the Asian Development Bank (AsDB) to 
14 percent of all lending in 2005 and accounted for 15 percent at the 
IDB. The assistance is directed to a wide range of governance issues, 
such as judicial reform to strengthen the rule of law, tax policy and 
revenue collection measures aimed at ensuring tax compliance and 
accountability, fiscal transparency and accountability, and procurement 
reform to help remove incentives for government corruption.
    Despite the challenges in developing countries, there are projects 
that are helping countries make important strides to improve 
governance. In the Philippines, for example, the Supreme Court adopted 
recommendations arising from a recently completed AsDB technical 
assistance project on reforms to the judicial system. These 
recommendations will be implemented under a World Bank loan. In 
Bolivia, the IDB has a project to strengthen capacity in the Finance 
Ministry to develop an e-government procurement program. The program 
will have an additional indirect effect of permitting greater public 
accountability for the Ministry's funds. Recognizing that building 
capacity can be significantly more challenging sometimes than building 
a road or school, we are nevertheless troubled that building governance 
and capacity has produced mixed results.
    Reasons for the mixed results were presented in a recent internal 
AsDB review of the implementation of its anti-corruption and governance 
policies. The AsDB concluded that the Bank has not yet completed the 
process of mainstreaming governance and anti-corruption throughout the 
institution. Challenges included inadequate identification of 
governance and corruption risks in country strategies, too many small 
projects covering too many areas, thinly deployed staff resources, and 
insufficient emphasis on public financial management systems. While the 
review identified a number of weaknesses, the candidness of the report 
and management's decision to prioritize strengthening its anti-
corruption and governance efforts under the next Medium Term Strategy 
illustrate the AsDB's enhanced commitment to fight corruption.
    Despite these challenges, there are promising steps to improve 
governance through the MDBs because of the changing incentives. For 
example, indicators in the World Bank/IFC Doing Business report 
highlight where countries need to dedicate resources to improve the 
business environment. Increasingly countries are asking how they can 
improve their rankings, with the recognition that through improved 
efficiency and systems, there is less government waste, fewer 
opportunities for corruption, and more opportunities for investment.
    At the institutional level, the World Bank has embraced good 
governance as a key area in the focus of its Country Assistance 
Strategies because of its importance to development sustainability. The 
World Bank and IFC, supported by other donors, have developed 
indicators to measure and track country performance in public financial 
management. Finally, the country incentives for good governance are 
driven by the performance-based allocation (PBA) systems, which 
allocate resources of the concessional windows across the MDBs on the 
basis of performance. Scarce resources should go where they will be 
used most effectively, and the PBA systems serve as a critical part of 
this incentive structure. For instance, the AsDF's weighting on 
governance factors in terms of measuring country performance has 
increased from 30 percent to 50 percent in just the last year. And in 
IDA, in the mid 1990s, the best performers received roughly 40 percent 
more on a per capita basis than the worst performers; today that figure 
is over 350 percent.
                   strengthening fiduciary safeguards
    When we think about corruption it is easy to have a picture of 
cases of grand-scale corruption, such as those of former Liberian 
leader Charles Taylor or the late Nigerian dictator Sani Abacha. The 
most egregious cases are often much easier to identify than the much 
smaller abuses, but it is the smaller scale mishandlings that can 
really add up, unless the appropriate fiduciary safeguards are in 
place. Thus, effective MDB project supervision and rules for 
procurement, disbursement, and audit are essential for protecting 
development resources, as well as for achieving and sustaining 
development results.
    Unfortunately, on one key aspect of international standards the 
U.S. is finding itself increasingly at odds with the donor community. 
The harmonization agenda of the OECD Development Assistance Committee 
(DAC) is encouraging development assistance providers to use countries' 
own procurement systems rather than internationally agreed standards. 
The appropriate direction of harmonization should be upward and to a 
widely accepted international standard.
    We believe countries should use the World Bank's procurement 
standards--not only because they are the best in the business--but also 
because the international business community is familiar with them and 
this promotes fair competition. At the other MDBs, we are trying to 
hold procurement standards to the highest-common denominator rather 
than the lowest. We have been urging all the MDBs to harmonize strong 
procurement standards by adopting the World Bank's procurement 
guidelines. The IDB did so last year. Unfortunately the AsDB failed to 
follow suit despite recent attempts to work with them on this. Strong 
procurement and disbursement guidelines create accountability and 
transparency, without which there is room for corruption.
                  results measurement and performance
    A critical win for the U.S. has been the acceptance in the donor 
community of the results agenda--embracing results measurement at the 
country and now increasingly at the institutional level. We believe 
this will improve accountability and effective use of scarce 
development resources. Results measurement is an integral aspect of the 
anti-corruption discussion because it is a way to ensure that resources 
are allocated on the basis of tangible outcomes. Focus on results 
demands country and institutional accountability for actions and 
hopefully can improve institutional efficiency as well.
    The measurable results agenda supported by the U.S. has been 
broadly recognized in the donor community as an essential tool for 
ensuring effective aid delivery at the project level. The good news is 
that now all project documents considered by the Executive Directors of 
the World Bank, AfDB, AsDB, IDB, and EBRD identify project objectives, 
which are subject to subsequent evaluation. The World Bank and AsDB are 
now incorporating results frameworks in all their new country 
strategies. For example, the AsDB's recent Bangladesh country strategy, 
which was the product of extensive consultations with civil society 
groups, comprises detailed and time bound development targets, 
including those on critical structural reforms related to governance.
    Incorporating a matrix of expected results in project planning is 
the first step; however, as a next step, the MDBs now need to ensure 
that effective oversight occurs during project implementation, allowing 
managers to recognize early on when a project is off-track and 
corrective action needs to be taken. The track record on this is 
improving, and one encouraging example of accountability is in Honduras 
where the community monitored all aspects of health and education 
projects and met regularly with World Bank staff. The community 
volunteers assessed the projects on an ongoing basis and were in a 
position to let staff know if things were off-track.
    At the institutional level, the U.S. has pushed for stronger links 
between project performance, staff compensation, and budget 
allocations. The AsDB recently implemented a new performance management 
system that assesses staff on the basis of performance against 
development outputs and rewards the top 10 percent of achievers. The 
World Bank is currently preparing to implement fully an Operational 
Policy of Results Measurement, which will effectively codify the 
importance of results at the center of Bank operations.
    However, despite their commitment to results, significant hurdles 
to the implementation of the results agenda within the institution 
remain. The World Bank needs to link the decisionmaking processes of 
human resources, operations, and the budget, allowing the results 
agenda to have an impact in the form of allocation of resources. The 
IBRD and IDA have not yet fully tied program budgets to results, but 
Bank management anticipates completion of this project by the beginning 
of its 2008 fiscal year. Meanwhile, at all of the MDBs except the IFC, 
there is a missing link to the results agenda as there does not appear 
to be any move to directly link staff or management compensation to 
project performance. Bottom line: while there is progress on the 
results agenda across the MDBs, more needs to be done in terms of 
implementation of results measurement at the institutional level.
    Making results measurement and strong fiduciary policies our 
priority in the MDB reform process serves a distinct purpose in the 
fight on corruption because it helps ensure accountability. In turn, 
accountability ensures that donor resources are used effectively and 
serves as an effective method to decrease the opportunities for 
corruption at the project and institutional level.
                               conclusion
    There is no easy fix or answer to corruption, and it remains a very 
serious impediment to growth, poverty reduction and improved living 
standards in the world's poorest countries. While we have made progress 
in focusing the MDBs on the fight against corruption, we are still a 
long way from victory. As I testify before you today I find reason for 
optimism in the recent steps taken by President Wolfowitz and other MDB 
Heads to intensify their efforts to tackle the problem both 
systematically and systemically. We will continue our intense efforts 
to push this agenda and look forward to our continuing cooperation and 
dialogue with Congress on the best ways to achieve concrete results. I 
can assure you that we will continue to pursue this cause tirelessly. 
Thank you for your time, and I look forward to answering any questions 
you may have.

    Chairman Lugar. Thank you Secretary Lowery for your 
testimony. And I'd like to call now upon Ambassador Perry.

    STATEMENT OF HON. CYNTHIA SHEPARD PERRY, U.S. EXECUTIVE 
     DIRECTOR, THE AFRICAN DEVELOPMENT BANK, WASHINGTON, DC

    Ambassador Perry. Thank you Mr. Chairman, Senator Martinez. 
Distinguished members of the Senate Foreign Relations 
Committee, thank you very much for your invitation to testify 
today. This is my fourth time appearing before this committee 
and I want first to thank you for the encouragement you have 
given me to do some of the terribly hard jobs I've had to do. 
This is another one. This an issue of great importance, 
fighting corruption on the multilateral development banks. I 
have submitted for the record a written statement, but I take 
this opportunity to highlight a few key areas of importance.
    The African Development Bank Group has made significant 
strides in the recent past against corruption, although much 
more remains to be done. We have a new President, Dr. Donald 
Kaberuka, who has made fighting corruption one of his top 
priorities. And the U.S. Executive Director's office has been 
working closely with the Bank to ensure that proper safeguards 
are implemented quickly and that those that already exist are 
strengthened.
    Of course, the fight against corruption cannot be won if 
the right tools are not at the Bank's disposal. Within the 
Bank, there must exist the right mechanisms to prevent, detect, 
and punish corruption. In member states, the right leadership 
must exist to foster a culture of zero tolerance when it comes 
to graft, and to strengthen national systems so that they can 
withstand the scourge of corruption. And, as a donor, we must 
do our part to sustain pressure and demand results.
    Both management and staff of a financial institution must 
be able to rely on systems and processes, in addition to 
corporate ethos, to make the fight against corruption 
effective. With our backing and our constant pushing, the Bank 
established the anti-corruption and fraud investigation unit 
and an oversight committee on fraud and corruption last year. 
The unit will undertake investigations in response to specific 
allegations of corruption and fraud and the oversight committee 
will ensure that punishment is meeted out appropriately. 
Getting this unit fully functional, however has been delayed 
somewhat, but we've worked closely with management to ensure 
this important work proceeds at pace.
    The Bank is also expected to bring to the board a 
whistleblower protection policy in the coming weeks which will 
include the definitions adopted by the MDB taskforce. We need 
to ensure that this policy is both comprehensive and 
successfully implemented.
    To support these efforts, the Treasury Department's Office 
of Technical Assistance agreed earlier this month to provide an 
advisor to this new anti-fraud unit to help develop capacity to 
carry out investigations and to detect fraud. I very much hope 
that this will strengthen African capacity to detect and punish 
corruption.
    The Bank is also updating its guidelines for financial 
governance and financial analysis of projects, which are used 
by all Bank staff as they design and implement projects. The 
completed guidelines should substantially improve portfolio 
quality and performance, and further mainstream the importance 
of fighting corruption in all Bank activities by all Bank 
staff.
    Diagnosis of opportunities for fraud and corruption is 
critical if the fight is to be won and the Bank uses the latest 
diagnostic tools. Country Financial Accountability Assessments, 
Country Procurement Assessment Reviews, and Country Governance 
Profiles, are used to assess operational risks and recommend 
ways to help borrowers fight corruption, restore integrity, and 
promote good governance. Nine Country Governance Profiles, and 
two CFAA's will be done this year.
    The Bank has joined with the OECD through the Partnership 
Against Corruption in Africa, PACA, to help member countries 
strengthen ongoing anti-corruption efforts and to initiate new 
ones. Invitations to join have been extended to 14 countries 
that received debt relief in 2005 from the Bank. In return for 
joining PACA we'll offer them a menu of reform programs to curb 
the supply and demand of corruption, a platform for regional 
dialogue and development of joint programs, and opportunities 
for the exchange of lessons learned.
    The Bank is also an observer of the Financial Action Task 
Force and regularly attends FATF meetings with other 
institutions fighting corruption. This Bank is developing a 
strategy on money laundering and terrorist financing this year.
    In late 2005, the Bank's new COSO internal framework--
control framework was implemented to help ensure that internal 
bank procedures are being followed and that risks are 
appropriately mitigated. In fact, the Bank now collects 
financial disclosure forms for Executive Board members and 
their staff, so that wrongdoing will be exposed before damage 
is done to the institution.
    And finally, the Bank's independent evaluation unit, OPEV, 
pinpoints weaknesses in governance in its member states through 
its variety of evaluation and reports. For example, the Bank 
recently found that while it was doing relatively well in 
Ghana, more had to be done in Mali and Mauritania.
    I must add one note of concern regarding OPEV, Mr. 
Chairman. While we have high regard for the quality and value 
of its work, we have not been able to secure the kind of 
independence for OPEV from Management, and we would like this 
unit to have a very strong--much stronger position. We have 
asked President Kaberuka to revisit this issue.
    The tools of the Bank, Mr. Chairman, when strengthened, 
will help the Bank take on and fight corruption internally and, 
also, in our member states. But the Bank's efforts, in order to 
be successful, have to rely on the second pillar of 
effectiveness, and that is good country leadership.
    Mr. Chairman, it's easy to dictate the importance of 
fighting corruption from a distance. It is much more difficult 
to put in place systems and attitudes that fight graft on the 
ground, on a day-to-day basis. A critical first step is having 
the right leadership. Leadership that is committed to 
eradicating corruption and the decay it causes to institutions. 
Leadership that is devoted to strengthening institutions and 
the rule of law so that judiciaries cannot be undermined and 
treasuries cannot be plundered. Leadership, Mr. Chairman, that 
creates a conducive environment to root out corruption and 
punish the corrupt.
    Through its work with member states, the Bank has helped 
those African governments with the right leadership to build 
safeguards and strengthen institutions. In places like Burkina 
Faso, for example, the Bank is helping develop policies and 
strategies that will fight corruption. The Bank has taken the 
lead in helping Benin and Mauritania build institutions to 
detect corruption and punish the corrupt.
    In other countries, like Nigeria, the Bank has helped 
strengthen the leadership's determination to fight corruption. 
In the--Gambia, the Bank helped get the word out for the 
government's Operation No Compromise, a public awareness 
campaign against corruption.
    However, more still must be done in a number of countries, 
such as you have mentioned, Kenya, Chad, Republic of Congo, and 
Uganda. New allegations of corruption have recently surfaced. 
The Bank is reviewing its engagements with those countries. 
Thus far, the Bank has found that none of its projects in Kenya 
were corrupted. We expect the Bank to design interventions in 
these and other countries. Thus far, the Bank has found that 
none of its projects in Kenya were corrupted. We expect the 
Bank to design interventions in these and other countries with 
a focus on anti-corruption and good governance. The Bank's 
technical assistance and capacity building activities can help 
these countries strengthen their systems to ensure resources 
are not being corrupted.
    More broadly, Mr. Chairman, the Bank is now working to 
build awareness in member states, among governments and the 
people, so that they are aware of the existence and negative 
impact of corruption.
    At my urging, President Kaberuka is organizing a half-day 
seminar on fighting corruption at the African Bank's upcoming 
annual meetings in Burkina Faso in May. Ministers from the 
Bank's 77 member countries will be in attendance, as well as 
other leading personalities from all over the world. I expect 
President Kaberuka to emphasize that there is no place for 
corruption in development, and no place for corruption at the 
African Development Bank itself. In such fora, where 
development leaders join together to review and assess the 
progress they have made, it is more important than ever before 
to make sure this message is heard loud and clear. By 
organizing this event, the Bank is showing leadership on a 
critical issue facing Africa.
    Finally Mr. Chairman, I would like to speak to the recent 
legislation concerning fighting corruption at the multilateral 
development banks sponsored by you and approved by Congress, 
and signed into law by the President. Several of the measures 
you introduced are already being implemented and many more are 
being strengthened. For example, financial disclosures for 
board members are now required, and the Bank's whistleblower 
protection policy is in its final stages of preparation. The 
Bank is also in discussion with other MDBs on implementing 
cross debarment of corrupt firms that are dealing with the 
MDBs.
    On the audit side, I've already mentioned the role we 
played in establishing the anti-corruption and fraud 
investigation unit and our plans to help develop the unit's 
investigative techniques. The new independent review mechanism 
will also build a more responsive and transparent culture 
within the Bank, and in our member states. Given some delays in 
recruitment, however, we will need to continue to press 
management to be sure that these nascent units become 
operational and effective without further delay.
    One particular area, and I've spoken to this before, I will 
focus my near term efforts relates to the independence of 
Bank's evaluation unit. As I mentioned earlier, we will need to 
redouble our efforts with management and other board members to 
bring the African Bank into alignment with other MDBs on this 
important issue.
    As a donor, we will continue to raise anti-corruption to 
the level of global importance that it deserves. For too long 
discussion of corruption has been swept under the carpet by 
donors or watered down to nonexistence in order to satisfy 
supposed exigencies. But without openly discussing the problem, 
one cannot even hope to tackle the problem. Mr. Chairman, I 
believe your leadership on this matter has given voice to 
others, encouraged them to lead, and given strength to all of 
those who stand against corruption.
    Mr. Chairman, progress is being made at the African 
Development Bank, but it will require substantial, ongoing 
efforts by all parties concerned. We will work to strengthen 
the tools we already have, and, as necessary, develop new ones 
to detect and prevent fraud. Working with like-minded leaders 
will help us deliver real development results to the neediest.
    Mr. Chairman, I hope you will agree that while the road to 
fighting corruption is a long one, we started off in good 
stride. Much more must and will be done in our development 
dollars are to make a dent against poverty. While there is no 
room for complacency, and we must remain intense and vigilant 
in our efforts, I believe that the African Development Bank is 
on the move. I thank you for your strong support.

    [The prepared statement of Ambassador Perry follows:]
Prepared Statement of Ambassador Cynthia Shepard Perry, U.S. Executive 
                   Director, African Development Bank
    Mr. Chairman, distinguished Members of the Senate Foreign Relations 
Committee, thank you for your invitation to testify today on an issue 
of great importance, Fighting Corruption at the Multilateral 
Development Banks.
    As former President of the World Bank Jim Wolfensohn noted more 
than a decade ago, ``corruption is a cancer . . .'' It is a cancer on 
the hope and dreams of people living in poverty across the globe, in 
every corner of the world. It is a cancer that eats away at the core of 
what is good and selfless: the fight to eradicate poverty. But 
corruption, as you have rightly pinpointed Mr. Chairman, doesn't start 
or end at the national level. As major international scandals have 
recently proven, corruption is a transnational problem and, it is clear 
that corruption and fraud are commonplace in many international 
institutions charged with fighting this cancer and making the world a 
better place to live.
    The African Development Bank Group has made significant strides in 
the recent past against corruption, although much more remains to be 
done. The new President of the Bank Group, Dr. Donald Kaberuka, has 
made fighting corruption one of his top priorities. Indeed, given his 
experience as finance minister of Rwanda, dealing with a post-conflict 
and fragile country, the Bank's new president is well-placed to know 
just how important institution-building can be. Upon taking office, 
President Kaberuka set the right tone. In his welcome address to Bank 
Staff, he told them that internal controls and the fight against waste 
were everyone's responsibility--not just Management's. Everyone had a 
stake in ensuring the Bank is clean and effective. The U.S. Executive 
Director's Office has been working closely with the Bank's senior 
Management to ensure that proper safeguards are implemented quickly and 
that those that already exist are strengthened.
    Of course the fight against corruption cannot be won if the right 
tools are not at the Bank's disposal. Within the Bank, there must exist 
the right mechanisms to prevent, detect, and punish corruption. In 
member states, the right leadership must exist to foster a culture of 
zero tolerance when it comes to graft and take it upon itself to 
strengthen national systems so that they can withstand the scourge of 
corruption. And, as a donor, we must do our part to sustain pressure 
and demand results.
    Mr. Chairman, let me take each of these areas and detail for you 
where I believe we are and where I believe we need to go from here.
         strengthening the bank's tools for fighting corruption
    Both Management and Staff of a financial institution must rely on 
systems and processes, in addition to corporate ethos, to make the 
fight against corruption effective.
    For the last several years, I have pushed the Bank to create a 
strong fraud and corruption investigation office. With our backing and 
our constant pushing, the African Development Bank established the 
Anti-Corruption and Fraud Investigation Unit in 2005. The Bank's Board 
also approved establishing an oversight committee on fraud and 
corruption. Together, these two functions will comprise an entire 
division of the Bank Group. Getting this unit fully functional, 
however, has been delayed somewhat but we have worked closely with 
management to ensure this important work proceeds apace.
    Once fully functional, this unit will undertake investigations in 
response to specific allegations of corruption and fraud against 
individual staff members or third parties who engage in business with 
the Bank. The Bank is currently developing a Whistleblower Protection 
Policy to bring to the Board in the next few weeks. This policy has 
taken longer than we expected to develop, but we understand that it may 
include several other important provisions, such as voluntary 
disclosure.
    Recently, the Treasury Department's Office of Technical Assistance 
agreed to provide an advisor to the new investigative unit to help the 
Bank and its member countries develop its capacity to carry out 
investigations and detect fraud. We expect this help to be mainstreamed 
in the Bank's member states and to the Bank's lending activities across 
Africa. In this way, we hope to strengthen African capacity to detect 
and punish corruption.
    The African Bank is also updating its Guidelines for Financial 
Governance and Financial Analysis of Projects. These guidelines 
describe and explain the Banks' policies, procedures and approaches to 
the financial governance, management and analysis of projects and 
programs that the Bank finances, and are used by all Bank staff as they 
design and implement projects. Updating the guidelines involves 
numerous workshops with other MDBs and stakeholders, as well as good 
governance experts to exchange state-of-the-art lessons learned and 
best practices. Once completed, the guidelines should substantially 
improve portfolio quality and performance and further mainstream the 
importance of fighting corruption in all Bank activities.
    Diagnosis of opportunities for fraud and corruption is critical if 
the fight is to be won. The Bank continues to use the latest diagnostic 
tools, such as the Country Financial Accountability Assessments (CFAA), 
Country Procurement Assessment Reviews (CPAR), and Country Governance 
Profiles (CGPs), to assess operational risks and recommend ways to 
assist borrowers to fight corruption, restore integrity, and promote 
good governance. CGP diagnostics are now incorporated into all Bank 
governance projects, and are used as a tool in Bank policy dialogues 
with borrowers, particularly in the design of policy-based loans. Last 
year, five Country Governance Profiles, for Madagascar, Djibouti, 
Ethiopia, Namibia and Mozambique, were completed, and an additional 
nine are scheduled for 2006. In addition, the Bank collaborated with 
the World Bank to carryout two CFAAs, in Togo and Uganda, last year, 
and six more are planned for 2006.
    In response to the accord between African leaders and the G8 at the 
Gleneagles Summit in 2005, the AfDB and OECD joined forces through the 
Partnership Against Corruption in Africa (PACA) to support member 
countries in strengthening ongoing anti-corruption efforts and to 
initiate new ones. Through the PACA framework, the two institutions 
merge their experience--both in Africa and internationally--in the 
fight against corruption, money laundering and related activities. 
Working with the OECD, the Bank plans to engage local and international 
partners, including the private sector, so that it can help African 
countries design, implement, and monitor the fight against corruption. 
Invitations to join have been extended to fourteen countries that were 
provided debt relief in 2005. In return for joining the partnership, 
PACA will offer countries a menu of reform programs to curb the supply 
and demand of corruption, a platform for regional dialogue and 
development of joint programs, and opportunities for the exchange of 
lessons learned. The Partnership could be an important tool for the 
Bank as it takes a lead role in raising awareness throughout Africa and 
the world on the costs of corruption.
    The Bank has also assumed its Observer role with the Financial 
Action Task Force (FATF) and regularly attends FATF meetings for 
information gathering and exchange of views with other institutions 
fighting corruption. These include African agencies engaged in the 
fight against money laundering and terrorist financing. In 2005, the 
Bank launched a process of preparing a strategy on money laundering and 
terrorist financing, which is expected to be finalized in early 2006. 
The United States has been pushing for the strategy for several years 
and we hope--once the Board approves the Bank's strategy for the Bank 
to mainstream it into member states' efforts. Working relations have 
also been established with African FATF-Style Regional Bodies (FSRBs) 
for the development of a common approach to tackling money laundering 
and terrorist financing.
    In late 2005, the Bank implemented a new COSO (named for the 
Committee of Sponsoring Organizations of the Treadway Commission) 
internal control framework. The framework is an important tool to check 
that internal Bank procedures are being followed and that risks are 
appropriately mitigated. The COSO framework tests Management policies 
and practices that could lead to fraud, waste, and corruption. The 
system, currently in use in most of the Fortune 500, should strengthen 
Management's ability to detect and stop corruption.
    In addition, the Bank recently instituted a means to ensure that 
corruption and conflicts of interest do not exist among members of the 
Bank's Board. Through a series of financial disclosure forms, we hope 
such conflicts and wrongdoing will be exposed before damage is done to 
the institution's integrity.
    Finally, the AfDB's independent evaluation department, the 
Operations Evaluation Unit (OPEV) continues to support the Bank's 
governance and anti-corruption work. In 2005, it issued 168 evaluation 
reports of Bank projects and activities covering the entire range of 
sectors and countries in which the Bank Group is active. These 
evaluations have helped to pinpoint weaknesses in governance in member 
states. OPEV has also completed a thorough review of the Bank's Country 
Strategy Papers (CSPs), which provide a framework for dialogue with 
borrowing countries on governance and corruption issues. The review 
concluded that the Bank's CSPs have covered governance issues 
adequately for about 84 percent of the cases reviewed.
    Also in 2005, OPEV undertook four Country Assistance Evaluations. 
The CAEs for Ghana, for example, found that the Bank's institutional 
support project, which included a component on governance, had a 
substantial positive impact on the country's institutional development. 
This is particularly helpful in Ghana because it is a HIPC country in 
the process of strengthening its institutions. In the other three CAEs, 
Bank institutional support was rated as modest but with substantial 
room for improvement. Some of the recommendations from the reviews have 
focused on paying even greater attention to governance in future CSPs 
for Mali and Mauritania.
    I should note, Mr. Chairman, one issue of concern regarding OPEV. 
While we have high regard for the quality and value of OPEV's work, we 
have not been able to secure the kind of independence from Management 
we would like this unit. A recent Board resolution--which we opposed--
calls for the head of OPEV to be hired and fired by the Bank's 
President, with only consultation of the Board, not its concurrence. We 
have asked President Kaberuka to revisit this issue.
    Mr. Chairman, the above elements help form a set of tools that, 
when fully implemented and strengthened, can help the Bank take on and 
fight corruption. But the effort--in order to be successful--has to 
rely on the second pillar of effectiveness: good country leadership.
                    creating a conducive environment
    It is easy to dictate the importance of fighting corruption from a 
distance, Mr. Chairman. It is much more difficult to put in place 
systems and attitudes that fight graft on the ground, on a day-to-day 
basis. A critical first step is having the right leadership. Leadership 
that is committed to eradicating corruption and the decay it causes to 
institutions. Leadership that is devoted to strengthening institutions 
and the rule of law so that judiciaries can not be undermined and 
treasuries can not be plundered. Leadership, Mr. Chairman, that creates 
a conducive environment to root out corruption and punish the corrupt.
    Through its work with member states, the African Development Bank 
has helped those member states with the right leadership to build 
safeguards and strengthen institutions. I would like to share a few 
examples with you of this important work and, most importantly, of the 
results the Bank has been able to achieve thus far:

   After developing an anti-corruption program with the help of 
        the Bank in 2003 and 2004, Benin started implementing anti-
        corruption efforts last year, including acceleration of 
        institutional reforms, revamping and strengthening government 
        policies, and consolidation of public finances. With the Bank's 
        help, Benin also established an office to monitor anti-
        corruption efforts.

   Nigeria's anti-corruption campaign is also supported by the 
        Bank, which provides technical assistance and capacity 
        building. Nigeria's National Empowerment and Development 
        Strategy (NEEDS), developed with the Bank's help, aims to 
        enhance public sector capacity for good governance and 
        responsible economic management, including fiscal planning. 
        Nigeria has also established the Economic and Financial Crimes 
        Commission (EFCC) and the Independent Corrupt Practices 
        Commission (ICPC), and the government has acted to remove high 
        ranking civil servants from office on grounds of corruption. 
        The Anti-Money Laundering Act was also reviewed last year, and 
        a revised version is currently with the National Assembly for 
        approval.

   After going off-track from its IMF program in 2003, Gambia 
        engaged the Bank and other international donors on a wide-
        reaching anti-corruption campaign. In late 2003, the Gambian 
        government passed the Financial Institutions, Insurance and 
        Money Laundering Act. The government also launched ``Operation 
        No Compromise,'' a campaign aimed at raising public awareness 
        of corruption and governance issues.

   The government of Burkina Faso has adopted the National 
        Policy to Combat Corruption, and is in the process of 
        establishing a national anti-financial crimes office. In 2005, 
        the government passed the National Policy on Good Governance 
        and both the Bank's Results-Based Country Strategy Paper and 
        two lending programs are designed to better identify and combat 
        corruption.

   In 2005, a new State Inspector General was appointed to help 
        investigate corruption charges in the government of Mauritania. 
        At the same time, the government has moved forward to improve 
        governance and the quality of services it provides to its 
        citizens. Over the course of 2005, the amount of time it took 
        to process a government complaint form has decreased from 1 day 
        to 45 minutes. The government is also working with the AfDB, 
        the World Bank and other donors to strengthen the National Good 
        Governance Program.

   The Ghana Anti-Corruption Coalition (GACC), made up of the 
        government and its partners (including the AfDB), has organized 
        workshops and agreed on an action plan to combat corruption. 
        The Serious Fraud Office (SFO) investigates corruption and the 
        Police Special Investigation Unit, which acts as a financial 
        intelligence unit.

    Of course much more must be done in the Bank's operations to fight 
corruption, both in countries and in Bank-funded projects. In a number 
of countries, such as Kenya, Chad, Republic of Congo, and Uganda, new 
allegations of corruption have surfaced recently. The Bank is reviewing 
its engagements with these countries. Thus far, the Bank has found that 
none of its projects in Kenya were corrupted. We expect the Bank to 
design interventions in these and other countries with a focus on anti-
corruption and good governance. The Bank's technical assistance and 
capacity building activities can help these countries strengthen their 
systems detect and prevent corruption.
    More broadly, Mr. Chairman, the Bank is working to build awareness 
in member states, among governments and the people, so that they are 
aware of the existence and negative impact of corruption. In July 2005, 
the Bank collaborated with other donors to host a regional workshop on 
Pro-poor Local Governance, and preparations are underway in the Bank to 
develop a strategy paper on rebuilding state capacity for better 
governance and development effectiveness. Printed information and 
public workshops are offered to sensitize local populations to the 
problem of corruption. Bank representatives form an integral component 
of this dialogue, so that corruption is fought at every step of Bank 
Group engagement.
    The Bank's role in building conducive and supportive environments 
is potentially very large. And the Bank should use its convening powers 
to raise awareness among member states. At my urging, President 
Kaberuka is organizing a half-day seminar on fighting corruption at the 
African Bank's upcoming Annual Meetings in Burkina Faso in May. 
Ministers from the Bank's seventy-seven member countries will be in 
attendance, as well as other leading personalities, from all over the 
world. I expect President Kaberuka to emphasize that there is no place 
for corruption in development, and no place for corruption at the 
African Development Bank itself. In such fora, where development 
leaders join together to review and assess the progress they have made, 
it is more important than ever before to make sure this message is 
heard. By organizing this event, the Bank is taking an important 
leadership role on the African continent.
                          sustaining pressure
    Finally Mr. Chairman, I would like to speak to the recent 
legislation concerning fighting corruption at the Multilateral 
Development Banks sponsored by you and approved by Congress, and signed 
into law by the President.
    Several of the measures you specifically introduced are already 
being implemented. And many more are being strengthened. For example, 
the African Bank is in the process of presenting a Whistleblower 
Protection Policy, which we hope to have up and running very soon. 
Financial disclosures for Board members are now required. The Bank is 
also in the process of discussing ways to implement ``cross debarment'' 
across the MDBs of corrupt firms found to be doing business with other 
MDBs. This was the topic of a high-level discussion between the Heads 
of the MDBs in Washington in February.
    On the audit side of Bank operations, we have successfully pushed 
for the establishment of an Anti-Corruption and Fraud Investigation 
Unit and I am proud to say that the United States is playing an active 
role to help the Unit develop investigative techniques and mainstream 
them to member states. As I noted earlier, getting this unit 
operational is the key next step, and we will continue to press 
Management on this score.
    The Bank has also established an Independent Review Mechanism which 
consists of a Compliance Review and Mediation Unit and a Roster of 
Experts to help advise the Board, if necessary, on projects that 
adversely affect people. Like the Anti-Fraud and Corruption Unit, 
however, staffing the unit has slowed its full effectiveness. We will 
continue to work to ensure that this becomes an effective mechanism 
that builds a more responsive and transparent culture in the Bank and 
member states.
    One particular area where I will focus my near term efforts is on 
the area of the independence of OPEV. As I mentioned earlier, we will 
need to redouble our efforts with Management and other Board members to 
bring the African Bank into alignment with the other MDBs on this 
important issue.
    As a donor, we have to raise anti-corruption to the level of global 
importance that it deserves. For too long, discussion of corruption has 
been swept under the carpet by donors or watered down to nonexistence 
in order to satisfy supposed exigencies. But without openly discussing 
the problem, one can not even hope to tackle the problem. Mr. Chairman, 
your leadership on this matter has given voice to others, encourages 
them to lead, and gives strength to anyone who stands against 
corruption.
                               conclusion
    Mr. Chairman, progress is being made, but it will require 
substantial, ongoing efforts by all parties concerned. We must 
strengthen the tools we already have to prevent and detect corruption, 
and, when necessary, develop new ones. We must work with like-minded 
leaders to raise awareness and strengthen institutions in the African 
countries. We must demonstrate our strong international leadership that 
helps keep the spotlight shining on fighting corruption. These efforts 
will help the Bank deliver real results to the neediest.
    Mr. Chairman, I hope you will agree that while the road to fighting 
corruption is a long one, we have started off in good stride. While 
there is no room for complacency and we must remain intense and 
vigilant in our efforts, I believe that the African Development Bank is 
on the move. I thank you for your strong support.

    Chairman Lugar. Thank you for that good news. We appreciate 
your testimony. Let me raise some questions. We'll have a 10-
minute question period. I'll ask some questions and then I'll 
yield to my dear colleague, Senator Martinez.
    First of all, Mr. Lowery, there is a U.S. News and World 
Report issue that has just come out focusing on internal 
problems at the World Bank, including that they are alleged to 
be ``kickbacks, payoffs, bribery, embezzlement, collusive 
bidding, plague bank funded projects around the world.'' The 
article states that, ``knowledgeable analysts believe corrupt 
practices may be associated with more than 20 percent of the 
funds disbursed by the World Bank each year.''
    Does Treasury agree with this figure, and, if not, what is 
your assessment? That article focuses American attention and 
probably a wider worldwide audience than our committee has on 
this particular issue.
    Mr. Lowery. Thank you very much. I also read this article. 
The estimates on how much money is lost on the MDBs on 
corruption are, frankly, all over the map. I've actually--I 
went back and looked through the different testimonies that 
I've seen in this committee for the last couple of years, and I 
saw that there have been different figures thrown out by 
different experts and some of it has been refuted by other 
experts.
    We do not have a great figure. Let me just say that my view 
is this--is that, I think Treasury Department's view is not one 
dollar--not 1 dollar should be lost. So how do we do that? We 
need to set up the right types of transparency mechanisms, the 
right types of internal controls, and the right types of 
punishment regimes in order to basically try to root that out. 
So while we don't have a figure, I actually want to, instead, 
focus on how to get rid of any figure.
    Chairman Lugar. Let me just ask about a specific area in 
which the Department of the Treasury is involved. You've been 
supporting the Extractive Industry Transparency Initiative and 
promoting its adoption resource developing countries. What 
steps has the Department of the Treasury taken to press the 
MDBs to require natural resource revenue and contract 
transparency for all projects and lending in the extractive 
industry sector?
    Mr. Lowery. Sir we--obviously--the State Department has the 
lead on the EITI initiative. We work very closely with the 
United Kingdom, which has been one of its biggest proponents. 
At the multilateral development banks, we are--we do a few 
things. First of all, we try to promote very much the idea of 
transparency in budgets. It is a crime that the countries of 
the world that have found oil have not been able to use this 
oil to help their--the betterment of their people.
    Let me just take a recent example. You mentioned in your 
statement earlier the Congo-Brazzaville just received debt 
reduction. The Congo-Brazzaville is a very, very poor country. 
The average person there lives on basically 2 dollars a day. 
And they are quite indebted. So there's an understanding as why 
they should get some debt relief. But, at the same time, there 
has been allegations of corruption in the government, some of 
them are very related to the oil sector and the National Oil 
Company. And what we supported and actually pushed very hard 
on, and President Wolfowitz supported, was basically, we 
provide the debt relief but we do it under a few different 
things. First is we would get annual certified audits of the 
National Oil Company during the time that it was getting debt 
relief, that's something that has not been happening in the 
past. Second, we basically said that we would put into escrow 
funds from the interim debt relief that could be monitored and 
overseen by Congolese civil society and by external experts. 
And third, we required that government officials disclose their 
assets and divest any financial holdings that they might have 
in the oil company.
    So we are very concerned about this problem. We agree with 
you and we're trying to push this both at the more systematic 
level, which is EITI, but also at the country level.
    Chairman Lugar. All right. I appreciate that emphasis. 
Anecdotally, let me mention that Senator Barack Obama of this 
committee and I had the privilege of visiting Azerbaijan in 
early September of last year. They are not into the banks for 
loans presently, in large part because they have become 
suddenly wealthy. But the British petroleum platforms out in 
the Baku Harbor and the Baku-Ceyhan pipeline have brought 
extraordinary revenues. I raised this question with the 
President of Azerbaijan and his answer was encouraging, that 
they're going to adopt what he called the Norway Plan. The 
Norway Plan roughly is to set up these extractive incomes from 
oil, or natural gas that will be coming in two years along the 
same pipeline, into sort of an endowment for the country. They 
plan to extract the income as it proceeds. If that's the case, 
it will be a wonderful course of action. It will be fairly 
unique in the area.
    Perhaps Treasury might have opportunities in its own 
international diplomacy, at conferences or what have you. 
Without calling it the Norway Play or the Azeris plan or what 
have you, the general idea of this is tremendously important. 
Because these resources finally run out and if, furthermore, 
they've been stolen and squandered in the process, they're in 
double or triple jeopardy. This is essentially what we're 
talking about with these loans and these opportunities for 
people.
    You've touched upon the Congo situation. What is our 
general call on that? I, in my opening statement, brought up 
some distressing circumstances and you've reiterated that in a 
way, but are we satisfied sufficiently in the Congo that those 
loans should proceed? And, if not, what sort of stipulations do 
we have for the future?
    Mr. Lowery. Actually, the two points you made are very 
related in terms of the Norway Plan and Congo. The--or the 
Azerbaijan Plan. It's basically--that's actually what we've 
been trying to do in Congo with this debt relief, is work--our 
Executive Director at the World Bank, Bob Holland, worked very 
diligently with the World Bank management who, I think, 
believed the exact same thing we did. The debt relief was kind 
of on its way forward and basically the United States raised 
concerns that we don't know exactly what's happening with the 
money. We're worried about some corruption issues in this 
country. So they established, basically, some of the things I 
just mentioned, including areas of how to kind of take the 
money that's being raised through debt relief, which is 
slightly different than oil revenues, obviously, and put it 
into accounts to use for people for health care programs, 
education, that type of thing. So that's what we were trying to 
do in Congo.
    In Chad, you mentioned this also in your opening statement, 
the--when the World Bank helped fund the pipeline in Chad they 
basically tried to establish something like this Norway fund, 
which is, let's create a rainy day fund. And, because this will 
go away at some point. Obviously that's run into a problem over 
the last few months because the Chadian government passed a--
there was a legislation that passed, I don't think it was 
enacted, but it was passed to basically--we need to take this 
money down because we need to spend resources right now.
    We were very supportive of President Wolfowitz basically 
suspending loans to Chad and going back into negotiation with 
them on this issue because, I mean, quite frankly the World 
Bank was being held at gunpoint. And it was--that was 
unacceptable. And so I think the President realized this is not 
a way to negotiate, we need to have a--and so I think that 
hopefully we can see a way forward for Chad, but it is 
definitely a problem. I mean I think we're pretty supportive of 
things like the Norway Plan, Azerbaijan Plan, I don't know 
Azerbaijan as well, but the Norway Plan.
    Chairman Lugar. I appreciate that point, as well as the 
whole issue of transparency that both of you have mentioned, 
that I mentioned to begin with. I hark back to the Azeris and 
British Petroleum. One of the important things about that was 
the transparency by British Petroleum of how much oil is 
actually going through the pipeline and how much they're 
getting for it, and who is getting the money. Those facts, 
likewise, outside the realm of governments, with private 
businesses are tremendously important in these issues. And I 
have commended the cooperation of the oil companies that are 
involved, that will play a very large role in transparency and 
responsibility by that government.
    Finally, is the administration requesting sufficient funds 
to pay our pledges to the MDBs, including arrearages? What is 
your take on where we stand on that respect? Is the President's 
budget adequate to bring us up to date?
    Mr. Lowery. The President's budget basically reflects a bit 
of a reality, which is that we go into these negotiations for 
replenishment agreements and we try to figure out what is--what 
we want to see in a number in terms of the reforms we want in 
these institutions and how do we take it forward over the next 
few years and then we put a pledge down. And the problem we've 
had is that our pledges, frankly, aren't being met and it's 
losing--we're losing credibility because of it.
    We have an arrears problem that has been growing over the 
last 5 years. In the past, in this administration, we've asked 
for arrears clearances and we haven't gotten them. So I think 
what you're seeing a reflection in the President's budget is 
that we're asking now, let's at least get what we're asking 
for, what we're pledging, what we're putting the name of the 
country on. And then we'll start trying to--if we can get that, 
then we can start making a dent again in our arrears problem.
    So our request is sufficient and the President's budget is, 
obviously I support, and that's because right now we figure 
we--we were listening to Congress, we're trying to do the best 
we can, but frankly at some point we need to actually get what 
we actually ask for.
    Chairman Lugar. That's a very good point and that's the 
reason I asked the question, to elicit your response. In the 
past the Congress may not have paid that much attention to the 
question. So as we begin to have a better dialogue and we make 
progress together, there probably, I'm hopeful, will be more 
enthusiasm by members of this committee and members of this 
body in tackling this, in supporting this. But at the same 
time, we need to have clearer figures from you on what the dues 
are and what the arrearages are so that, at least in the backs 
of our minds if not more forward, we have some idea of where we 
stand.
    If you can furnish, just for the record of this hearing, 
where all of that stands, that would be very helpful to us.
    Mr. Lowery. Absolutely. Our arrears are $738 million. But 
what we'll do is, we just actually put out our justification 
document for the budget over the last week, and we'll make sure 
that this committee gets a full accounting of it.
    Chairman Lugar. Excellent. Very timely.
    Senator Martinez?
    Senator Martinez. Mr. Chairman thank you very much and 
thank you for calling this important hearing on the issue that 
I think is so important to the developing world. I'm delighted 
to hear from the panel this morning. I'm very encouraged, 
Ambassador Perry, by the information you give us on the 
progress being made in the African Development Bank. I would 
just comment that over the years, I think corruption has always 
been a concern in all relationships of these multinational 
banks. But just as much that as I have watched over the years, 
there's also been the misuse or the poor use of funds and the 
lack of measurable results on accountability.
    One of the things that I've also observed is the 
concentration of very grandiose and large projects sometimes 
with, frankly, questionable results. And I wonder, is there any 
move or any direction, Mr. Lowery or Ambassador Perry, as to 
whether or not we should be looking or moving in a direction of 
more people lending, bringing it down to a level of assisting 
families, assisting small enterprises, micro-lending, things of 
this nature that might put money more directly in the hands of 
people. I'm not sure how you get from A to B and to C, but I 
just wondered if there's anything you can comment to me on 
that?
    Mr. Lowery. Thank you very much. This is a terrific 
question because it plays into exactly, I think, the way we 
like to think of these institutions.
    One of the--our biggest priority right now probably, at the 
Inter-American Development Bank, is to promote small and medium 
enterprise assistance. The reason is that the--Latin American 
is going through a lot of changes but we are listening very 
carefully, very carefully to what Latin America is saying to 
us. And I think what we are hearing, and hopefully we're 
hearing it correctly, is the poor people of Latin America don't 
have the opportunities. They don't have the opportunities to 
grow a business, to make a living, to create jobs. And we think 
the Inter-American Development Bank can do a much better job on 
this area. And I was--again, I was just talking to the 
President of the IDB this morning about that very subject and 
we're going to be proposing a resolution, hopefully, at the 
annual meetings next week to basically engage all the Governors 
in a more effective manner on this front.
    In terms of big infrastructure programs, infrastructure is 
important for development. We have to--development has got lots 
of factors to it. We have to worry about social sectors like 
education and health care, and providing clean water. But we 
also have to worry about infrastructure. We need to basically 
make sure that--most poor countries are reliant on agriculture 
and so the poor farmers need to be able to get their products 
to markets, which means building small roads, building ports. 
Ports are tough to build, and there's a lot of corruption, 
unfortunately, associated with ports, so you have be very 
careful about how it's done. The MDBs can play a vital role in 
that, but it has to be a very careful role.
    Ambassador Perry. I'm going to say, first of all, that that 
is not the same problem we have at the Bank. We're not making 
too large loans. We're making too many small loans. And what 
we're trying now to do is to think of ways to increase the size 
of those loans because it takes a lot of our energy and 
management time to process and to evaluate and to watch over. 
So we're trying to get into that mode.
    But we do share the same concern you have, is that the 
money should be going to families, building families, and so, 
therefore, we have an emphasis on lending more to women who 
will take care of that particular interest, and putting more 
money into infrastructural development which, in itself, leads 
to more involvement of women and families in the whole aspect 
of development.
    The President has just appointed two women vice presidents 
who also have that interest of bringing family--the plights of 
families and the whole incidence of illnesses and especially in 
Africa, you know, the HIV/AIDS, but all the attending diseases 
that need to be treated. So we are looking at the plight of the 
poor people.
    We now, as you may now, have our first American vice 
president, who has top executive powers. And we hope that this 
will also help the Bank to move further into delivering to 
families. But I do thank you for your concern about it.
    Senator Martinez. Thank you. I would just ask one other 
question as it relates to the African Bank. I know that, as 
expressed by the Chairman and the acts of this Congress and--
the United States has a strong commitment in this area of 
corruption and fighting corruption, and I wonder if the other 
investors of the Bank, the African Development Bank, share in 
our concern, are equally committed to that effort.
    Ambassador Perry. I would think that the non-African 
members are as concerned as we are about corruption. There are 
only six, let's say EDs who service that area of the non-
African countries.
    I would say there's less concern about corruption among our 
African EDs and therefore, we're spending a lot of time 
educating them to this question of corruption and how it's 
going to hurt their delivery to their constituent countries. So 
they support our efforts in this view, even though it might 
hurt some of their own countries as it goes through, at first. 
They are committed to supporting it.
    Senator Martinez. Thank you, Mr. Chairman.
    Chairman Lugar. Thank you very much, Senator Martinez. I 
have some additional questions for you, Director Perry. I have 
noted and many have stated that the African Development Bank is 
difficult to monitor because its project program and policy 
documents are not widely available. Should the African 
Development Bank more actively disseminate this information to 
civil society? And when should we expect the information about 
each African Development Bank project to be made available on 
the Web site of the Bank?
    Ambassador Perry. Many of the projects are already being 
put on the Web site. And our independent evaluation department, 
the OPEV, is helping us to do this. Our CSPs, for example, 
especially the draft CSPs, are being placed so that people can 
read them. All of our efforts toward anti-corruption are also 
on. The minutes of our board meetings are not on, but we've 
agreed to highlight--put the highlights of our actions on the 
Web. There's a lot of information that is on and is being 
prepared to go on. We're not where we'd like to be, but it is 
moving in that direction.
    Chairman Lugar. President Kaberuka has underscored the 
importance of measuring the development effectiveness of the 
Bank's operation.
    Ambassador Perry. Yes.
    Chairman Lugar. What can be done to promote these 
evaluations of the African Development Bank? Or what kind of 
evaluations has the President promoted at this point?
    Ambassador Perry. He's looking primarily at evaluations of 
our projects in the field, whether or not they are being 
completed the way that they say they are, to speed up 
disbursements, for example, which have traditionally been very 
slow at the Bank. We are concerned about corruption in some of 
the projects, to try to make sure it does not exist. This new 
support that we're getting from the Office of Technical 
Assistance is very important to our ability to do that, and the 
President has really pushed very hard for us to get this 
assistance, and we are grateful for that. That goes to our 
auditing efforts, goes to our whistleblowing efforts, to our 
follow up effectiveness evaluations.
    We really appreciate this kind of support that is coming 
from the Treasury Department to us to help Mr. Kaberuka. But 
he's sort of made a mark in the sand, you know, that corruption 
is the biggest problem we have and that corruption is a bigger 
problem than disease and wars and all the things that we're 
plagued with, and has given it his full attention. I suppose 
that would be his mark in history, that he's been able to 
reduce--can anybody say that they will get rid of it? 
Especially in a tradition where corruption has always existed, 
to remove that from our country-states. It does not have to go 
on within the Bank. And that's what he's after, clean up the 
Bank first, and then let's use this kind of assistance we're 
getting from Treasury to advise our member-states in this whole 
area. He's working very hard at it, he has my faith that he's 
going to succeed.
    Chairman Lugar. You're modest in underscoring your role. 
It's important as the American Director of that Bank, in 
support of the President, that you have knowledge of his 
activities. Likewise as you've cited, this direct aid by the 
Treasury specifically to bring about changes in any corruption 
culture that may be there is important.
    I'm just curious, is there any independent audit of what's 
happening? In other words, when you try to evaluate, either the 
President of the Bank or yourself, you call in technical 
personnel that you have in your employ, but do you bring in 
anybody else to look at this situation?
    Ambassador Perry. Yes, absolutely. We do have independent 
auditors who continually watch over what we're doing and the 
Bank and bring to our attention things that need to be worked 
on. It is a constant kind of watchfulness I think, that did not 
exist in the last regime that has taken place. Now you 
understand that this President has only been there since 
September.
    Chairman Lugar. Yes.
    Ambassador Perry. His first job is to try to get everybody 
to understand where he's going and to get their complicity and 
their strength and energies to make it happen, even though it 
might change some of their lives as well. But we do have the 
internal and the external auditing function to make sure that 
we keep it clear. We haven't reached the success we want, but 
we're working at it. Thank you.
    Chairman Lugar. Let me ask a question which is a 
correlation of one I asked Secretary Lowery. Has the United 
States lost voting shares at the African Development Bank 
because of our failure to fully fund our pledges to the Bank?
    Ambassador Perry. I've got to look through my notes on that 
so I don't say the wrong thing.
    Mr. Lowery. I believe the answer is----
    Ambassador Perry. No, can I please answer it, though? Yes, 
I want to answer it myself.
    I want to answer this because it's very important to me. 
It's of great concern to me. The U.S. has been consistently 
clear to both AFD management and other donors that we fully 
intended to purchase all of our allocated shares, which we lost 
during the last replenishment.
    In addition to the innumerable hours which my staff and I 
in my office have spent over this issue over the last 12 
months, and senior Treasury officials also engaged and wrote 
several letters to convey our interest and concern. And we 
raised it orally with the former and current Presidents, both 
here in Washington and in Tunis. Nonetheless, the Bank strictly 
followed its very tight share transfer reviews and, because we 
were unable to purchase our allocated shares by the deadline, 
another donor stepped forward to do so. So we lost 
approximately .2 percent of our voting shares.
    Because of funding shortfalls now on the fiscal year 2006 
request, we will also be short $1.4 million on April 4, when 
our next payment falls due, and our inability to purchase those 
shares will result in a further reduction of voting share by 
approximately .5 percent. We can use our influence to get the 
management and to ring fence our shares and to hold them until 
we are able to pick them again on subsequent allocations.
    But as it is right now, the rules read that if we forfeit 
it, then another country can move in and pick them up. This 
uncertain situation makes it much more difficult for us to 
secure the changes that we seek, and that you seek. It's 
important to fully fund our fiscal year 2000 request of $5.02 
million. But I must say, I wish it would come before fiscal 
year 2007 because a loss of these shares minimizes our 
influence in changing attitudes not only of our G-7 colleagues, 
but our African colleagues and making things happen at the 
Bank.
    It's more than just really a question of losing voting 
power, but losing influence is most important. And I, you know, 
I hate to see it happen on my watch. So anything that could be 
done to pick up our arrearages would be great as of the 2006 
cut. I think we're at $2 million now in arrears. That amounts 
to something like 189 shares. And these--if our shares are put 
into the general pool, then our G-7 colleagues have already 
said they'll pick up quickly unless their ring fenced so that 
they cannot be touched. So I will be working with our President 
on that. I think I have his confidence. It's a matter of 
keeping up his resolve and making some very difficult 
situations. This is the way I see my role, Mr. Chairman. Thank 
you very much for asking the question because it's very dear to 
my heart.
    Chairman Lugar. It's very important to us, too. As a 
committee, we've taken this project seriously. So have you. But 
our ability to work with others in other nations, our 
credibility for reform, is based upon at least some of the 
thrust of our enthusiasm to pick up the tab for our part of it, 
as we require them to do their share. So we will attempt to 
work together in this situation.
    I would just say to both of you, I am encouraged by what is 
occurring. I would say modestly that our hearings have not been 
particularly very well covered in the United States. The people 
simply lose track of all these banks and what in the world we 
are doing.
    But when we get into specifics of other countries, I can 
assure you that our press secretaries pick up many articles and 
editorials and for many countries it's a revelation of what has 
been occurring. The transparency happens really, because of 
your testimony or our questions or some combination of this. 
And that has brought some movement, I believe. It's made for 
more of a dialogue as our State Department officials or 
Treasury move around the world and visit with people. People 
ask what is going on here and why the deep concern, and you 
have opportunities to witness for this country and our ideals.
    So I appreciate both of you coming this morning and the 
work that you are doing and your cooperation with us and we 
look forward to seeing you again, because this will be an 
ongoing pursuit.
    Ambassador Perry. Thank you Mr. Chairman.
    Chairman Lugar. Thank you.
    Mr. Lowery. Thank you very much Mr. Chairman.
    Chairman Lugar. Thank you Mr. Lowery. Let me now call upon 
our second panel of witnesses: Dr. William Easterly, professor 
of economics, New York University; Dr. Ruth Levine, acting 
President of the Center for Global Development; and Dr. Adam 
Lerrick, Director of the Gailliot Center for Public Policy at 
Carnegie Mellon University.
    We welcome this distinguished panel. Perhaps you were here 
at the onset of the hearing at which I had mentioned that a 
number of Foreign Service Officers of the United States have 
joined us for this hearing.
    We're very pleased to see the article in the Washington 
Post this morning that indicates that Foreign Service Officers 
in a good number of difficult places around the world will 
receive additional compensation for those posts. This is 
relevant to the banks and private firms, that a good number of 
these take their clue from these raises and these evaluations 
as to their compensation of persons who are abroad.
    This, as the article points out, development today was a 
rather little known and uncommented part of legislation that 
actually passed last year in conference with the Senate and 
with the House and now is seeing the light of day in the lives 
of about 80,000 persons in our Government, as well as others 
who are elsewhere.
    I mention this because frequently as we talk about service 
abroad we are talking about multinational firms, multinational 
banks, in addition to our own diplomatic representation, and 
the presence of our country in these countries. These willing 
persons who are prepared to do difficult jobs and to do so 
consistently are tremendously important to recognize and, I 
believe, to compensate. So there is a reason for some rejoicing 
this morning. I take this liberty to simply mention our feeling 
in this committee.
    We look forward to hearing your testimony about the issues 
at hand. And I'm going to ask you to testify in the order that 
I introduced you, which will be, first of all, Dr. Easterly, 
then Dr. Levine, and then Dr. Lerrick. And all of your 
statements will be made a part of the record in full and you 
may proceed as you wish. Dr. Easterly?

STATEMENT OF DR. WILLIAM EASTERLY, PROFESSOR OF ECONOMICS, NEW 
                        YORK UNIVERSITY

    Dr. Easterly. Thank you Mr. Chairman.
    Mr. Chairman, UK Chancellor of the Exchequer, Gordon Brown 
recently gave a compassionate speech about the tragedy of 
extreme poverty afflicting billions of people, with millions of 
children dying from easily preventable diseases. He called for 
a doubling of foreign aid, a Marshall Plan for the world's 
poor. He offered hope by pointing out how easy it is to do 
good. Medicine that would prevent half of malaria deaths costs 
only 12 cents a dose. A bed net to prevent a child from getting 
malaria costs only 4 dollars. Preventing 5 million child deaths 
over the next 10 years would cost just 3 dollars for each new 
mother.
    However, Gordon Brown and many other aid advocates have 
been silent about the other tragedy of the world's poor. This 
is the tragedy in which the West already spent $2.3 trillion on 
foreign aid over the last 5 decades and still has not managed 
to get 12-cent medicines to children to prevent half of all 
malaria deaths. The West spent $2.3 trillion and still had not 
managed to get 4-dollar bed nets to poor families. The West 
spent $2.3 trillion and still had not managed to get 3 dollars 
to each new mother to prevent 5 million child deaths. It's a 
tragedy that so much well-meaning compassion did not bring 
these results for needy people.
    The two key elements that have been missing in foreign aid 
have been feedback and accountability. And I salute your 
efforts to increase the accountability of the multilateral 
development banks. The needs of the rich, of course, get met 
through feedback and accountability. Consumers tell a firm that 
this product is worth the price by buying the product, or they 
decide the product is worthless and return it to the store. 
Voters tell their elected representatives that public services 
are inadequate and the politician, an elected representative, 
tries to fix the problem.
    Profit-seeking firms make a product they find to be in high 
demand, but they also take responsibility for the product. If 
the product poisons the customer, they are liable, or at least 
they go out of business. Elected representatives take 
responsibility for the quality of public services. If something 
goes wrong, they pay politically. If it succeeds, they get the 
political rewards.
    Aid agencies could be held accountable for specific tasks. 
Instead of what we see are extremely weak or, really, even 
absent incentives that follow from the collective 
responsibility of all aid agencies and recipient governments 
for broad goals that depend on many other things besides aid 
agency effort, such as the current, very fashionable campaign 
to achieve the United Nations' millennium development goals.
    If a bureaucracy shares responsibility with many other 
agencies to achieve vague goals that depend on many other 
things, then it is not accountable. Without accountability then 
the incentives for finding out what works is weak. True 
accountability would mean having an aid agency take 
responsibility for a specific, monitorable task to help the 
poor, whose outcome depends almost entirely on what the agency 
does. Then independent evaluation of how well the agency does 
the task will then create strong incentives for performance.
    Although evaluation has taken place for a long time in 
foreign aid, it is often self-evaluation, using reports from 
the same people who implemented the project. Mr. Chairman, my 
students at NYU would not study very hard if I gave them the 
right to assign themselves their own grades.
    The World Bank makes some attempt to achieve independence 
for its Operations Evaluation Department, which reports 
directly to the Board of the World Bank, not to the President. 
However, staff move back and forth between OED, the Operations 
Evaluation Department, and the rest of the rest of the Bank. A 
negative evaluation could hurt staffs career prospects. I 
actually experienced that personally when I wrote a negative 
evaluation and since moved onto another career. The OED 
evaluation is subjective.
    Unclear methods lead to evaluation disconnects like one 
that delicately described in Mali. This is a quote: ``It has to 
be asked how the largely positive findings of the evaluations 
can be reconciled with the poor development outcomes observed 
over the same period and the unfavorable views of local 
people.''
    Even when internal evaluation points out failure, do 
agencies hold anyone responsible or change aid agency 
practices? It is hard to find out from a review of the World 
Bank's evaluation Web site. The Operations Evaluation 
Department indicated how eight, what it called influential 
evaluations, influenced actions, not of the World Bank, but of 
the borrowing government in 32 different ways, but it mentioned 
only two instances of its evaluations affecting behavior within 
the World Bank, and one of them was for the worse.
    The way forward is politically difficult. Truly independent 
evaluation of specific aid efforts. Not overall sweeping 
evaluations of a whole nationwide development program, but 
specific and continuous evaluation of particular interventions 
from which agencies can learn. Only outside political pressure 
on aid agencies are likely to create the incentives to do these 
evaluations. A World Bank study of evaluation in 2000 began 
with the confession, despite the billions of dollars spent on 
development assistance each year, there is still very little 
known about the actual impact of projects on the poor. Mr. 
Chairman, I suggest that's an astonishing statement after a 
half century of the World Bank's existence.
    The World Bank has recently changed the name of its 
Operations Evaluation Department. It is now called the 
Independent Evaluation Group, although it is unclear whether a 
name change is sufficient to achieve true independence. That 
evaluation unit still remains housed within the World Bank and 
still uses the same staff, which still obviously compromises 
their independence.
    I know personally from my time at the World Bank of several 
examples, many examples, of pressure being brought to bear from 
the rest of the Bank on OED, now called the Independent 
Evaluation Group, to alter its evaluation reports. Negative 
reports were censored by the rest of the World Bank until the 
report was more favorable.
    The solution is as obvious as it is unpopular. Create a 
truly independent group of evaluators who have no conflict of 
interest with the World Bank or other multilateral development 
banks. Require all the multilateral development banks to set 
aside some of their budget, such as the part now wasted on 
self-evaluation, for these independent evaluators. Many would 
understandably squirm at the thought of a new evaluation 
bureaucracy, but the good news about evaluation is that it can, 
and should, be one of the least bureaucratic activities 
imaginable. It can be completely decentralized, so that a loose 
network of independent evaluators can write their reports on a 
random sample of each multilateral development bank's projects 
and programs.
    Of course, there has to be incentives to do something as a 
result of the evaluations. Allocations of money to multilateral 
development banks should go up or down depending on their 
average performance as rated by the independent evaluators. 
Also multilateral development banks should get credit for 
discontinuing failed programs, as reported by the evaluators, 
or fixing them if they are fixable, while inaction should be 
correspondingly penalized.
    It is time, after half a century and $2.3 trillion dollars, 
it is time for an end to the second tragedy of the world's 
poor, which will help make progress on the first tragedy, that 
of poverty itself. To gradually figure out how the poor can 
give more feedback to more accountable agents on what they know 
and what they most want and need. The big utopian dreams about 
ending world poverty, such as the U.N. Millennium Development 
Goals embraced by the World Bank, hold nobody accountable for 
anything. Can't we just hold the agents of charity accountable, 
so they do get 12-cent medicines to children to keep them from 
dying from malaria, do get 4-dollar bed nets to the poor to 
prevent malaria, do get 3 dollars to each new mother to prevent 
child deaths?
    Thank you very much Mr. Chairman.

    [The prepared statement of Dr. Easterly follows:]
  Prepared Statement of Dr. William Easterly, Professor of Economics,
                          New York University

           Accountability for Multilateral Development Banks*

                              introduction
---------------------------------------------------------------------------
    *My publisher would like me to announce at this point for copyright 
purposes that this testimony is excerpted from William Easterly, The 
White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So 
Much Ill and So Little Good (The Penguin Press: New York), 2006. This 
does not prohibit the posting of this excerpt on the Internet.
---------------------------------------------------------------------------
    I am driving out of Addis Ababa, Ethiopia to the countryside. An 
endless line of women and girls is marching in the opposite direction 
into the city. They range in age from 9 to 59. Each one is bent nearly 
double under a load of firewood. The heavy load propels them forward 
almost at a trot. I think of slaves driven along by an invisible slave-
driver. They are carrying the firewood from miles outside of Addis 
Ababa, where there are eucalyptus forests, across the denuded lands 
circling the city. They bring the wood to the main city market, where 
they will sell the load for a couple of dollars. That will be it for 
their day's income, as it takes all day to heft firewood into Addis and 
to walk back.
    I later found that BBC News had posted a story about one of the 
firewood collectors. Amaretch, age 10, woke up at 3 a.m. to collect 
eucalyptus branches and leaves, then began the long and painful march 
into the city. Amaretch, whose name means ``beautiful one,'' is the 
youngest of 4 children in her family. She says:

        I don't want to have to carry wood all my life. But at the 
        moment I have no choice because we are so poor. All of us 
        children carry wood to help our mother and father buy food for 
        us. I would prefer to be able to just go to school and not have 
        to worry about getting money.\1\

    The World Bank and other aid agencies aim at reducing this tragic 
poverty. Former President James Wolfensohn of the World Bank put on the 
wall of the lobby of World Bank headquarters the words ``our dream is a 
world free of poverty.'' He wrote about this dream with inspiration and 
eloquence:

        If we act now with realism and foresight,
        if we show courage,
        if we think globally and
        allocate our resources accordingly,
        we can give our children a
        more peaceful and equitable world.
        One where suffering will be reduced.
        Where children everywhere
        will have a sense of hope.
        This is not just a dream.
        It is our responsibility.\2\
The Two Tragedies of the World's Poor
    UK Chancellor of the Exchequer Gordon Brown is also eloquent about 
the tragedy of the world's poor, at least one of their two tragedies. 
In January 2005, he gave a compassionate speech about the tragedy of 
extreme poverty afflicting billions of people, with millions of 
children dying from easily preventable diseases. He called for a 
doubling of foreign aid, a Marshall Plan for the world's poor, an 
International Financing Facility (IFF) to borrow tens of billions more 
dollars against future aid to rescue the poor today. He offered hope by 
pointing out how easy it is to do good. Medicine that would prevent 
half of malaria deaths costs only 12 cents a dose. A bed net to prevent 
a child from getting malaria costs only $4. Preventing 5 million child 
deaths over the next 10 years would cost just $3 for each new mother. 
An aid program to give cash to families who put their children in 
school, getting children like Amaretch into elementary school, would 
cost little.\3\
    However, Gordon Brown was silent about the other tragedy of the 
world's poor. This is the tragedy in which the West already spent $2.3 
trillion on foreign aid over the last 5 decades and still had not 
managed to get 12-cent medicines to children to prevent half of all 
malaria deaths. The West spent $2.3 trillion and still had not managed 
to get $4 bed nets to poor families. The West spent $2.3 trillion and 
still had not managed to get $3 to each new mother to prevent 5 million 
child deaths. The West spent $2.3 trillion and Amaretch is still 
carrying firewood and not going to school. It's a tragedy that so much 
well-meaning compassion did not bring these results for needy people.
Planners Versus Searchers
    A big part of the problem in aid is that aid agencies like the 
World Bank adopt sweeping goals like ending world poverty, for which it 
is impossible to hold them accountable. They follow an unproductive 
Planners' approach to foreign aid, where a more humble but much more 
productive Searchers' approach would work better. In foreign aid, 
Planners announce good intentions but don't motivate anyone to carry 
them out; Searchers find things that work and get some reward. Planners 
raise expectations but take no responsibility for meeting them; 
Searchers accept responsibility for their actions. Planners determine 
what to supply; Searchers find out what is in demand. Planners apply 
global blueprints; Searchers adapt to local conditions. Planners at the 
Top lack knowledge of the Bottom; Searchers find out what the reality 
is at the Bottom. Planners never hear whether the Planned got what they 
needed; Searchers find out if the customer is satisfied. Will Gordon 
Brown be held accountable if the new wave of aid still does not get 12-
cent medicines to children with malaria?
    Indeed, the two key elements that make searches work, and the 
absence of which is fatal to plans, are feedback and accountability. 
Searchers only know if something works if the people at the bottom can 
give feedback. This is why successful Searchers have to be close to the 
customers at the bottom, rather than surveying the world from the top. 
Consumers tell the firm ``this product is worth the price'' by buying 
the product, or decide the product is worthless and return it to the 
store. Voters tell their local politician that ``public services 
stink'' and the politician tries to fix the problem.
    Lack of feedback is one of the most critical flaws in existing aid. 
It comes about because of the near-invisibility of efforts and results 
by aid agencies in distant parts of the world. Many aid critics are 
beginning to explore how to address this flaw, from employing local 
``watchers'' of aid projects to doing independent evaluation of aid 
projects.
    Of course, feedback only works if somebody listens. Once a Searcher 
implements the result of a search, they take responsibility for the 
outcome. Profit-seeking firms make a product they find to be in high 
demand, but they also take responsibility for the product--if the 
product poisons the customer, they are liable, or at least they go out 
of business. A political reformer takes responsibility for the results 
of the reform. If something goes wrong, they pay politically, perhaps 
by losing office. If it succeeds, they get the political rewards.
    Although all governments include bureaucracy, in well-developed 
democratic governments the bureaucrats are somewhat more specialized 
and accountable for specific results to the citizens (although God 
knows they try hard not to be). Active civic organizations and 
political lobbies operate from the bottom up to hold leaders and 
bureaucrats accountable, correcting mistaken steps and rewarding 
positive ones. Rich voters complain if municipal trash collectors don't 
pick up their trash; politicians and bureaucrats have political 
incentives to correct any breakdown in trash collection. Feedback 
guides democratic governments toward supplying services the market 
cannot supply, and toward providing institutions for the markets to 
work.
    At a higher level, accountability is necessary to motivate a whole 
organization or government to use Searchers. In contrast, Planners 
flourish where there is little accountability. Again, outsiders don't 
have much accountability and so are Planners; insiders have more 
accountability and are more likely to be Searchers.
    We will see some of the helpful changes that can happen in aid when 
increasing accountability, shifting power from Planners to Searchers. 
Aid agencies can be held accountable for specific tasks, rather than 
the weak incentives that follow from collective responsibility of all 
aid agencies and recipient governments for broad goals that depend on 
many other things besides aid agency effort. Aid workers now tend to be 
ineffective generalists; accountability would make them into more 
effective specialists.
    To oversimplify by a couple gigawatts, the needs of the rich get 
met because they give feedback to political and economic Searchers, and 
they can hold the Searchers accountable for following through with 
specific actions. The needs of the poor don't get met because they have 
little money or political power with which to make their needs known 
and to hold somebody accountable to meet those needs--they are stuck 
with Planners. The second tragedy continues.
    The prevalence of ineffective Plans is because the results of 
Western assistance happen out of view of the Western public. More 
ineffective approaches survive than they would if results were more 
visible. The Big Plans are attractive to politicians, celebrities, and 
activists who want to make a big splash, without the Western public 
realizing that the Big Plans at the top are not connected to reality at 
the bottom.
Desperate Needs
    The effort wasted on the Plans is all the more tragic when we 
consider some of the simple, desperate needs of the poor, which 
Searchers could address piecemeal. The typical country in Africa has a 
third of the children under 5 with stunted growth due to malnutrition. 
A group of women in Nigeria report that they are too weakened by hunger 
to breast-feed their babies. Throughout Africa, there is a long 
``hungry season'' in between when the stores from the last harvest run 
out and the new crop becomes available. Even in a more prosperous 
region like Latin America, a fifth of children suffer from 
malnutrition. Malnutrition lowers the life potential of children, as 
well as making them more vulnerable to killer diseases. As a woman in 
Voluntad de Dios, Ecuador put it, children get sick ``because of lack 
of food. We are poor. We have no money to buy or to feed ourselves.'' 
\4\
    In Kwalala, Malawi, wells break down during the rainy system 
because of lack of maintenance. Villagers are forced to take their 
drinking water from the lake, even though they know it is contaminated 
with human waste from the highlands, causing diseases like diarrhea and 
schistosomiasis.\5\ Schistosomiasis is caused by parasitic worms passed 
along through contaminated water; it causes damage to the lungs, liver, 
bladder, and intestines.\6\
    An old man in Ethiopia says:

        Poverty snatched away my wife from me. When she got sick, I 
        tried my best to cure her with tebel [holy water] and woukabi 
        [spirits], for these were the only things a poor person could 
        afford. However, God took her away. My son, too, was killed by 
        malaria. Now I am alone.\7\

    Some success stories show that aid agencies can make progress on 
problems like these. There have been successful programs feeding the 
hungry, which means children could get food in Voluntad de Dios, 
Ecuador. Success on expanding access to clean water could help the 
villagers of Kwalala, Malawi. In Mbwadzulu, Malawi, in fact, two new 
boreholes have allowed villagers to discontinue using polluted lake 
water, causing a decline in cholera.\8\ The Ethiopian man's tragedy 
could have been avoided with cheap medicines.
    In Ethiopia, Etenshe Ajele, 36, spent 12 years carrying firewood 
into Addis Ababa. Now she is trying to help women and girls like 
Amaretch. She runs the Former Women Fuelwood Carriers' Association, 
whose members teach girls so they can stay out of the firewood brigade. 
Etenshe Ajele and her colleagues also teach women alternative skills, 
like weaving, and give them small loans for startup capital. ``Most 
women know how to weave but do not have enough money to buy 
materials,'' says Ajele, ``So we provide that and we also help them 
with new and different designs so that they can sell the shawls and 
dresses that they make more easily.'' \9\ This Association is no 
panacea--it still has not reached Amaretch--but it shows the kind of 
homegrown effort that foreign donors could support much more.
Accountability and Evaluation
    If a bureaucracy shares responsibilities with other agencies to 
achieve vague goals that depend on many other things, then it is not 
accountable to its intended beneficiaries--the poor. Without 
accountability, then the incentive for finding out what works is weak. 
True accountability would mean having an aid agency take responsibility 
for a specific, monitorable task to help the poor, whose outcome 
depends almost entirely on what the agency does. Then independent 
evaluation of how well the agency does the task will then create strong 
incentives for performance.
    Although evaluation has taken place for a long time in foreign aid, 
it is often self-evaluation, using reports from the same people who 
implemented the project. My students at NYU would not study very hard 
if I gave them the right to assign themselves their own grades.
    The World Bank makes some attempt to achieve independence for its 
Operations Evaluation Department (OED), which reports directly to the 
Board of the World Bank, not to the President. However, staff move back 
and forth between OED and the rest of the Bank--a negative evaluation 
could hurt staffs career prospects. The OED evaluation is subjective. 
Unclear methods lead to evaluation disconnects like that delicately 
described in Mali:\10\

        it has to be asked how the largely positive findings of the 
        evaluations can be reconciled with the poor development 
        outcomes observed over the same period (1985-1995) and the 
        unfavourable views of local people. (p. 26)

    Even when internal evaluation points out failure, do agencies hold 
anyone responsible or change aid agency practices? It is hard to find 
out from a review of the World Bank's evaluation web site. The OED in 
2004 indicated how eight ``influential evaluations'' influenced actions 
of the borrower in 32 different ways, but mentioned only two instances 
of affecting behavior within the World Bank itself (one of them for the 
worse).
    The way forward is politically difficult--truly independent 
scientific evaluation of specific aid efforts. Not overall sweeping 
evaluations of a whole nationwide development program, but specific and 
continuous evaluation of particular interventions from which agencies 
can learn. Only outside political pressure on aid agencies are likely 
to create the incentives to do these evaluations. A World Bank study of 
evaluation in 2000 began with the confession ``Despite the billions of 
dollars spent on development assistance each year, there is still very 
little known about the actual impact of projects on the poor.'' \11\
    After years of pressure, the IMF created an Independent Evaluation 
Office in 2001. The World Bank in 2004 laudably created a Development 
Impact Evaluation Taskforce. The taskforce will use the randomized 
controlled trial methodology followed by most academic researchers to 
assess the impact of selected interventions on the intended 
beneficiaries. The taskforce has started two dozen new evaluations in 
four areas (conditional cash transfers in low income countries, school 
based management, contract teachers, use of information as an 
accountability tool for schools and slum upgrading programs). It 
remains to be seen if the evaluation results change the incentives to 
do effective programs in the operational side of the World Bank. The 
World Bank also changed the name of its Operations Evaluation 
Department to Independent Evaluation Group, although it is unclear as 
of this writing to what extent this represents real change.
    Despite the use of the word ``independent'' by both the IMF and the 
World Bank, these evaluation units still remain housed within these 
organizations and use the same staff, which obviously compromises their 
independence. I know personally from my time at the World Bank of 
several examples of pressure being brought to bear from the rest of the 
Bank on OED (now called IEG) to alter its evaluation.
    The solution is as obvious as it is unpopular--create a truly 
independent group of evaluators who have no conflict of interest with 
the World Bank or other multilateral development banks. Require all the 
multilateral development banks to set aside some of their budget (such 
as the part now wasted on self-evaluation) for these independent 
evaluators. Many would understandably squirm at the thought of a new 
Evaluation Bureaucracy, but the good news about evaluation is that it 
can--and should--be one of the least bureaucratic activities 
imaginable. It can be completely decentralized, so that a loose network 
of independent evaluators can write their reports on a random sample of 
each multilateral development bank's projects and programs. An 
evaluation unit should be more like The New York Times than like The 
Bureaucracy that Ate Foreign Aid. A minimal staff of ``editors'' can 
simply assign projects to ``reporters'' (evaluators) and publish the 
results. Of course, there has to be incentives to do something as a 
result of the evaluations--allocations of money to multilateral 
development banks should go up or down depending on their average 
performance as rated by the independent evaluators. Also multilateral 
development banks should get credit for discontinuing failed programs 
or fixing them if they are fixable, while inaction should be 
correspondingly penalized.
Success Through Evaluation
    In 1997, the Mexican Deputy Minister of Finance, a well-known 
economist named Santiago Levy, came up with an innovative program to 
help poor people help themselves. Called PROGRESA (Programa Nacional de 
Educacion, Salud y Alimentacion), the program provides cash grants to 
mothers if they keep their children in school, participate in health 
education programs, and bring the kids to health clinics for nutrition 
supplements and regular checkups.
    Since the Mexican federal budget didn't have enough money to reach 
everyone, Levy doled out the scarce funds in a way that the program 
could be scientifically evaluated. The program randomly selected two 
hundred and fifty-three villages to get the benefits, with another two 
hundred and fifty-three villages (not yet getting benefits) chosen as 
comparators. Data was collected on all 506 villages before and after 
the beginning of the program. The Mexican government gave the task of 
evaluating the program to the International Food Policy Research 
Institute (IFPRI), who commissioned academic studies of the program's 
effects.
    The academic findings confirmed that the program worked. Children 
receiving PROGRESA benefits had a 23 percent reduction in the incidence 
of illness, a 1-4 percent increase in height, and an 18 percent 
reduction in anemia. Adults had 19 percent fewer days lost to illness. 
There was a 3.4 percent increase in enrollment for all students in 
grades 1 through 8; the increase was largest among girls who had 
completed grade 6, at 14.8 percent.\12\
    More anecdotally, people in a small village called Buenavista have 
noticed the difference. One mother says that she can feed her children 
meat twice a week now to supplement the tortillas, thanks to the money 
she receives from PROGRESA. Schoolteacher Santiago Dias notices that 
attendance is up in Buenavista's two-room schoolhouse. Moreover, Dias 
says ``because they are better fed, the children can concentrate for 
longer periods. And knowing that their mothers' benefits depend on 
their being at school, the children seem more eager to learn.'' \13\
    Because the program was such a clearly documented success, it was 
continued despite the voters' rejection of the long-time ruling party 
in Mexico's democratic revolution in 2000. By that time, PROGRESA was 
reaching 10 percent of the families in Mexico and had a budget of $800 
million. The new government expanded it to cover the urban poor. 
Similar programs began in neighboring countries with support from the 
World Bank.\14\
    The lesson for aid reformers is: a combination of free choice and 
scientific evaluation can build support for an aid program where things 
that work can be expanded rapidly. The cash-for-education-and-nutrition 
in itself could be expanded, with suitable local adjustments, to more 
countries and on a much larger scale than it is now. A program like 
this in Ethiopia could get the girls around Addis Ababa out of being 
slaves to firewood and get them in school where they can gain the 
skills to escape poverty.
                               conclusion
    Only an elite few in the West can be Planners. People everywhere, 
not just in the West, can all be Searchers. Searchers can all look for 
piecemeal, gradual improvements in the lives of the poor, in the 
working of foreign aid, in the working of private markets, in the 
actions of Western governments that affect the Rest. Many Searchers can 
watch foreign aid at work in many locales around the world and let 
their voice be heard when it doesn't deliver the goods. It is time for 
an end to the second tragedy of the world's poor, which will help make 
progress on the first tragedy. To gradually figure out how the poor can 
give more feedback to more accountable agents on what they know and 
what they most want and need. The Big Plans and Utopian Dreams just get 
in the way, wasting scarce energies. Can't we just hold the agents of 
charity accountable, so they do get 12-cent medicines to children to 
keep them dying from malaria, do get $4 bed-nets to the poor to prevent 
malaria, do get $3 to each new mother to prevent child deaths, do get 
Amaretch into school?
                                endnotes
    \1\ http://news.bbc.co.uk/1/shared/spl/hi/picture_gallery/04/
africa_ethiopian_
wood_collector/html/7.stm
    \2\ World Bank, Our Dream: A World Free of Poverty (November 2000).
    \3\ Gordon Brown speech at National Gallery of Scotland, January 6, 
2005. International Development in 2005: the Challenge and the 
Opportunity, Gordon Brown Press 2005-03.htm
    \4\ WHO and World Bank, Dying for Change, Washington DC, 2003, p. 
10.
    \5\ ibid, p. 11.
    \6\ http://www.cdc.gov/ncidod/dpd/parasites/schistosomiasis/
factsht1_
schistosomiasis.htm
    \7\ WHO and World Bank, Dying for Change, Washington DC, 2003, p. 
21.
    \8\ From Many Lands, Voices of the Poor Volume 3, World Bank, 2002, 
p. 63.
    \9\ http://news.bbc.co.uk/1/shared/spl/hi/picture_gallery/04/
africa_ethiopian_
wood_collector/html/7.stm
    \10\ OECD and UNDP 1999.
    \11\ Judy L. Baker, Evaluating the Impact of Development Projects 
on Poverty: A Handbook for Practitioners; Directions in Development, 
The World Bank, Washington, D.C.
    \12\ I am paraphrasing the summary of Esther Duflo and Michael 
Kremer, Use of Randomization in the Evaluation of Development 
Effectiveness, mimeo MIT and Harvard University, 2004.
    \13\ http://news.bbc.co.uk/1/hi/programmes/crossing_continents/
412802.stm
    \14\ Duflo and Kremer 2004.

    Chairman Lugar. Thank you very much Dr. Easterly. Dr. 
Levine?

 STATEMENT OF DR. RUTH E. LEVINE, DIRECTOR OF PROGRAMS, CENTER 
                     FOR GLOBAL DEVELOPMENT

    Dr. Levine. Thank you very much Chairman Lugar. I am very 
grateful for this opportunity to contribute to an essential and 
timely debate about the effectiveness of multilateral 
development banks.
    To start with an obvious point: to succeed as institutions, 
MDBs have to succeed in their main business, and that's working 
with governments to finance programs that improve welfare, 
productivity, access to credit and other resources, and long 
term prosperity of those who are sometimes called the ultimate 
beneficiaries.
    The ideal of the development enterprise reflects the spirit 
of the well-known Chinese proverb, probably heard several times 
each year in this room: ``Give a man a fish and you feed him 
for a day. Teach a man to fish and you feed him for a 
lifetime.'' So development assistance is not primarily about 
the transfer of financial resources from wealthy countries to 
poor countries for immediate survival. It's about providing a 
foundation of knowledge for long-term development. I am sure 
that you and others who energetically fight corruption do so 
because you believe the funds, if used as intended in the 
project design, will yield those sorts of results. But will 
they?
    Sadly, as Bill Easterly indicated, we now have very few 
ways to answer that question. From my experience at the World 
Bank and the Inter-American Development Bank, as well as my 
recent research, I can tell you that there is much more talk of 
results than measurement of them. The institutional focus of 
performance monitoring remains how much money did we move out 
the door, and what were the outputs? The schools built, the 
teachers trained, the poor women enrolled in microcredit 
programs and others. That goes some distance, but it's not 
nearly enough.
    We don't ask whether those investments made a real 
difference relative to what would have happened without the 
programs. Did more children get to school and stay in school 
and then enter the labor market? Did households raise 
themselves out of poverty?
    For most types of programs financed by the multilateral 
development banks, a body of sound evidence about effectiveness 
is lacking.
    For almost all projects currently in the pipeline, 
virtually no credible information will be generated about 
program impact. For lack of feedback through good impact 
evaluation, the banks continue to repeat failed approaches and 
miss opportunities to expand successful ones. In short, we 
don't know how to fish, we're not learning how to fish, and we 
have very little hope of teaching others how to fish.
    At the Center for Global Development, the Evaluation Gap 
Working Group has spent many months thinking through the 
reasons for the shortcomings in impact evaluation, and 
assessing the demand for knowledge about program performance 
within development agencies, among constituencies, and in 
developing countries. In addition to encouraging efforts to 
improving evaluation and create a culture of learning within 
institutions, we believe this may be a moment to call for a 
collective international initiative to develop an impact 
evaluation agenda, agree to rigorous methodological standards 
and jointly fund design and implementation of a set of 
independent impact evaluations.
    While the overall agenda of evaluation questions should be 
developed by interested parties, including those in this 
chamber, impact evaluations themselves need to be done 
independently of the major international agencies and borrowing 
country governments. Returning to the example of the fish, I 
think we'd all agree that it's better to ask an impartial judge 
to measure a fish with a standard ruler than to ask the 
fisherman to guess at the size of his catch.
    Independent evaluations would be more credible in the 
public eye and less subject to the inappropriate pressures that 
Dr. Easterly referred to within institutions to modify results 
or conclusions, or limit dissemination of unfavorable findings.
    This committee, and the U.S. Congress more generally, can 
take a leadership role in fostering genuine, long-term success 
of the multilateral development banks, as well as other 
development agencies by sending the right signals with three 
clear statements. First, that Congress values and demands the 
type of knowledge about program impact that comes from rigorous 
evaluation. Second, that Congress sees development agencies' 
success first and foremost in terms of whether the many, many 
program experiences that are being financed are yielding 
learning. Some work, some don't, we have to learn from both 
types of programs. And the relevant new knowledge needs to be 
shared with partner governments, as a key ingredient for long-
term, sustained development. And finally, Congress can send a 
signal that it has an interest in exploring new ways to foster 
independent, high quality impact evaluation across the banks 
and other agencies.
    I think if we are really serious about getting to the point 
where the multilateral development banks are fulfilling their 
tremendous potential, and for the efforts to combat corruption 
themselves to be meaningful, we have to systematically, 
rigorously, and independently evaluate the impact of the 
programs that are financed. Thank you.

    [The prepared statement of Dr. Levine follows:]
 Prepared Statement of Ruth E. Levine, Director of Programs and Senior 
                 Fellow, Center for Global Development
    Chairman Lugar, ranking minority member Biden and members of the 
committee: I very much appreciate the opportunity afforded by this 
committee and its staff to contribute to an essential and timely debate 
about how to improve the ability of development banks to support 
progress in low- and middle-income countries. What I will speak about 
today is based on work we have done over the past 2 years, under the 
auspices of the Evaluation Gap Working Group at the Center for Global 
Development. I would like my full testimony to be entered as part of 
the record, and I will summarize my major points.
    To start with an obvious point: To succeed as institutions, 
multilateral development banks must succeed in their main business. In 
the near term, their main business is working with low- and middle-
income governments to finance projects and programs that lead to better 
economic and social conditions than would have occurred without those 
projects or programs. The results from these investments should be 
valuable not only in absolute terms, but relative to the value of 
alternative uses of the funds. In the long-term, the banks' 
contributions must be still greater. They must help establish the 
fundamental conditions under which developing country governments can 
foster the welfare, productivity and prosperity of their people.
    The ideal of the development enterprise, in which multilateral 
development banks play a special role, reflects the spirit of the well-
known Chinese proverb: ``Give a man a fish and you feed him for a day. 
Teach a man to fish and you feed him for a lifetime.'' In other words, 
development assistance is not solely or even primarily about the 
transfer of financial resources from wealthy countries to meet 
immediate survival needs of poorer nations; it is about providing the 
foundation of knowledge that constitutes the basis for long-term 
development. This is particularly true for development banks, who 
principally offer loan financing. Such resources are, by definition, 
appropriate only for investments oriented toward improved outcomes over 
the long-term.
    In contrast, the success of development banks cannot be measured on 
the basis of whether they remain solvent, are on good terms with 
Congress and non-governmental organizations, have contented employees, 
or fight corruption at home and abroad. These probably are all 
necessary, but they are not sufficient. Success of development banks, 
as of other development agencies, rests on whether they can make the 
lives of those who are sometimes referred to as the ``ultimate 
beneficiaries'' better off, in a meaningful and sustained way.
    Knowing whether or not the banks are succeeding in financing 
programs that directly improve people's lives is the core of 
accountability. Assessing this type of performance comes from impact 
evaluations, defined as evaluations that measure the results of an 
intervention in terms of changes in key variables (e.g. mortality, 
health status, school achievement, labor force status) that can be 
directly credited to the program itself, as distinguished from changes 
that are due to other factors. That is, they are evaluations that 
permit attribution of program-specific effects.
    At the World Bank and other development banks, as in the field of 
development more broadly, there has been far more talk of ``results'' 
than measurement of them. Much emphasis has been placed on measuring 
and tracking inputs (such as commitments and disbursements) and 
assessing at the conclusion of a project whether the activities 
anticipated at the design stage have been completed. For example, were 
the schools built, teachers trained, blackboards procured? Did the 
government undertake the hoped-for changes in hospital finance or 
contracting with NGOs for delivery of basic health services? I can tell 
you from my experience within the World Bank and the InterAmerican 
Development Bank, and my observation from my current vantage point at 
the Center for Global Development, the institutional focus of 
monitoring performance remains very much on the ``how much money did we 
move out the door?'' and ``what was financed?''
    Distressingly, very little investment has been made in conducting 
rigorous impact evaluations that are necessary to tell us which 
interventions and approaches do and do not work in achieving the real 
goals of all that spending and program activity. Did those schools, 
teachers and blackboards result in more children attending and 
completing school than would have occurred in the absence of the 
project? Did the innovations in health finance and organization yield 
the results anticipated: less financial exposure of poor people when 
they became ill? Better use of essential health services, and 
ultimately better health? The failure to answer those basic questions 
in a systematic way leaves the banks, and the professionals and high-
level decisionmakers within them, lacking feedback to foster 
improvement; it leaves Congressional overseers, taxpayers and others 
who wish to hold the institutions accountable for results with little 
to go on. I suspect those in this chamber are personally familiar with 
this deeply frustrating situation. I imagine that when you evaluate the 
development bank's performance, you would rather hear the results of 
serious impact evaluations of a sample of important programs than a 
recitation of amounts committed and disbursed, or number of textbooks 
procured.
    Paradoxically, underinvestment in impact evaluation (and consequent 
undersupply of evidence about the relationship between specific types 
of investments and their effects) means that the banks have few chances 
of succeeding in the even more important goal of ``teaching a man to 
fish'': If we don't learn whether a program works in changing the well-
being of beneficiaries, how can a government know if it is worth 
putting the money and effort into similar programs in the future? If we 
don't bother to measure the results that are direct consequences of the 
specific program, how can anyone make a credible case for this, or any 
other type of expenditure of public funds? If we don't learn whether 
and why our investments yield benefits, we have fundamentally failed.
Why So Little Impact Evaluation?
    Several factors explain the lack of impact evaluation.

   Good impact evaluations require a degree of technical 
        sophistication that has only emerged only recently among those 
        who focus on international development, although it has been 
        available to US domestic social programs since the 1970s. 
        (Think, for example, of the landmark studies of Head Start, the 
        tradition of excellent evaluations of within income support and 
        job training programs in the US, and the Department of 
        Education's laudable program evaluation initiatives today.) 
        While many studies compare conditions before and after a 
        project, such comparisons can be quite misleading without 
        attention to other factors that might have also contributed to 
        observed changes. Only by comparing observed changes among 
        those who benefited from a project to some other control group 
        is it possible to begin to disentangle how much of the effects 
        can be attributed to the project or program itself. For 
        example, when HIV prevention programs are evaluated, it is 
        essential to measure the change in HIV incidence with both 
        those participating in the program and a set of similar 
        individuals or communities not exposed to program activities. 
        Without such a comparison, before-after changes are impossible 
        to interpret. A fall in HIV incidence in the population within 
        the program--an observation that would likely be called 
        ``success'' by the program implementers--might simply reflect 
        declines due to non-program factors. A rise in HIV incidence 
        among program participants--something that might be seen as 
        ``failure''--might actually reveal success if incidence is 
        rising more slowly than in the general population. Without 
        appropriate comparisons, we will never know. Separating out the 
        changes due to projects from changes due to other factors is a 
        complicated business that may require random assignment of 
        beneficiaries or other methods. Fortunately, advances in 
        research methods and increasing capacity around the world to 
        conduct such impact evaluations are beginning to surmount these 
        technical difficulties. Interestingly, we have seen how 
        feasible this is through experiences in Mexico, where excellent 
        design of PROGRESA, a conditional cash transfer program, 
        illustrated the possibility and the value of introducing 
        rigorous evaluation within the design a program as it scales 
        up.

   Demand for the knowledge produced by impact evaluations 
        tends to be distributed across many actors and across time. It 
        is only at the moment of designing a new program, however, that 
        anything can be effectively done to start an impact evaluation. 
        At that precise moment, program designers want the benefit of 
        prior research, yet have few incentives to invest in starting a 
        new study. In contrast, they will get rewarded for quickly 
        starting implementation, rather than doing the spadework to 
        undertake a baseline study. Paradoxically, if they do not 
        invest in a new study, the same program designers will find 
        themselves in the exact same position 4 or 5 years later 
        because the of the missed opportunity to learn whether or not 
        the intervention has an impact.\1\ Because information from 
        impact evaluations is a public good, other institutions and 
        governments that might have obtained valuable knowledge from 
        the experience also lose when these investments in learning 
        about impact are neglected.
---------------------------------------------------------------------------
    \1\ O'Donoghue, T., Rubin, M., 1999. ``Doing It Now or Later.'' The 
American Economic Review 89, 103-124.

   Evaluation simply is not seen as the central business of the 
        development banks. When material and human resources are 
        stretched, short-term operational demands will over-ride the 
        longer-term, more strategic imperative of evaluation and 
        learning. As one indication, resources spent to design and 
        implement impact evaluations were not even recognized as a 
        separate item in the World Bank's budgeting system until 2005. 
        Most task managers at the development banks can tell very sad 
        tales about watching their evaluation budgets disappear during 
---------------------------------------------------------------------------
        negotiations with either management or borrowing governments.

   Those rare individuals within large bureaucracies who wish 
        to undertake impact evaluations typically encounter daunting 
        resistance. Program implementers may perceive evaluation as a 
        threat, potentially leading to a cut-off of funding if results 
        are not uniformly positive. At higher levels in an 
        organization, managers who are responsive to demands by 
        shareholders for ``results, results, results'' may prefer to 
        promulgate anecdotes about success, without regard to the 
        strength of evidence, rather than expose the genuine lessons of 
        experience--including the occasions when results were poor. 
        This behavior continues if it is tolerated by the institutions' 
        constituencies and funders, including legislative bodies.

    All of these reasons contribute to the situation observed today: 
For most types of programs, a body of scientific evidence about 
effectiveness is lacking. For almost all projects currently in 
operation or in the pipeline, virtually no credible information will be 
generated about program impact. The banks don't know whether they are 
succeeding, and they are not generating knowledge for the future. For 
lack of feedback, the banks continue to repeat failed approaches, and 
miss opportunities to expand upon successful ones. In short: We do not 
know how to fish. We are not learning how to fish. We have little hope 
of teaching others how to fish.
What Can Be Done?
    Fortunately, some have recognized this problem, care about solving 
it, and are trying hard to find a way to do so. Within the development 
banks, the Independent Evaluation Departments make heroic efforts to 
squeeze knowledge out of the experiences of projects that are conducted 
without baseline data, without comparison groups, frequently without 
any impact indicators at all. This is a difficult and often fruitless 
task, although it does generate the basis for improvements in the 
operational activities, which is very valuable. They deserve additional 
resources so that they can undertake more in-depth studies.
    Separate from the Independent Evaluation Department (previously 
called Operations Evaluation Department), in the past couple of years, 
the World Bank has created a new initiative called the Development 
IMpact Evaluation (DIME) to increase the number of Bank projects with 
impact evaluation components, particularly in strategic areas and 
themes; to increase the ability of staff to design and carry out such 
evaluations, and to build a process of systematic learning on effective 
development interventions based on lessons learned from those 
evaluations. The regional development banks also have undertaken a 
limited set of impact evaluations, within either research or evaluation 
departments. These efforts should be recognized and provided with 
additional institutional resources so that they contribute to a 
cultural change.
    But much more is required, both within and outside of the 
institutions. Indeed, a broader and bolder solution to the problem is 
needed. Three central elements are required for a lasting and genuine 
solution to the problem of lack of knowledge about what works.
    First, we need to use good evaluation methods to get answers to 
important questions. This means identifying the enduring questions, a 
process that would be done best in true partnership between developing 
countries and the range of institutions that provide development 
finance. The World Bank has made a start by identifying a handful of 
thematic areas within its impact evaluation initiative. But the 
benefits of concentrating such studies around enduring questions across 
agencies and countries would be far greater.
    Second, we need to use evaluation methods that yield answers. This 
means increasing the number of impact evaluations that use rigorous 
methods--such as random assignment and regression discontinuity--and 
applying them to a small number of programs from which the most can be 
learned.
    Third, while the overall agenda should be developed by the 
``interested parties,'' impact evaluations themselves need to be done 
independently of the major international agencies and borrowing country 
governments. Returning to the example of the fish, I think we'd all 
agree that it is better to ask an impartial judge to measure a fish 
with a standard ruler than to ask a fisherman to guess at the size of 
his catch! Independent evaluations would be more credible in the public 
eye, and less subject to inappropriate pressures within institutions to 
modify results or conclusions, or limit dissemination of unfavorable 
findings. We have learned about the value of independence in evaluation 
many times over in other fields, including medicine and social programs 
in our own country. The existence of an independent source of impact 
evaluation--geared to a longer time frame and toward learning--will 
avoid many of the inevitable pressures to focus on implementation 
alone, and restrict the communication of bad news to higher levels of 
management.
    At the Center for Global Development, we have spent many months 
thinking through the reasons for the shortcoming in impact evaluation, 
assessing the demand for knowledge about program performance, learning 
about the efforts in the development banks, bilateral agencies and 
developing country governments related to evaluation, and developing 
options and recommendations. In addition to encouraging within-
institution efforts to improve evaluation and create a culture of 
learning, we believe this may be a moment to call for a collective 
international initiative for leading-edge bilateral and multilateral 
development agencies to develop a shared impact evaluation agenda 
(working with interested developing countries), agree to methodological 
standards and, potentially, jointly fund both design and independent 
implementation of impact evaluations on enduring questions in 
international development. We have developed ideas about many of the 
specific functions for such an initiative, and believe that there are 
technically, politically, and financially feasible institutional 
options.
                               conclusion
    This committee, and the U.S. Congress more generally, can take a 
leadership role in fostering genuine, long-term success of multilateral 
development banks, as well as other agencies. This can be done by 
making three clear statements: First, that Congress values and demands 
the type of knowledge about program impact that comes from rigorous 
evaluation. Second, that Congress sees development agencies' success 
first and foremost in terms of whether the program experiences are 
yielding true learning, with relevant new knowledge being shared with 
partner governments, as a key ingredient for long-term, sustained 
development. Third, that Congress has an interest in exploring 
mechanisms to foster independent high quality impact evaluation across 
agencies.
    I firmly believe that the development banks have tremendous 
untapped potential to contribute to improved outcomes over the long 
term--the healthier children, more productive adults, cleaner 
environment and lasting prosperity that we wish for all nations. From 
personal experience as well as recent research, I believe that they 
will not be firmly on the track toward fulfilling that potential until 
the development banks ask, and publicly answer, serious questions about 
the impact of their programs.

    Chairman Lugar. Thank you very much. Dr. Lerrick?

STATEMENT OF DR. ADAM LERRICK, DIRECTOR OF THE GAILLIOT CENTER 
         FOR PUBLIC POLICY, CARNEGIE MELLON UNIVERSITY

    Dr. Lerrick. Senator, I think you're going to hear quite a 
few things over and over again during this hearing--but given 
my reputation as an outspoken critic, they'll just be louder, 
possibly, from me.
    Chairman Lugar. Very well.
    Dr. Lerrick. I will remark that those who say nice things 
about the bank are called economists, and people who say 
critical things are called outspoken critics. However, I 
consider myself a member of the loyal opposition.
    First of all, it's a privilege to appear before the Senate 
Foreign Relations Committee.
    The World Bank has just changed the name of its Operations 
Evaluation Department. This sends a clear signal that the Bank 
has no intention of changing its ways. The new sign on the door 
reads Independent Evaluation Group. The Bank is digging in to 
fend off an increasingly vocal demand for a truly independent 
review of its stewardship of aid. I think what this panel has 
said confirms that.
    After half a century and more than half a trillion dollars, 
there is little to show for World Bank efforts. But we have no 
measure of the Bank's performance except the one it chooses to 
promulgate and no means to validate the wisdom of the 
industrialized world's collective investment decision.
    The optimism of weighty reports cannot cover up the 
realities on the ground. The living standards of the poorest 
nations have stagnated and, in sub-Saharan African, actually 
declined 25 percent over the last 10 years. Thirty-eight 
countries have amassed $71 billion in unpayable multilateral 
loans, encouraged by the Bank's self-serving projections of 
country growth, and on these loans it's going to be the rich 
country taxpayers who now must now make good. Corruption has 
been exposed both within the Bank and in its programs and is 
now estimated at more than $100 billion. Protest is rising 
among Africa's own who seek to stop all aid because it serves 
only to entrench and enrich a series of corrupt elites. Massive 
anecdotal evidence of waste, ineptitude and outright theft can 
no longer be ignored.
    The Bank gives itself good marks and boasts that more than 
three quarters of its projects achieve satisfactory outcomes. 
But when the auditors are captive, when the timing of judgment 
is premature, when the criteria are faulty and when the numbers 
are selectively manipulated, how credible are the conclusions?
    Should we just take the Bank's word for it when U.S. 
taxpayers are being asked to commit more than $2.5 billion per 
annum for the next 40 years?
    Independence at the Bank is purely cosmetic, for a 
temporary change of desk and a new nameplate do not alter the 
signature on the paycheck nor the rewards of the Bank's 
personnel system. The Independent Evaluation Group is a 
department of the Bank like any other, save the ceremony of 
reporting to an executive board that is passive at best, and 
for a titular head, the Director General, who cannot return to 
the bank. But for all others, a revolving door leads back to 
standard line jobs and advancement.
    This hardly fosters disinterested and rigorous judgments, 
even though the Bank boasts that staff cannot review projects 
that they themselves designed. Fact-finding missions are 
suspect when they do not stand at full arm's length from their 
subject. The magnitude of the Enron failure spotlighted the 
folly of placing credence in inside oversight and even in 
outside auditors who can be intimidated by well-paying clients.
    In 2002, scandal arose at the German government employment 
office when claims of 50 percent placement rates were sliced to 
17 percent by an independent audit. Corporations always seek to 
elevate the price of their stock, public agencies always wish 
to expand their funding. External auditors beyond the subject's 
influence are needed to pierce the film of self-congratulation 
and to provide the discipline that protects the public 
interest.
    What the Bank proclaims as results are really only 
projections made at a moment when optimism is high. Outcome 
means only likelihood rated by the loan officer when the 
disbursement of funds is complete. That is often years before 
physical plants are up and running. Seldom does the Bank return 
to inspect the long-term project performance and many onsite 
investigations come up empty for lack of monitoring and 
records. The focus is on quantity of inputs with little effort 
expended to measure the effective output of programs.
    Performance measures have been manipulated to bolster 
management claims of success and refute critics. In the late 
1990s, satisfactory ratings jumped when the criteria were 
revised upon the instruction of Bank management without a 
corresponding adjustment to previous years to ensure 
consistency of measurement, again, upon the instruction of Bank 
management. After the Meltzer Commission in 1999 noted that 
sustainability, the sine qua non of development, had languished 
at 50 percent success rates for years, ratings jumped to 72 
percent in 2000. Were these true improvements or had the bar 
simply been lowered?
    The Bank is better at managing its numbers than at managing 
its programs. What is needed is a bonafide external audit by 
private sector companies onsite to determine the lasting 
contribution of Bank projects in the poorest countries after a 
3- to 5-year operating history and to provide a continuing 
benchmark for the efficacy of Bank aid. Auditors would report 
directly to the legislative and executive branches of the Group 
of Seven governments. Independent program audits and aggregate 
evaluations of performance would be published and the exercise 
repeated every 3 years.
    Five to seven million dollars, or less than two-tenths of 1 
percent of the U.S. commitment to the Bank's IDA funding for 
the next 3-year cycle, would pay for the cost of an audit of 
the performance of a one-third of IDA projects.
    As an anecdote, when the Meltzer Commission asked 
independent auditors what the cost of performance audit would 
be, the estimates came from three different firms were $4 
million, $6 million, and $1.5 million. I asked the head of the 
firm submitting the $1.5 million bid why his estimate was so 
low, and his response was, we know these countries very well, 
we know the Bank very well, we know the Bank's programs very 
well. We operate the infrastructure of many of these countries. 
We fully expect that when we arrive, on one-half of the 
programs there will be nothing. There will be no evidence of 
anything at all. And those will be very quick audits. There 
will be no road, there will be no school, and therefore, we're 
actually charging $1.5 million to do half the audits, because 
the first half will be very quick.
    For 6 years the Bank has resisted an independent evaluation 
of its programs. Its objections to external examination have 
centered on damage to the institution's morale, on the waste of 
funds and on the irrelevance of a past record that has been 
allegedly rectified by the latest version of the New Bank. As 
the Millennium goal of halving extreme poverty has gained 
momentum, donor nations are poised to fund an exponential 
increase in development aid, a $50 billion doubling of annual 
flows to the poorest nations by 2010 and another $50 billion 
annual increment previewed for 2015. The Bank will get more 
than its share. Then there is the windfall of so-called ``debt 
relief'', where the Bank extorted 100 cents on the dollar from 
the G-7 for a $46 billion portfolio of worthless developing 
country loans on which it had been sitting for more than 20 
years. The result is an assured stream on automatic pilot to 
fill deep holes in the Bank's balance sheet and then pour out 
as unauthorized new aid.
    Giving masses of money does not end our responsibility to 
the developing world. Donors have an inescapable interest in 
the uses to which aid is put and the results that aid achieves. 
Sums this significant must be weighed against alternative uses 
of scarce taxpayer resources.
    This is the moment to insist that the World Bank be under 
serious, continuous external review. The Bank must become the 
exemplar for the transparency and accountability it commends to 
the developing world. Provision for a tri-annual external 
performance audit must become a condition of approval of the 
Gleneagles accord on debt relief and the funding of future aid. 
There will be no reform without the recognition of past 
failure.
    Thank you Mr. Chairman.

    [The prepared statement of Dr. Lerrick follows:]
Prepared Statement of Adam Lerrick, Director of the Gailliot Center for 
  Public Policy Friends of Allan H. Meltzer, Professor of Economics, 
 Carnegie Mellon University, and Visiting Scholar American Enterprise 
                               Institute

                 Is the World Bank's Word Good Enough?

    It is a privilege to appear before the Senate Committee on Foreign 
Relations.
    The World Bank has just changed the name of its Operations 
Evaluation Department. This sends a clear signal that the Bank has no 
intention of changing its ways. The new sign on the door reads 
Independent Evaluation Group. The Bank is digging in to fend off an 
increasingly vocal demand for a truly independent review of its 
stewardship of aid.
    After half a century and more than US$ 500 billion, there is little 
to show for World Bank efforts. But we have no measure of the Bank's 
performance except the one it chooses to promulgate and no means to 
validate the wisdom of the industrialized world's collective investment 
decision.
    The optimism of weighty reports cannot cover up the realities on 
the ground. The living standards of the poorest nations have stagnated 
and even declined as much as 25 percent.\1\ Thirty-eight countries have 
amassed $71 billion in unpayable multilateral loans, encouraged by the 
Bank's self-serving projections of country growth, on which rich 
country taxpayers must now make good. Corruption has been exposed both 
within the Bank and in its programs and is now estimated at more than 
$100 billion. Protest is rising among Africa's own who seek to stop all 
aid because it serves only to entrench and enrich a series of corrupt 
elites. Massive anecdotal evidence of waste, ineptitude and outright 
theft can no longer be ignored.
---------------------------------------------------------------------------
    \1\ Aid was not the moving force behind the impressive gains in 
China, India and Indonesia where virtually all progress in developing 
country living standards has occurred.
---------------------------------------------------------------------------
    The Bank gives itself good marks and boasts that more than three 
quarters of projects completed had ``satisfactory outcomes''. But when 
the auditors are captive, when the timing of judgment is premature, 
when the criteria are faulty and when the numbers are selectively 
manipulated--how credible are the conclusions?
    Should we just take the Bank's word for it when US taxpayers are 
being asked to commit more than $2.5 billion per annum for the next 40 
years?
    ``Independence'' at the Bank is purely cosmetic, for a temporary 
change of desk and a new nameplate do not alter the signature on the 
paycheck nor the rewards of the Bank's personnel system. The 
Independent Evaluation Group is a department of the Bank like any 
other, save the ceremony of reporting to an executive board that is 
passive at best. For everyone save the titular Director General, a 
revolving door leads back to standard line jobs and advancement at the 
Bank. Because results are published, there is strong pressure to 
display success. Outside verification is precluded because there is no 
public access to the underlying data. This hardly fosters disinterested 
and rigorous judgments, even though the Bank boasts that staff cannot 
review projects that they themselves designed.
    Fact-finding missions are suspect when they do not stand at full 
arm's length from their subject. The magnitude of the Enron failure 
spotlighted the folly of placing credence in inside oversight and even 
in outside auditors who can be intimidated by well-paying clients. In 
2002, scandal arose at the German government employment office when 
claims of 50 percent placement rates were sliced to 17 percent by an 
independent audit. Corporations always seek to elevate the price of 
their stock; public agencies always wish to expand their funding. 
External auditors beyond the subject's influence are needed to pierce 
the film of self-congratulation and to provide the discipline that 
protects the public interest.
    The ``independence'' issue aside, the Bank's evaluation methodology 
spews out conclusions without worth.
    What the Bank proclaims as results are really only projections made 
at a moment when optimism is high. ``Outcome'' means only 
``likelihood'' rated by the loan officer when the disbursement of funds 
is complete. This is often years before physical projects are up and 
running. Generalized ``adjustment programs'' attract the highest marks. 
Yet promised reforms will require years to impact the economy if they 
are indeed ever implemented.
    Seldom does the Bank return to inspect long-term project success 
and many onsite investigations come up empty for lack of monitoring and 
records. The focus is on quantity of inputs with little effort expended 
to measure the effective output of programs.
    Performance measures have been manipulated to bolster management 
claims of success and refute critics. In the late 1990s, satisfactory 
ratings jumped when the criteria were revised upon the instruction of 
Bank management without a corresponding adjustment to previous years to 
ensure consistency of measurement, also upon the instruction of Bank 
management. After the Meltzer Commission in 1999 noted that 
``sustainability'', the sine qua non of development, had languished at 
50 percent success rates for years, ratings jumped to 72 percent in 
2000. Were these true improvements or had the bar simply been lowered?
    The Bank is better at managing its numbers than at managing its 
programs. What is needed is a bona fide external audit by private 
sector companies onsite to determine the lasting contribution of Bank 
projects in the poorest countries after a 3-5 year operating history 
and to provide a continuing benchmark for the efficacy of Bank aid. 
Auditors would report directly to the legislative and executive 
branches of the Group of Seven (G7) governments. Individual program 
audits and aggregate evaluations of performance would be published and 
the exercise repeated every 3 years.\2\
---------------------------------------------------------------------------
    \2\ Senator Crapo of Idaho and Senator Enzi of Wyoming focused on 
the issue of an external performance audit of World Bank programs in 
the 106th Congress. See S. Con. Res. 136 in the 2nd session.
---------------------------------------------------------------------------
    Five to seven million dollars or less than \2/10\ths of 1 percent 
of the U.S commitment to the Bank's International Development 
Association (IDA) funding for the next 3-year cycle, would pay for the 
cost of an audit of the performance of a \1/3\ sample of 3 years of IDA 
projects.
    Bank objections to external examination have centered on damage to 
the institution's morale, on the waste of funds and on the irrelevance 
of a past record that has been allegedly rectified by latest version of 
the ``New Bank''. This last has been the routine response by a series 
of managements over the past three decades.
    The technicalities of client confidentiality and sovereignty rights 
of nations that wish to evade scrutiny have also been advanced as 
impediments. For those on the receiving end of billions of dollars of 
subsidies that flow from industrialized nation taxpayers through the 
channel of World Bank financing, there should be a corresponding 
obligation. Free access to the facts and the ability to publish them 
must become a condition of all World Bank loans.
    As the Millennium goal of halving extreme poverty has gained 
momentum, donor nations are poised to fund an exponential increase in 
development aid--a $50 billion doubling of annual flows to the poorest 
nations by 2010 and another $50 billion increment previewed for 2015. 
The Bank will get more than its share. Then there is the windfall of 
so-called ``debt relief'' where the Bank extorted 100 cents on the 
dollar from the G7 for a $46 billion portfolio of worthless developing 
country loans on which it had been sitting for more than two decades. 
The result is an assured stream of funds on automatic pilot to fill 
deep holes in the Bank's balance sheet and then pour out as 
unauthorized new aid.
    Giving masses of money does not end our responsibility to the 
developing world. Donors have an inescapable interest in the uses to 
which aid is put and the results that aid achieves. Sums this 
significant must be weighed against alternative uses for scarce 
taxpayer resources.
    This is the moment to insist that the World Bank be under serious 
and continuous external review. The Bank must become the examplar for 
the transparency and accountability it commends to the developing 
world. Provision for a tri-annual external performance audit must 
become a condition of approval of the Gleneagles accord on debt relief 
and the funding of future aid. There will be no reform without the 
recognition of past failure.

    Chairman Lugar. Thank you very much Dr. Lerrick. I 
appreciate this panel. I think you had an extraordinarily 
profound influence upon our deliberations here.
    Let me just start with basics to add to our own 
edification. First of all, let's say a development bank decides 
that a road in a particular country is going to be of value, or 
a network of roads, several roads. Did the road get built? 
You've addressed that in a way, Dr. Lerrick. Maybe half of the 
roads don't get built, or some percentage. If a school is the 
objective, did the school actually get built? Physically, did 
the money come to fruition with completion of a project?
    Now you're raising questions, obviously, beyond that. But 
that's sort of fundamental, and one of the audit questions to 
begin with is did it happen, as opposed to the money being 
diverted to other purposes by a government or contractors.
    But, second then, you're raising more difficult question, 
should the road have been built, or, in fact, when the road was 
built, what difference did it make to the country or specific 
persons who might use the road? Did it disrupt the environment 
or completely change commerce in diverse ways? So that this is 
a question which then verges, some would say, upon the 
sovereignty of the country. Officials there would say, we're 
the folks who were elected or appointed, or however they got 
there, and we are making some judgments about what is important 
for our country. And we think that school ought to be built and 
the road ought to be built. Are poor people helped? The 
Millennium idea that somehow we can lift millions of people 
from desperate poverty is sort of an outside evaluation on our 
part, humanitarian part. Others in the country would say, we 
know best how to do this.
    Let's accept the fact that the internal audits that are now 
being conducted, however one wants to characterize the renaming 
of them and so forth, are inadequate and maybe worse. But let's 
say that we had a truly independent audit that was 
incorruptible, not like the companies that were auditing Enron, 
that supposedly were outside Enron.
    Let's say we find these honest people who are bright, who 
understand the world, and they weighed into this. First of all, 
can you find such persons? And then, second, who does set the 
philosophy, or the basic parameters of what is helpful to poor 
people or to development in a way that is internationally 
accepted? We're talking about international banks, different 
cultures, different histories all looking at these things. 
Anyone want to make a comment about that sort of general set of 
questions? Please, Doctor.
    Dr. Levine. Thanks very much. I'll tackle a couple of the 
dimensions of them.
    The programs that the development banks finance are 
negotiated, as you know, with the developing country borrowers. 
And those borrowers have to repay the loan, albeit on often 
soft terms. And so it is very much the case that the resources 
are shared resources. The designs are or should be shared 
designs and the goals of the programs are, themselves, shared 
between the development banks and the national governments.
    Chairman Lugar. Is it taken for granted now that the people 
at the development banks know something about the country? In 
other words, is there engaging in this dialogue with----
    Dr. Levine. Yes.
    Chairman Lugar [continuing]. The leaders? That this is an 
intelligent, up front way of saying how can we help people?
    Dr. Levine. Right. My point is that unlike perhaps granting 
agencies, development banks actually do develop their loans in 
collaboration with national counterparts. Who among that group 
is informed about local conditions one can argue. But they are 
shared programs. And what those programs can generate if 
they're evaluated effectively against their ultimate aims--the 
more kids in school and so the people being moved above the 
poverty line. What that can generate is knowledge that then the 
developing country governments can use to assess whether or not 
that's the right use of both the development bank financed 
resources and their own.
    I'm thinking of the value that the U.S. Congress has seen 
in things like the evaluation of Head Start, the evaluations of 
the income support and job training programs. The current, 
really laudable evaluations that the U.S. Department of 
Education is undertaking--this is the kind of knowledge that we 
generate for our own social programs and public investments, 
and that legislative leaders in this country use to decide, 
well, what do we do next? How do we safeguard the interests of 
the taxpayer?
    So I guess I would resist the idea that the independent 
evaluations would be done solely for the benefit of the 
agencies. The long term goal is that they'd be done to inform 
public spending priorities in the countries themselves. That's 
the end goal.
    Dr. Lerrick. Senator, first, I frequently say that on my 
tombstone they're going to write ``It's not as simple as he 
thought''. Because that's what usually people say when I talk 
about these issues. I truly believe these are very simple 
issues. I think, first, one of the lessons we've learned over 
the last 50 years, why it took 50 years, I can question, is 
that aid does not succeed, projects do not succeed, unless the 
recipient wants it to succeed, has an interest in the project. 
That was viewed as a revolutionary concept as recently as 6 
years or 7 years ago when David Dollar wrote it.
    But so first let's assume the host government chooses the 
project, decides this is a priority of our people. Second, one 
of the issues here is there is a terrible problem in aid that 
every measurement is done on inputs. At the World Bank now they 
basically measure inputs of cash. Now they're saying we're 
going to measure outputs because we're going to measure the 
number of textbooks arriving at the schools, the number of 
teachers trained, the number of miles of roads built. But those 
are still inputs.
    What we should be measuring is number of children who can 
read, the number of roads that are passable and workable after 
5 years, not how many roads were built on the day we started. 
And those are very easy to quantify. This is not to go out and 
measure the number of roads that still are functioning after 10 
years or the number of children that can read or the number of 
babies that have been vaccinated. It's easily audited, it's 
easily evaluated.
    And, in fact, that's why one of the areas that I've focused 
a lot of research on: turning aid from a loan-based mechanism 
to what I call a performance-based grant mechanism. Where you 
literally only pay money upon audited performance. That will go 
a long way to achieving our goal.
    The second question you raised is a much more difficult 
question. How do you translate number of passable roads to how 
has that raised the income level of the people in the country? 
That's a much more difficult question and I don't think we have 
the metrics to do that. But I think the first step is just 
making sure that the roads are built and they're still 
functioning. And we can measure the traffic over the roads.
    Chairman Lugar. Let me just comment anecdotally, that in 
our own country with the No Child Left Behind concept we've 
been trying to evaluate how third-graders, eighth-graders and 
what have you are doing, maybe all the way through the grades 
as you magnify those tests. Of course you might point out, why 
do states choose how much evaluation they want? Some states 
have tougher tests than others and so forth. But let's take for 
granted that it's a reasonable concept here. We find out that 
maybe 70 or 75 percent of children are achieving third grade 
results or something of this sort.
    The idea is that therefore, on a performance basis, people 
ought to be rewarded for achieving this. But that is not so 
easy because the rest of the schools there, they would say we 
have special problems. Without enumerating all of them, from 
educational conferences you have a long list. Do you mean this? 
Are you going to shut down these schools that are 
nonperforming? And we say, well no, we opened those up to other 
people and we try to shore up things. But the fact is, you 
know, a great deal of money is going into these programs, 
Federal, state, local. So here we're wrestling with problems 
that are profound. Ultimately you raised the question, if 
you're being difficult about it, even if people can read third 
grade level, how does that affect their performance? Are they 
likely to have higher incomes, better lives, all the rest of 
it?
    But now you're saying, keep it simple. Don't begin to get 
profound to the third or fourth order judgments, just see 
whether, after 5 years, the road still works, or whether in 
fact the school got built and some children entered it and 
learned something. They may be more modest goals. And that's 
sort of important because as we try to structure this 
independent audit system, wherever it's going to come from, the 
kinds of questions we asked this group to evaluate will 
probably determine the public confidence in this. And that kind 
of structure can come from you as experts in your experience, 
probably better than from us. That's why I'm raising these 
questions.
    Dr. Lerrick. You have chosen the most controversial issue 
among the areas we're talking about, which is education. 
There's a huge debate in this country about evaluation.
    I think you're right, it has to be kept simple. It has to 
be transparent, it has to be simple, everyone has to recognize 
how it was done and accept that this is a valid metric for 
measuring the performance. As I said, one way of doing this, 
which makes it simpler, is to say, we're only going to pay, 
we're only going to deliver cash dollars based on each child 
that can pass a literacy test, we will pay aid of this amount. 
For each child vaccinated against measles we will pay $4.50 
upon independent audit.
    When you think of the World Bank, all its client countries 
are viewed as similar. They're not. There is one group of 
countries, what we call the middle income countries that have 
totally different problems from the really poor countries, such 
as Africa. The poorest countries that don't have access to 
capital, private capital, they are so far away from what we 
would call the desired goal, that getting them 90 percent of 
the way there is not--should not be controversial. The last 10 
percent may be controversial, but we have a long way to go 
before that happens.
    Chairman Lugar. Dr. Easterly, do you want to weigh in on 
this?
    Dr. Easterly. Yes, Mr. Chairman, if you'll permit me to 
return to your original question about how to work with 
sovereign governments. I think this is an issue that the aid 
community has been stuck on for 50 years and has not found a 
way out of this conundrum. They're so stuck on it that they--
despite, as Dr. Lerrick pointed out, despite the increased 
knowledge that we have, that it is obviously counterproductive 
to give aid to corrupt autocrats, which just props up gangsters 
in power to stay longer in power. Amazingly enough, despite 
that knowledge, there has been no change in the aid community 
in how selective it is to give money to better governments.
    The World Bank's latest ratings on democracy and corruption 
showed no--there's no association whatsoever between the amount 
of aid a country receives and how corrupt it is or how 
democratic it is. And that I--for example, just to give you a 
particularly egregious example, Paul--the dictator Paul Biya of 
Cameroon, who's been in power for decades, he had something 
like 80 percent of his government revenues from foreign aid, 
despite the fact that Cameroon also has oil revenues. Where 
does that kind of result come from? It comes from the intense 
pressure that there is to try to help Cameroonians, individual 
Cameroonians, to help poor people, even if they are so unlucky 
as to be stuck with a bad government.
    And, you know, that conundrum leads to continued engagement 
with very bad governments, even failed states are now getting 
aid under the rubric of reconstruction aid, which is also 
funneled through the warlords that are now in a temporary 
coalition government in places like Democratic Republic of the 
Congo.
    What is the way out of this conundrum? First of all, you 
know, the evaluator should hold the World Bank and other aid 
agencies accountable for how selective they are, for how they 
choose the governments that receive their money. It's a 
disgrace that Paul Biya is still getting aid money.
    And second, that the aid agencies like the World Bank 
should explore ways in which they can try to help individuals 
directly, like Dr. Lerrick was talking about, bypassing the 
governments. And this--of course they have to be sensitive to 
the issue of not undermining the sovereignty or the political 
development of the host country, but they can do so by working 
to try to empower individuals from below to make them better 
educated, to give them better roads. All of these things help 
individuals and, you know, better individuals can themselves 
create the conditions for political reform and form the next 
generation of political leadership, which could give us better 
government.
    The attempt to change bad government directly through aid 
conditions has totally failed. It's been tried over and over 
again. It's been a complete failure. So I think the answer is 
to just be really ruthless about screening out the bad 
governments, not giving them money, but if there is still the 
need to help desperate poor people in those countries, then try 
to help them as individuals, not through the government.
    Chairman Lugar. In the governance of these banks, obviously 
the United States plays a role, we play a large one. We were 
discussing today whether we're paying our fair share and 
whether we're up to the plate. Still these are multinational 
banks. There are a lot of people here.
    This may be an extreme case, but in February the United 
States had the Chairmanship of the Security Council at the 
United Nations. I was honored to be invited to give a speech to 
the Security Council, which I did, and we did not dwell upon 
these particular issues, but we did in a sense by getting into 
the Human Rights Commission reform. Just after visiting with 
the Security Council about this, Senator Voinovich, Senator 
Coleman and I visited with a group of 77 leaders. These are 
countries that clearly have very special problems in terms of 
development. They have a feeling that by banding together they 
can be heard with regard to the members of the Security Council 
or the Permanent Five or what have you.
    But here we have an issue about who is going to evaluate 
human rights. Who ought to be eligible to be on a human rights 
commission that is trying to bring about human rights for 
people? There are profoundly different views on this. I don't 
cast dispersions on any of those with whom we visited, but some 
might suggest, who is to be the judge of this? Is this a 
unilateral decision of the United States or Great Britain or 
France? Furthermore, if it is, that's why we have a group of 
77, to stop that kind of evaluation. We are evolving in our 
political procedures, they would say. You really can't get 
there all at once.
    So if there are some human rights problems, that's been 
mankind's fate and the fate of the poor people who lived under 
those governments. This is a big question. Who will evaluate 
human rights--on the commission, there are 40-some members who 
would cast just judgment and make criteria.
    My guess is, back at the headquarters of some of the 
development banks there are similar issues of countries saying 
our place in the sun comes from solidarity with some others who 
have similar problems. And, as a matter of fact, all together 
we're a majority, if you vote one by one, but maybe not if you 
vote by the stock in the bank or what the contributions are. 
But for whoever is trying to govern these situations, this must 
be very, very difficult. In any event, the United States 
objects to whatever the compromise is, we vote against it, 
we're one of four countries in the world. All the rest are 
willing to accommodate the fact that Rome is not changed in a 
day and you have to sort of understand these conditions.
    I raise this simply because, as reformers or as people 
trying to generate this, we're dealing with people who have 
real lives in these banks. You've been there Dr. Easterly, so 
you understand acutely and you very modestly said in your own 
experience as a whistleblower, this is not a comfortable 
situation. In fact, termination likely to come to you. And help 
me a little bit, how do we influence some sort of reform given 
sovereignty, given the feeling that if we are small and we band 
together to have a common culture, which may not be quite 
there, or may, in fact, not be there at all, but nevertheless 
might be helpful to us in our leadership in those countries 
right now?
    Dr. Easterly. Mr. Chairman, I think the ideal is to get the 
feedback from the poor intended beneficiaries themselves. And 
that the evaluators that are truly, truly credible are those 
that find ways to really represent--give a political voice to 
those poor people that----
    Chairman Lugar. Let's say they go into a country and they 
interview the poor people----
    Dr. Easterly. Uh-huh. [Affirmative]
    Chairman Lugar [continuing]. And the government says, well 
you're interfering. You're like an NGO that's trying to foment 
democracy in our country. I'm just curious, how, as we search 
for these evaluation methods, do we really get to the 
grassroots without retribution of the people who gave the 
interviews or who saw these auditors?
    Dr. Easterly. Right. That's a very--these are very subtle 
insights and you rightly put your finger right on the core of 
the problem. And I think it has--the independent evaluation 
unit would have to be independent in another sense in that it 
would have to be independent from rich countries so it's not 
seen as the tool of rich country governments. You're not trying 
to interfere in other countries' internal affairs.
    It has to be just a worldwide network of truly independent 
grassroots people who--and, you know, academics and researchers 
who have no political allegiance. And it certainly should 
include people from the poor countries themselves in large 
numbers. So that it would not be a representative of the U.S. 
Government trying to meddle in the politics of Cameroon or 
something.
    Chairman Lugar. Dr. Lerrick?
    Dr. Lerrick. I disagree with much of what Dr. Easterly 
said. Let's be clear, there is a small group of countries in 
this world that are financing all development aid. And the fact 
of the matter is the donors are the ones who must receive the 
account as to whether their money is being spent. Former 
Secretary of Treasury Paul O'Neill use to refer to the 
carpenters and plumbers of the United States, that he was not 
going to dump the money of the carpenters and plumbers into 
this bail out or this aid agency or this failed program.
    I think it cannot be a solely U.S. initiative, that's not 
what these institutions are. But I think it has to be a 
coordinated effort of the donor countries to establish what are 
the benchmarks for aid and for performance.
    The Bank has often hid behind some of the issues you 
raised, what they call the technicalities of client 
confidentiality, that they just can't release information about 
their projects, or the sovereignty rights of nations. But the 
problem here is that for those on the receiving end of billions 
of dollars of subsidies that flow from industrialized nation 
taxpayers through the channel of World Bank financing, there's 
a corresponding obligation. They must give free access to the 
facts and the ability to publish them. And the control 
mechanism is that the report, the audits, the evaluations will 
be published, at the individual project level, at the country 
level, at the combined bank level.
    I think, Senator Lugar, a good idea would be if you were to 
try to implement this process, to set up a commission of, I 
don't know whether you would call them leading experts or 
senior statesmen, who would oversee the establishment of what 
this audit would look like, how will it be performed, what 
would be the standards, who would execute the audit? Again, a 
public process, hearings, input, and there should be on that 
commission representatives of the major developing countries to 
get their input as well.
    But I think you have a much deeper problem in this whole 
process which is the fundamental problem in the aid business: 
The donors are more desperate to give than the recipients are 
to receive. If that is true, aid will fail. It cannot but fail, 
because, I would ask you, what would you do, and when Secretary 
Lowery spoke about this, what are you going to do if Chad just 
says no, or Congo says no? We're just not going to implement 
the anti-corruption measures. And they dare you to say you're 
not going to give the money? What are you going to do?
    The President of Chad has already said, if you cut off my 
funding, it doesn't bother me. It's the poor people of Chad 
that are going to suffer. And they were poor for centuries 
before and they'll just be poor again until you decide to give 
me my money. And that's a very difficult position.
    Chairman Lugar. That is the problem and, you know, let me 
just say that this is, you know, acutely the problem felt by 
the American people, who are compassionate, who see hundreds of 
millions of very poor people and feel surely there is some way 
we can help those people. So then we have the mechanisms of 
banks, and even our own foreign aid or the Millennium Challenge 
in which we try to do this. But, as you say, it could very well 
be that our overwhelming sense of conscience that we ought to 
do something is more overwhelming than the recipient side of 
what is to be done with the money.
    Dr. Lerrick. And it's not just in the official sector. The 
Gates Foundation has encountered the same problem. They've 
tried to implement what would be a kind of performance-based 
aid, where they were actually going to go in and audit the 
performance. But in the end, when Kenya refused to comply, the 
head of the Gates Foundation said very simply, the greatest 
failure of a foundation is not distributing the money. If that 
is a fact, then there can not be a successful outcome.
    Chairman Lugar. Yes. Dr. Levine.
    Dr. Levine. I've been listening carefully to my colleagues 
and I think that in this discussion we are conflating a couple 
of different interpretations of the word evaluation. One being 
more linked to the accountability mission: Did something pass 
or fail? So getting to your education example, did schools pass 
or fail in terms of how students did on tests.
    The other function of evaluation is to look at the 
relationship between impact, passing or failing, with what was 
done in the first place, what approaches were taken. So in the 
education example, what's the relationship between say, class 
size and how kids do on tests. That, over the long term, is the 
real contribution that can be made from evaluation.
    There's obviously a short term need to look at that pass/
fail question, but then it leaves you with exactly what you 
posed, well, what do we do about the failures? Do we neglect 
them entirely? Do we close down schools? No, of course not. 
What you do is you look for ways to improve. Where do you look? 
There's the kind of eminence-based approach of asking a bunch 
of very smart people what they think. That's what we often do. 
Then there's a more evidence-based approach, which is that you 
actually look carefully, do in-depth evaluations, and learn 
from comparing across different approaches and comparing doing 
something with not doing anything.
    I just want to highlight that as we talk about evaluation, 
independent or otherwise, it's useful to make that distinction.
    Chairman Lugar. I'm trying to gather now, from your 
collective testimony, just who ought to be appointed, and by 
whom, and who should pay for it.
    You mentioned the Gates Foundation. One suggestion would be 
that this is not going to happen, this evaluation, from a 
governmental entity or something that the Congress conjures up, 
but rather there must be some independent people out there who 
have independent money and so forth. And maybe the Gates 
Foundation or others might provide this sort of thing. But even 
if they do, who selects the persons who go down in the weeds, 
as you suggested, Dr. Levine, as opposed to having high-minded 
thoughts without the evaluation in the field? And what do we do 
in the Congress? Do we try to provide through legislation a 
provision for these independent audits, or a group that does 
this kind of work? Do we offer some criteria as to who ought to 
be involved in it and some idea of who pays for it?
    I'm just grappling with the questions that you've raised, 
which I think are very important, and which we wanted you to 
raise, so that we're not left at the end of the hearing with 
the thought that, sadly enough, back in the banks are still 
these people who we don't think are as independent as they 
ought to be. Even though they're doing better and the whole 
question has been elevated by five hearings plus all of what 
they're doing, we're still not quite there.
    I know you need to leave at some point, Dr. Easterly, so I 
respect that. Would you have a go at that first, in the event 
that you need to leave our hearing?
    Dr. Easterly. Mr. Chairman, I think that as far as who pays 
for it, I think the aid agencies themselves should all be 
asked, and we should try to start this as an international 
effort, but we can start with the multilateral development 
banks, that they should be required to set aside part of their 
budget, it doesn't have to be a huge amount because these 
evaluations are not that costly compared to the volume of 
lending.
    Chairman Lugar. Set it aside outside their structure.
    Dr. Easterly. Set it aside outside the structure to fund an 
independent evaluation group that's truly independent, not like 
the name change that both Dr. Lerrick and I have made fun of. 
And, you know, there are lots of development professionals, 
economists, academics, social reformers of all kinds that are 
out there that will be judged on the basis of just professional 
standards, whether they're qualified to do evaluations, and 
they can be assembled in a very decentralized, loose network. 
It doesn't have to be a large bureaucracy. But funded by these 
funds that are set aside from the development agencies.
    I think they can operate in the same sort of independent 
way that we have an auditing industry that provides audits on 
corporations, you know. It's not part of the U.S. Government, 
it doesn't serve sort of U.S. Government strategic policy. And, 
in the same, I think the--to disagree a little bit with my 
friend, Dr. Lerrick, I think there needs to be a firewall 
between anything that would smack of U.S. Government strategic 
interest or the strategic interest of any donor country. And 
just the goal of pure altruistic aid to help the poor. And 
those auditors should be only concerned with the effectiveness 
of altruistic aid to help the poor.
    There is a large group of auditors available out there that 
could be hired. A lot of them could be from developing 
countries themselves. There are many highly trained 
professionals in developing countries that could be paid to do 
this.
    Chairman Lugar. Dr. Lerrick?
    Dr. Lerrick. First, Senator Lugar, I'd just like to call 
your attention to Senators Crapo and Enzi who actually put 
forth a Senate resolution in the 106th Congress calling for an 
independent audit of IDA programs. The question--I'll divide 
the question in two parts, who should pay for it? That really 
should not be a major problem because, as Dr. Easterly said, 
we're not talking about large amounts of money. It's a 
relatively small amount of money. I will tell you that I have 
been approached by two foundations that are willing to finance 
such a performance audit. The main difficulty is cooperation, 
not participation, but cooperation of the World Bank, which 
means, literally, just access to the files, to the documents. 
What is the project? What was the project supposed to do? What 
did it cost? Where did it go?
    And, as Dr. Easterly said, it's not very difficult finding 
auditors to do this. I would propose that a commission could be 
set up of what I would call senior statesmen to supervise the 
structure of what the audit process would be and how it would 
be implemented. And then you would actually have private sector 
auditing firms go out and literally compile the reports in 
different countries.
    There are major multinational firms that do this as a 
business. And they could do this as well. If you wanted to go 
to a more grassroots approach and have many little individual 
auditors I think it would be more difficult, but it is 
feasible.
    The third method would be, basically, to say that we are 
going to have a performance audit and have it report to the 
legislative and executive branches of the leading donor 
countries, all of them, and I agree with Dr. Easterly, it has 
nothing to do--it should have nothing to do with strategic 
interests or foreign relations interests. It's purely 
effectiveness of the programs. And each one of those 
governments has the counterpart to the GAO. Why can't the GAO 
supervise on behalf of Congress and say this is how the 
structures were done, these were the processes that were put in 
place, we consider them reasonable and pass judgment not on the 
individual programs, but on the mechanics that were 
implemented. That would be a third way of going about it.
    Chairman Lugar. We might appropriate money for the GAO to 
begin with.
    Dr. Lerrick. Again, appropriate the money and have the GAO 
to review how the process was done.
    Chairman Lugar. But then how do they get the records in the 
World Bank? The GAO goes over there and----
    Dr. Lerrick. No. The World Bank would have to say we are 
going to cooperate. And that will only come if the major 
shareholders agree the World Bank should cooperate with this 
process.
    Chairman Lugar. Dr. Levine.
    Dr. Levine. Again, I think we're running into a little 
point of departure about what the aim of this sort of function 
might be. I agree with my colleagues that the financing is 
small, very small relative to the total funds that are 
disbursed by the World Bank, the Inter-American Development 
Bank, and the grant-making agencies. So a small share of each 
devoted to a collective enterprise would certainly be adequate.
    But in terms of who and how, I think it depends very much 
on what the aims are. There's the auditing idea. I'm fearful 
that would be quite unsatisfying because, in fact, most World 
Bank programs do not even have baseline information. So you 
could barely even do before and after comparisons, let alone 
comparing what would have happened with a different approach, 
what would have happened in the absence of the program.
    So I think a collective evaluation agenda needs to be set 
on enduring questions in development: How to get kids in 
school, how to prevent HIV/AIDS, and other things for which 
huge amounts of money are being devoted against very little 
evidence. So set that evaluation agenda, establish 
methodological standards. As Dr. Easterly said, there is an 
academic industry devoted to that practice. And then commission 
independent evaluations through an open and competitive process 
with the results being disseminated widely, again to stimulate 
the kind of learning that we've talked about earlier.
    Chairman Lugar. I thank you very much. You've been most 
helpful, I believe, in giving the parameters of the problem, as 
well as some specifics toward solutions. As you suggested, Dr. 
Levine, there are probably people out there who are going to be 
able to set some standards. There probably is money to be 
obtained. It's not very much. Hopefully we will obtain access 
to the records, imperfect as they may be, as you say. If they 
are as rudimentary as you have suggested, this is going to be 
tough for the auditors, but there has to be a beginning at some 
point, at least establishment of the independence of the 
process, so that it's not an in-house affair and it's not 
business as usual.
    My guess is that even the discussion of the project and the 
formation of all of this is likely to bring about some salutary 
results as countries and banks and so forth think through the 
implications of that. We look forward to staying in touch with 
all three of you. We appreciate your insights and your specific 
public testimony today. And so saying, the hearing is 
adjourned.

    [Whereupon at 11:37 a.m., the hearing was adjourned.]
  

                                  
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