U.S. GOVERNMENT PRINTING OFFICE

65–971 CC WASHINGTON : 2000

DEVELOPMENT, GROWTH, AND POVERTY REDUCTION IN LATIN AMERICA: ASSESSING THE EFFECTIVENESS OF ASSISTANCE

HEARING

BEFORE THE

SUBCOMMITTEE ON

THE WESTERN HEMISPHERE

OF THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

WEDNESDAY, JUNE 28, 2000

Serial No. 106–129

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international relations

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVE CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. MCHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE P. RADANOVICH, California

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff

SUBCOMMITTEE ON THE WESTERN HEMISPHERE

ELTON GALLEGLY, California, Chairman

DAN BURTON, Indiana

CASS BALLENGER, North Carolina

CHRISTOPHER H. SMITH, New Jersey

ILEANA ROS-LEHTINEN, Florida

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

KEVIN BRADY, Texas

PAUL E. GILLMOR, Ohio

GARY L. ACKERMAN, New York

MATTHEW G. MARTINEZ, California

ROBERT MENENDEZ, New Jersey

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

VINCE MORELLI, Subcommittee Staff Director

DAVID ADAMS, Democratic Professional Staff Member

KELLY MCDONALD, Acting Professional Staff

JESSICA BAUMGARTEN, STAFF ASSOCIATE

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C O N T E N T S

Page

WITNESSES

Carl Leonard: ...........................................................................................................

Acting Assistant Administrator, Bureau for Latin America and the

Caribbean, United States Agency for International Development .... 1

William E. Schuerch: ...............................................................................................

Deputy Assistant Secretary, International Development, Debt, and

Environmental Policy, United States Department of the Treasury .. 5

Sylvia Saborio: .........................................................................................................

Senior Fellow, Overseas Development Council ....................................... 18

Colin Bradford, Jr., Ph.D.: ......................................................................................

Professor of Economics and International Relations ..............................

The American University .......................................................................... 22

APPENDIX

Prepared statemente:

The Honorable Elton Gallegly: ...............................................................................

A Representative in Congress from California and Chairman, Subcommittee on Western Hemisphere ..................................................... 34

The Honorable Robert Menendez: ..........................................................................

A Representative in Congress from New Jersey ..................................... 35

Carl Leonard ............................................................................................................ 38

William E. Schuerch ................................................................................................ 50

Sylvia Saborio .......................................................................................................... 60

Colin Bradford .......................................................................................................... 67

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DEVELOPMENT, GROWTH, AND POVERTY REDUCTION IN LATIN AMERICA: ASSESSING

THE EFFECTIVENESS OF ASSISTANCE

Wednesday, June 28, 2000

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON THE WESTERN HEMISPHERE,

COMMITTEE ON INTERNATIONAL RELATIONS,

Washington, D.C.

The Subcommittee met, pursuant to notice, at 2:20 p.m., in room

2200, Rayburn House Office Building, Hon. Elton Gallegly (Chairman of the Subcommittee) presiding.

Mr. BALLENGER. [Presiding.] First of all, let me apologize to the

people gathered here today. Every once in a while this place gets

to be kind of a madhouse, and I am afraid this is that time of the

year when everything we do doesn’t satisfy everybody, and so we

get three or four votes at a time, and we are spending your money

unwisely just for a little while here. But this is a very worthwhile

cause we have got going here, and I would just like to say that the

chairman will be here in a minute. But this idea that we vote four

votes and then we wait an hour and then we vote four more votes

and wait an hour may continue up until the evening pretty late.

So we will go ahead and start this whole thing, and if I may, I

will introduce Mr. Carl Leonard first, the Assistant Administrator,

Bureau of Latin America and the Caribbean, USAID, and Secretary Schuerch, Deputy Assistant Secretary for International Development, Debt, and Environmental Policy, Department of Treasury. Mr. Leonard, if you would, fire away.

STATEMENTS OF CARL LEONARD, ACTING ASSISTANT ADMINISTRATOR, BUREAU FOR LATIN AMERICA AND THE CARIBBEAN, UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT

Mr. LEONARD. Thank you very much, Congressman Ballenger. I

want to thank you for the opportunity to testify before the Subcommittee today, and as requested, I will direct my remarks to how

foreign assistance programs managed by USAID are promoting the

economic and social development of Latin America and the Caribbean and, in particular, how these programs are alleviating poverty. I ask that my full written statement be included in the record.

Mr. BALLENGER. Without objection.

Mr. LEONARD. The work that we do every day takes place largely

outside the headlines, but we strongly believe that our goals—

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drawn from the Summit of the Americas—will help achieve greater

prosperity throughout the region.

As Ambassador Lino Gutierrez testified before this Committee

earlier this month, perhaps the most important challenge to democracy in the hemisphere is poverty. He further noted, ‘‘While democracy is more widespread than ever, recent events remind us that

democratic progress in the Americas is neither immutable nor uniform.’’

Despite these challenges, we remain optimistic with regard to the

future of the Americas. Latin America is making progress, and our

U.S. foreign assistance programs are achieving significant results

and thereby contributing to U.S. national interests in the region.

In contrast to the lost decade of the eighties, in which GDP per

capita declined by nine percent, the economic reforms introduced in

the early 1990’s have brought about a resumption of growth and

a decline in poverty in much of the region. This improvement in

the region’s economic fortunes followed a sustained reform effort by

many countries aimed at enhancing the role of market forces and

increasing the region’s integration into the global economy.

It is important to note that the largest poverty reductions in the

1990’s have occurred in the countries that adopted the reforms

first. Chile, for example, almost halved the proportion of households in poverty. Other aggressively reforming countries also

achieved major reductions, such as El Salvador and Costa Rica.

Other countries have made more modest progress, while still others, chiefly nonreforming countries, have seen the proportion of

households in poverty actually increase.

Until all countries can show sustained progress in attacking poverty, democracy in the hemisphere will neither be complete nor secure. Surveys have shown a strong correlation between income concentration and support for democracy. In countries with the most

equitable income distribution in Latin America, more than 80 percent of the population believe that democracy is the best form of

government, while less than 50 percent are supportive in those

countries with the greatest income disparities.

The region’s democracies are finding that economic growth and

the macroeconomic reforms that help generate that growth, while

essential, are not sufficient. In addition, there is heightened recognition that good governance and positive social outcomes are mutually reinforcing. Good governance creates a predictable environment for firms and households to invest and increase their productivity. These improvements support both increases in income and

improvements in social indicators, such as literacy and mortality.

Indeed, the countries that are succeeding today, having successfully implemented the first generation of macroeconomic reforms,

are now carrying out second generation reforms, including rule of

law, citizen participation, and anticorruption activities.

USAID’s core program in the region is based on achieving the objectives established in the Summit of the Americas, including

strengthening democratic institutions, fostering open markets and

expanded trade, and reducing poverty in the hemisphere. USAID

contributes to increasing the income of households living below the

poverty line through targeted activities that increase their productivity. These activities do three things:

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First, they increase access and reduce barriers to services that

the poor need to achieve their full potential, such as financial services, education and health care, land title and property rights;

Second, they seek to improve governance, accountability, and the

enabling environment within which the poor work to assure that

they have access to a level playing field, participate fully in the selection of governments, and have effective national and local government institutions;

Third, they assist countries in crisis prevention and mitigation.

USAID combats poverty through improved access to credit, particularly micro finance. We have learned that the chief obstacle to

credit is not risk but the cost to the lender of administering small

loans. In addition, the poor typically have few assets that can easily serve as collateral. USAID has long been a leader in funding innovative techniques to give the poor access to small loans on affordable terms that cover the full costs of the lending operation.

Over the past decade, we have seen progress toward adoption of

policies governing property rights and access, which operate on

market principles. Yet, today, much property is still not formally

registered. Modernized registration systems are essential to creating a basis for commerce, services, and governance to reach down

to the poor. More broadly, the same institutional reforms and systems that empower the poor to participate in markets are also critically needed to facilitate expanded international investment in the

region.

USAID is leading the Summit initiative on property registry

modernization. We are working with the multilateral development

banks and other partners to increase transparency, decrease transaction costs, expand access, and improve the security of tenure.

The single most powerful tool for reducing poverty and improving

equity in the long run is high-quality primary and secondary education. In most countries of the region, primary school enrollments

now exceed 90 percent, but two serious problems remain. First, the

quality of those schools is often deficient. Many schools lack textbooks and other basic instructional materials, and schoolteachers

are often poorly trained. As a result, repetition and drop-out rates

are unacceptably high. Our response focuses on management, curriculum, technology, and policy reform. Specifically, our programs

promote decentralization, increased availability of textbooks, improved teacher training, and better testing and evaluation systems.

Latin America has made notable progress in health in the last

decade. Declines in total fertility rates have improved the health

status of mothers and their children. Decreased family size increases the probability that children will remain in school and will

have access to health care. In the last ten years, mortality rates

for infants and children under 5 significantly declined in the region, even in the poorest countries. USAID has helped countries

improve water and sanitation, widen access to health services, and

raise rates of vaccination coverage. With USAID’s support through

the Pan American Health Organization, polio has been successfully

eradicated in the Americas, the first region in the developing world

to do so.

Although HIV is still in an early phase in most of Latin America,

the Caribbean region is the most severely affected, with some of

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the highest prevalence rates outside Sub-Saharan Africa. USAID is

working to reduce cross-border HIV/AIDS transmission and is placing renewed attention in the countries in the Caribbean that are

threatened by the HIV/AIDS epidemic.

Investments in governance have paid off significantly over the

past ten years with the successful institutionalization of democratic

processes, reductions in human rights violations, and peaceful transitions of power.

Over the past decade, USAID has expanded its support for rule

of law. We have supported major constitutional reforms to improve

justice systems, to provide access to justice, and to protect basic

human rights. High levels of crime and violence affect all, and particularly the poor; therefore, USAID works with national and local

governments and other U.S. Government agencies to develop the

capacity to provide basic security and justice.

USAID is a leader in treating corruption as a significant development issue. Our missions have supported a variety of initiatives.

These include automated financial management systems to increase transparency, civil society groups that monitor elections, and

technical assistance to controller general offices to improve their

ability to audit the use of public funds and to investigate cases of

fraud.

The emergence of elected local government is an important trend

in the consolidation of democracy in the region. Elected officials

now run municipal governments in 23 countries, up from six two

decades ago. USAID is helping to strengthen the capacity of local

government to respond to citizen needs.

Since economic crises and natural disasters have a disproportionate and long-lasting impact on the poor, USAID and other donors are devoting increased attention to crisis prevention and mitigation. The impact of Hurricane Mitch on the poorest people in

Central America underscores the importance of improved environmental management. Deforestation, unsound land use, and inappropriate agricultural practices significantly increase the vulnerability of the poor to the impacts of disasters. USAID’s environmental programs, including park protection, forest management,

small-farmer hillside agriculture, and watershed restoration, are

helping countries reduce their vulnerability to natural disasters.

From 1988 until 1997, I served as USAID mission director in

three countries: Costa Rica, Bolivia, and El Salvador. Each of these

countries established coherent and growth-oriented policies, made

a strong political commitment to change, and took advantage of

USAID’s targeted programs. Although no one would claim that foreign assistance is the determinant factor in their success, our programs in each country worked with governments and citizens alike

to achieve significant results.

In Costa Rica, the stabilization and subsequent restructuring of

the economy built on a foundation of long-term investments in education and health yielded economic growth with equity.

Bolivia experienced a dramatic recovery from the economic chaos

and hyperinflation of the 1980’s. USAID has played an important

role in helping Bolivia to build institutions, strengthen popular

participation, encourage licit crop production, and create alternative development opportunities.

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For El Salvador, the 1990’s saw the signing of the peace accords

and policy reforms which ended conflict, achieved reconciliation,

spurred strong economic growth, reduced poverty, and strengthened democratic institutions.

To continue these and other programs in the region, we will need

the bipartisan support we have received for our programs. My written statement provides an overview of the fiscal year 2001 budget

request. I also discuss priority areas, including Plan Colombia and

completion of the reconstruction program for Central America and

the Caribbean.

In conclusion, for democracy to flourish in the region, we need to

sustain efforts to expand access, improve governance, and confront

crises. Because of our close geographic, economic, and cultural ties,

development and democracy in Latin America and the Caribbean

matter greatly to the United States. USAID’s field presence in 16

countries and our bilateral and regional programs are an integral

part of U.S. foreign policy.

The nations of the hemisphere have set ambitious goals of greater prosperity, reduced poverty, and strengthened democracy. That

will require an acceleration of growth and reduction in inequality.

With sustained commitment, we know steady progress can be

achieved. We look forward to working closely with the Subcommittee and Congress in the achievement of these shared goals.

Thank you.

[The prepared statement of Mr. Leonard appears in the appendix.]

Mr. BALLENGER. If I may, Congressman Menendez, I think you

have got an opening statement, and I am sorry I started. Just go

right ahead? OK. Secretary Schuerch?

STATEMENT OF WILLIAM E. SCHUERCH, DEPUTY ASSISTANT

SECRETARY, INTERNATIONAL DEVELOPMENT, DEBT, AND

ENVIRONMENTAL POLICY, UNITED STATES DEPARTMENT

OF THE TREASURY

Mr. SCHUERCH. Congressmen Ballenger and Menendez, I appreciate the opportunity to discuss the central role that the World

Bank and the Inter-American Development Bank play in helping

the countries of Latin America and the Caribbean address their

formidable economic and development challenges. In our integrating world, the United States has a growing stake in the economic and political stability and the success of Latin America and

the Caribbean. The region is particularly important given our

strong cultural, economic, and strategic interests as it accounts for

20 percent of both U.S. exports and U.S. foreign direct investment.

As we know from development experience, it is a country’s own

commitment to sound policies that is the most critical factor in its

ability to improve the economic welfare of its people. When such a

commitment is genuine and policies are sound, the World Bank

and the IDB can provide valuable supporting roles in promoting

sustainability economic growth, open markets, poverty reduction,

environmental protection, and good governance.

At the same time, most Latin American countries rely far more

heavily on private financing, and the multilateral institutions now

provide only a small fraction of total resource flows. My colleague,

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Mr. Leonard, has provided a comprehensive picture of USAID’s assistance programs in the region. AID and the MDB’s share common

objectives—promoting growth, reducing poverty, and improving

governance—and they collaborate on the ground, with other donors

and through consultative groups and other aid fora. There is a commonality between the MDB’s and USAID in many of their targeted

development priorities, such as addressing corruption, institution

building, public participation, education, health, and, as we saw in

the aftermath of Hurricane Mitch, economic reconstruction.

The MDB’s are also active in promoting reforms in a broad range

of areas which we often now take for granted. These include allowing markets, not governments, to set industrial, energy, and agricultural prices, liberalizing trade and investment, prioritizing public expenditures, professionalizing and shrinking civil services, reducing or eliminating public subsidies to public enterprises, privatization and allowing private firms to compete in all sectors of an

economy, and reforming the banking sector through sound banking

and credit policies.

I would like to provide a little bit of an overview of the economic

and social situation—their major economic turn-around following

the low decade of the 1980’s. The 1990’s saw important strides in

implementing sound macroeconomic policies, adopting more outward-oriented and private sector-friendly environments, and improving public sector management. Despite individual country setbacks, there has been a major improvement in the direction of

democratic and more accountable government.

Real annual growth for the region was 3.6 percent over the

1991–98 period. However, this amounts to only 1.1 percent per capita annual growth. This is a significant improvement over the 2.6

percent annual increase during the prior 15 years, but it is only an

increase of 0.4 percent on a per capita basis during that period.

In 1998, growth in Latin America slowed to 2.1 percent and was

virtually flat in 1999. Growth has subsequently rebounded, and the

projected rate is roughly 4 percent for this year.

During the 1990’s, growth was achieved against a background of

financial crises, natural disasters, and fluctuations in commodity

prices. The Mexico crisis in 1995, the Asia crisis in 1997, the Russia crisis in 1998, Brazil’s financial instability in 1999, natural disasters of El Nin ̃

o, La Nin ̃a, Hurricanes Mitch and Georges, and the

mudslides in Venezuela we all remember.

Economic growth has also translated into important social

progress. Infant mortality rates dropped from 61 per 1,000 live

births in 1980 to 31 in 1998. Life expectancy at birth has increased

from 65 years in 1980 to 70 years in 1998. Primary school enrollment has increased from 86 percent for males and 85 percent for

females to 95 percent for males and 93 percent for female, from

1980 to 1997. The percent of the population with access to sanitation has increased from 46 percent in 1982 to 68 percent in 1995.

At the same time, much remains to be done. Economic and social

progress has been uneven both within and among countries, and

Latin America’s record in translating economic growth into poverty

reduction has been very disappointing.

Latin American countries have the greatest income disparities of

any region in the world. The poorest 20 percent of the population

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receive less than five percent of total income while the richest 20

percent receive 53 percent.

More than 15 percent of the population are living on less than $1 per day; more than 36 percent are living on less than $2 per

day. These shares have roughly remained constant, and perhaps

have had only a slight decline over the past 10 years or so.

One of Latin America’s most crucial development challenges is to

do a better job in ensuring that efforts to promote economic growth,

poverty reduction, and economic inclusion are mutually reinforcing.

In addressing this challenge, we know some things about the factors that contribute to equitable growth. For example, there is now

a broad consensus on the need to focus explicitly on attacking poverty and by concentrating resources more effectively on interventions that most directly affect poverty. While it is crucial for the

countries of the region to maintain sound economic management,

they also need to give priority to investments in human development, particularly the provision of stronger and more efficient basic

education and health services and rural development that expand

opportunities for the poor.

I would like to turn to the roles of the two banks specifically. Because Latin America’s per capita income is relatively high compared to other developing regions, only a small portion of World

Bank and Inter-American Development Bank assistance—

concessional assistance, that is—is provided to the region, roughly

about $875 million annually over the past five years. This assistance is restricted to the region’s poorest countries: Bolivia, Guyana,

Haiti, Honduras, and Nicaragua.

The level of hard loan lending to Latin America normally aver- ages about $10 billion annually. There was a substantial increase

in assistance during 1998 and 1999 to a peak of about $16 billion

in 1999 to cushion the financial and development impacts of the

crises in particularly Argentina and Brazil. Lending has now returned to more normal levels.

Throughout the 1990’s, in terms of net transfers instead of new

lending, it is not unusual in some years for the Latin American region as a whole to have a negative flow, an outflow in repayments

and charges vis-a-vis new lending, or in other years to see net flows

roughly in balance.

The effectiveness of MDB lending to Latin America varies by

country. Overall, we believe the World Bank and the IDB have

played a highly positive role in encouraging and supporting countries of the region to build economic frameworks necessary to make

markets work more effectively and allow private enterprise to

grow.

I would like to use two examples of success stories in the region:

Argentina and Bolivia.

Since 1991, when Argentina began a dramatic turn-around, Argentina has been the second largest Latin American borrower from

both the World Bank and the Inter-American Bank. Over this period, in sharp contrast to its past stagnation, economic growth

averaged five percent per year. Total GNP doubled in real terms,

and the economy was put on a sounder footing to address outstanding problems, particularly a stubbornly high level of unemployment and the need to improve certain social indicators that

8

have been deteriorating, such as income equity and poverty. The

World Bank committed a total of $12.6 billion since 1991 in a program that evolved from support of public sector reform and privatization to support of financial sector reform, and then provincial reform, focused first on provincial finances and increasingly on provincial social sector issues.

The World Bank’s independent Operations Evaluation Department recently reviewed the Bank’s assistance strategy for Argentina. Its report is highly positive in terms of the total impact of the

Bank’s supportive financial and advisory role on a highly committed government. The overall strategy was judged largely successful, with high rates of achievement of project objectives and low

levels of portfolio problems.

Bolivia is the largest recipient of aid to Latin America in both

IDA’s and the IDB’s Fund for Special Operation concessional windows over the last decade. It has experienced a dramatic economic

transformation also. Emerging from a period of severe economic

and social chaos, Bolivia has compiled an impressive 12-year track

record of stabilization and reform despite major economic constraints, including weak institutional capacity, major infrastructure

weaknesses, adverse terms of trade, and vulnerability to climatic

setbacks.

As is the case in Argentina, it is the strong commitment of successive democratically elected governments that has been decisive,

although MDB’s have provided crucial support. Annual growth in

Bolivia averaged 4.3 percent, or two percent per capita, in the

1990’s after recording negative growth during the 1980’s. Inflation

has been reduced from 24,000 percent in the mid-1980’s to about

five percent today. Privatization has reduced state-controlled enterprises from 25 percent of the economy in the early 1990’s to less

than two percent.

Unfortunately, the resulting impact of economic growth and reform on poverty has been modest. While most social indicators

show improvement, some 70 percent of the population remain poor.

The government is strongly committed to addressing this problem

and is currently in the process of developing a Poverty Reduction

Strategy Paper in the context of the World Bank’s program and

IMF’s concessional program that will set clear strategies for addressing key constraints on reducing poverty.

The World Bank and the IDB will continue to support economic

reform in Latin America, recognizing that many countries are now

in the most difficult phase of the reform process—addressing major

public sector reforms, pension reform, budgetary reforms, institutional and judicial reform, frequently at both the Federal and local

levels—where implementation is complex and politically difficult

and the efforts needed to build necessary domestic public consensus

are time-consuming.

Future programs will also focus heavily on reducing countries’

vulnerability to adverse developments in the international economy

and financial markets, while concentrating even more assistance on

social sectors.

Both institutions are also participating in the Heavily Indebted

Poor Countries Initiative for some of the poorest countries in the

region. The United States has played perhaps the leading role in

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helping to design and implement the HIPC Initiative, and the enhanced HIPC Initiative seeks to improve prospects for long-term

growth and poverty reduction, by reducing debt for countries that

have demonstrated good economic performance in order to provide

a cushion against future debt problems and to free up significant

new resources for productive investments to reduce poverty. Bolivia

was determined eligible for enhanced HIPC relief in January; Honduras is expected to become eligible this July. Two other Latin

American countries—Guyana and Nicaragua—are also on the list.

HIPC is not a cure for the poverty of these countries, but it is one

of several programs, including the provision of concessional IDA

and FSO resources and USAID resources, focused on deepening

long-term sustainable efforts at poverty reduction.

I should note the Administration request to help finance HIPC

is pending before the Congress. Passage is crucial for the initiative

as a whole, but particularly for eligible Latin American countries.

I chaired a meeting last week among the IDB and its member

countries where agreement was reached on how to finance the

IDB’s full participation in the HIPC. However, without a substantial U.S. contribution to the HIPC Trust Fund, debt relief for Bolivia will not occur. In addition, debt relief for other Latin American HIPC’s will not move forward. With Honduras also expected

to become eligible shortly, the need for a sizable U.S. contribution

to the Trust Fund is urgent.

In terms of the annual funding appropriations, the cost for financing other World Bank and IDB operations in Latin America is

very modest. We no longer request funding for either institution’s

hard loan windows because we believe the existing capital bases of

the institutions are adequate to sustain their lending indefinitely.

Budgetary costs attributed to IDA operations in Latin America are

about $70 million annually. The latest replenishment for the IDB’s

FSO concessional window entails no additional commitment of new

resources from the United States. The next replenishment is likely

in the time frame of 2008.

This year’s Administration request for appropriations for other

World Bank and IDB developing countries’ programs which impact

Latin America total $76 million; $16 million is for the Multilateral

Investment Guarantee Agency that provides investment insurance

against noncommercial risk for private insurers and the major

users of that program happen to be U.S. companies operating in

Latin America; $34 million for IDB’s Inter-American Investment

Corporation, which provides long-term loans and equity investments in small- and medium-size enterprises, primarily in smaller

and poor countries; and, for $25 million for IDB’s Multilateral Investment Fund, which focuses on catalyzing investment reforms

through grants for technical cooperation, human resource development, and small enterprise development as well as micro finance

institutions.

In each case, I would note the amounts that are going through

the budget process and actions in the House and Senate Committees are substantially lower than the requests that are before those

Committees.

Like all institutions, the Bank and the IDB can both be improved

and their capacity can be strengthened to respond quickly and creVerDate 11-MAY-2000 10:19 Aug 17, 2000 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 65971.TXT HINTREL1 PsN: HINTREL1
10

atively to evolving requirements of their membership. The Administration has worked hard with the members of the World Bank

and the IDB and with their managements to promote reforms that

improve their development effectiveness. We have been successful

in achieving significant changes in many areas: more transparency

and accountability in the institutions and their operations; increased attention to poverty reduction, greater attention to lending

effectiveness and project quality, more focus on governance and

anticorruption, increased attention to environmental sustainability

and core labor standards. The reform program continues.

In concluding, Mr. Chairman, I would like to reemphasize that

the Treasury Department remains committed to working hard with

the management and members of the World Bank and the IDB and

with the Congress to ensure the institutions are able to work effectively in supporting borrowing governments that are committed to

sound economic management and reform. The challenge of reenergizing efforts to combat poverty in Latin America is a complex one

and multidimensional. In a good policy environment, economic assistance—multilateral and bilateral—can and does make a significant difference in spurring growth and reducing poverty. We will

work closely with the Congress to maintain a selective and welltargeted program in this area.

Thank you for your consideration, and I would submit my written statement for the record.

Mr. GALLEGLY. [Presiding.] Without objection, it will be made a

part of the record in its entirety.

[The prepared statement of Mr. Schuerch appears in the appendix.]

Mr. GALLEGLY. Mr. Secretary and Mr. Leonard, I first of all want

to apologize for the circumstances of today’s agenda. I think everyone knows what is going on on the floor, and it is unfortunate but

it is a part, I guess, of the process, or we would have more members here.

In the interest of time, I am going to ask unanimous consent that

my opening statement be made a part of the record rather than me

presenting it orally, and without objection that will be the order.

[The prepared statement of Mr. Gallegly appears in the appendix.]

Mr. GALLEGLY. At this point I would defer to Mr. Menendez, if

you have opening comments or if you would just—whatever your

preference is, Mr. Menendez.

Mr. MENENDEZ. Thank you, Mr. Chairman. I ask unanimous consent to have my full statement included in the record as well.

Mr. GALLEGLY. Without objection.

[The prepared statement of Mr. Menendez appears in the appendix.]

Mr. MENENDEZ. I just want to use parts of my statement to challenge both of you and the respective agencies that you represent.

I had hoped to listen to testimony that would have dealt more—

not only with what you dealt with, which was fine, but with our

funding levels, and, what I consider to be ever increasing declining

aid levels in the context of one of the most important regions to the

United States on questions of trade, on questions of health, on

questions of immigration, on questions of illicit narcotics trafVerDate 11-MAY-2000 10:19 Aug 17, 2000 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 65971.TXT HINTREL1 PsN: HINTREL1
11

ficking, on questions of biodiversity, and the list is endless. While

we speak in words that suggest to the hemisphere that we care

about them and that we are interested in them, we act in different

ways.

Clearly, if we want to seriously talk about long-term sustainable

development, we have got to talk about investments in education,

first and foremost, in health care, in property rights, in judicial reform and good governance. But if I look at the foreign assistance

for the region, which is one of our primary tools for addressing

these development issues, I see a drastic cut. In the 12-year period,

the United States reduced its bilateral assistance to the region by

two-thirds, from $1.8 billion in 1985 to $600 million in 1997. In

1988, Latin America represented 17 percent of total USAID programs, yet ten years later, in 1999, it represents only seven percent, from 17 to seven percent in a decade.

Let’s put this in perspective. Latin America and the Caribbean

countries contain more than one in six persons in the world’s nations, yet it gets only seven percent of our aid. The region accounts

for over 12.5 percent of the world’s population, yet only seven percent of the aid.

Of those living in poverty in the world, nearly 30 percent of them

live in Latin America and the Caribbean, yet, again, only seven

percent of our aid, the overall purpose of which is to reduce poverty, goes to the region.

So I look at that, I look at the wealth and income gaps in the

region, already the highest in the world during the 1970’s, widened

dramatically in the 1980’s, the lost decade of no growth and high

inflation, and have continued to increase even with the resumption

of growth in the 1990’s.

In part, clearly my concern and my questions to both of you and

to the Secretary, only 18 percent of the IDB’s total lending last

year went for social needs, a decrease from the 24 percent lent in

1998 for these purposes. At the same time, total World Bank lending for social programs fell to $1.4 billion, only 19 percent of the

total, from $2.6 billion, or 44 percent of the total, the previous year.

It seems to me that the challenge we face is to change our policies, which includes our resources to address poverty, not just simply drugs and immigrants. That is all we hear about here, drugs

and immigrants. If that is the way we continue to speak to Latin

America, we are not going to go very far.

People flee their countries because they are either mired in poverty or to escape civil conflict. Otherwise, those countries have

enormous resources for people to stay in their own countries. We

spent enormous amounts of money in Central America for war, and

now when we have planted the seeds of the potential for democracy, we basically abandon it, leaving to their own devices the ability to move forward.

So we need to change our policies. We obviously need to create

a constituency with Latin America, and that is why I propose—and

I will be offering legislation—to create a development fund for

Latin America. I hope my colleagues on the Committee will be supportive of it. I seek to create a floor, not a ceiling. I am tired of

Latin America being the one location when there is an interVerDate 11-MAY-2000 10:19 Aug 17, 2000 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 65971.TXT HINTREL1 PsN: HINTREL1
12

national issue that money is taken away from. It is already too little.

Last, I am very happy to see in the testimony that Professor

Bradford will be offering before this Committee that he tells the

Members of this Committee—and I would love to have him at some

point before the full Committee that we could get some attendance

at and they would listen—that, the concerns in terms of assistance,

development assistance, he says in his testimony that in an internationally recognized report that recently was released, it demonstrates that progress—this is speaking about development assistance—that progress is possible. It shows convincingly how different

elements of the international development assistance efforts under

our review can achieve a reduction in poverty. It vividly demonstrates the concerted effort by both bilateral and multilateral development programs, the degrees of success they have. Finally, it

says something that I totally agree with him on, which is that it

is simply the case that the central issue in aid effectiveness today

is aid volume, and we cannot expect grand results from meager investments.

With all due respect, gentlemen, listening to your testimony and

reading through it as you were presenting it—AID, I am a great

supporter of AID. It does what it can with what it has. But you

just simply should be out there advocating much stronger for a

greater part for Latin America, and the Administration should not

be opposing Latin America development fund efforts so that we can

finally match our actions to the words that we say to the people

of the hemisphere when we bring them together in grand summits.

There is nothing worse than to defraud a people by giving them

a vision of what is possible and then totally having a hollow response to that vision. That is really where I believe that we have

been at with the hemisphere.

Thank you, Mr. Chairman, for your indulgence.

Mr. GALLEGLY. Thank you, Mr. Menendez.

Mr. Secretary, the IDB’s eighth replenishment required that 50

percent of the projects funded be in the social sectors, including

those of civil society and the environment. This has been a major

challenge for the Bank. Can you give us an idea of how the Bank

has met this requirement so far?

Mr. SCHUERCH. I am not sure, depending on what is classified as

social expenditures. There is quite a bit of discussion as to all of

the components that go into——

Mr. GALLEGLY. The subjectivity of——

Mr. SCHUERCH. Yes, the subjectivity of classification schemes is

an interesting discussion, actually, but we have called for, as you

have said, 50 percent in the eighth replenishment. In the World

Bank, on the other side, we have called for 40 percent of lending

to go into the social sector. Both of these are major shifts, and I

would say in both cases we probably have statistics, although I

haven’t seen precisely the ones you are quoting, that show them

trailing what the aspirations were in the international agreement.

Certainly I have seen that in the World Bank, and certainly in

totals. I don’t think on a disbursement basis you would see 50 percent of the IDB numbers either. They have very definitely, not just

at the Bank but in the leadership of the individual countries, come

13

to a consensus that there needs to be substantially more effort and

more investment in the social area, particularly education and

health. But the numbers, I believe, have yet to fully catch up with

the aspirations and where leadership is.

Mr. GALLEGLY. I appreciate the fact that there is some subjectivity to the issue of social expenditures, but there is certainly no

question about the spirit, and certain areas that clearly, as you

mentioned—education, health, things of that nature—fit in that

category. But it doesn’t seem like we are getting anywhere.

Mr. SCHUERCH. We are in agreement with the tenor of your remarks, and we have continued to push on this. Where there is marginal disagreement on classification it is more in the infrastructure

areas, which elements of infrastructure, roads and other things, or

schools, can be counted in the social area.

We continue to push on the social sector and on increasing it.

The Secretary’s speeches at the Annual Meetings have also pushed

on this. There is improvement in the IDB. The IDB took up the

poverty alleviation theme and the focus in its programs before any

of the other institutions. But we are not at a 50 percent level at

this point.

Mr. GALLEGLY. On page six of your testimony, you provided a

warning on the region’s political and, I think you said, economic

vulnerability, and I don’t think that is anything that we disagree

on. You also say that the World Bank and the IDB will concentrate

even more aid on the social sectors.

Is it fair to say that the IDB and the World Bank will consider

increasing its assistance to the region or just redirect existing efforts to the social sector?

Mr. SCHUERCH. I think every dollar the IDB has is for this region, obviously, so it is not a question of an increasing pie in that

particular instance. So there it is clearly redirection.

I think within the World Bank it is redirection as well, but there

is a difference in the World Bank in that in the concessional program, the IDA Program, we now have in place under the last replenishment a performance allocation structure. So countries are

judged on how well they are investing the money they are getting

from the institution, how well they are running their portfolios,

their economies, and on corruption issues and governance issues.

So they get an allocation that is based on a judgment about how

well the resource they would receive will be utilized. That judgment is made on an annualized basis, so a country in a sense earns

its allocation under the IDA program. Latin countries can improve

their performance, and they will get more resources as they improve their performance. This applies to every region. So it is not

a top-down direction of more resources in that case.

In terms of the hard loan windows, it is performance-based as

well as demand-based. The countries themselves need to make a

judgment about the amount they want to borrow. Many of them

can borrow on the private markets at a lot closer to the interest

rates they can get from the World Bank or IDB, so it is not solely

a judgment of need as to how much they choose to borrow from institutions. Neither institution is fully constrained in terms of its

total resource levels today. There is headroom for additional lending.

14

Mr. GALLEGLY. Mr. Ballenger?

Mr. BALLENGER. It was strange to listen to both of you deliver

your testimony, and nobody mentioned the effect of, first of all, losing NAFTA, having its original effect on the Caribbean area, and

then I just happened to be in El Salvador when they announced

that CBI was going to—that the Senate and House had agreed—

it hadn’t passed yet, but the Senate and House had agreed, and I

was talking to a manufacturing gentleman there that was looking

for 1,200 people immediately. Contracts were coming so rapidly

that he needed to hire 1,200 people immediately.

In fact, I heard the Presidents of Nicaragua, El Salvador, and

Guatemala say, your aid is wonderful and all this kind of stuff, but

if you get a CBI, we would rather have that than anything that you

can do for us. It really is kind of strange that neither one of you

mentioned it.

Second of all, especially as far as the banks are concerned, I

know I have discussed with the President of Nicaragua and other

areas down there the fact that most of their banks are so small

that if you really wanted to be able to develop anything down

there—and I am not knocking the social. I think jobs are almost

a very important part of the social structure. I don’t know what

you can do about small banks that can’t lend very much money. It

is one of those things. We don’t know how you solve that, to be

honest with you. Do you have any—especially in the banking business, do the banks borrow money? Who borrows the money? Does

the country borrow the money or do the banks borrow the money?

Who borrows the money?

Mr. SCHUERCH. Which money? If you are talking about IDB

money or World Bank money, it requires in the case of the World

Bank a sovereign guarantee, and in most of the cases of the IDB,

a sovereign guarantee also.

In terms of lending to small- and medium-business enterprise,

both banks have private sector windows: one, the International Finance Corporation in the World Bank, does somewhat larger operations, but has a major portion of its business in Latin America;

the Inter-American Bank has the Inter-American Investment Corporation, and we have just completed last year a replenishment for

a ten-year period, $500 million, and it is targeted more at the types

of countries I think you are focused on at the moment, which is the

smaller countries, the poorer countries, because many of the large

ones, even though they have large percentages of the poor population, in fact have internal resources that are quite consequential.

Brazil and Mexico both have development programs that are internal and that are large. I think Brazil’s exceeds the size of the IDB’s

lending program, for example.

Mr. BALLENGER. What I would like to say to the U.S. AID is,

having seen your operation for the—what do you call it? It is not

small loans, but small businesses that they had. First I saw it in

El Salvador. Then I think your manager that you had in El Salvador moved to Nicaragua, and both of them, as far as I could see,

I have never seen a young girl who started off with $50 worth of

goods in Nicaragua and had built it up to where she had a fairly

nice little size area of—kind of a shopping center of groceries and

things. To my way of thinking, when you can see the pride that

15

was developed by those people in that whole general area, I commend you highly for that. I also commend you for the ability to—

when you really go out in the boon docks and you see those poor

people that don’t know how to feed children and you have that program with corn and oil and a mixture and so forth and you teach

the mothers how to feed the children, I am very happy with what

you do.

I can’t understand how we have cut—did we do this or did you

do this, the amount of money?

Mr. LEONARD. Let me just say, Congressman Ballenger, I was in

El Salvador and I remember well some of your trips to the region,

and we greatly appreciate the interest and support you have given

to Central America and the Caribbean over the years. When I was

in El Salvador, we were supporting the peace process and economic

reforms, and I remember some of those trips to the micro finance

programs we put in place, and then your later interest and the support after the hurricanes to get the reconstruction assistance going.

So we very much appreciate that, and we do feel we have made excellent progress.

You are right to mention the importance of trade and CBI enhancement. That is critical for the region, and it is a manifestation

of the bipartisan support that we need to move the region forward,

the passage of the CBI enhancement. We have worked in Central

America, we are working in the Caribbean to enhance competitiveness, and that is very important for getting the growth we need.

We need both growth and we need the poverty reduction programs

to go forward concurrently.

In terms of the cuts, the cuts have been with us for a long time.

Congressman Menendez pointed out where we were back in 1990

and where we are today. It has happened in a context of budget

constraints that we all know about. The Agency for International

Development worldwide has fewer resources today than we had in

1990. Along with that, programs in the region have also been cut.

I would hope that we in the Administration, Congress, the American people, we could build a consensus for greater volumes of foreign assistance, and with that there would be greater volumes for

Latin America. But in response to the question could we use more

resources, are there needs for more resources, the answer is clearly

yes. I hope we can work together.

Mr. BALLENGER. Just one more question, and you can have it,

but our friends there say, it is strange how, if we have a war in

our country, Congressmen by the—gobs of Congressmen keep coming down here to see us and money flows, mostly giving us bullets

and guns and stuff. But as soon as the war is over, everybody disappears. It is kind of a strange situation.

You wanted to go ahead?

Mr. SCHUERCH. Yes, I thought I would give a contribution. I

maybe don’t look that old, maybe I do, but I go back far enough

that I remember the first CBI, the Caribbean Basin Initiative, and

it was the early 1980’s, not the current CBI you are referring to.

I would say the high point of the total foreign aid budget—at least

in terms of the Foreign Operations Subcommittee, I spent 14 years

on the Appropriations Committee staff here—was in fiscal year

1985, during the Reagan years. Since that time in net present

16

value terms, in real terms, it has been decreasing not every year,

but virtually every year. There have been a few years with a plateau and a couple of upticks. That 1985 bill was about $18.5 billion

compared to a bill today that is in the range, in nominal terms, of

$13 billion or so, $12 billion to $13 billion. That bill only grew last

year because of a Presidential veto, because it was substantially

cut, and I think a couple billion was added back in the process late

last year after the veto.

That cycle has been constant, and it has been constant regardless

of executive/legislative control in terms of the party structure.

Mr. BALLENGER. Could I do it this way?

Mr. SCHUERCH. Do it your way. That is fine.

Mr. BALLENGER. It looks like growth from this——

Mr. SCHUERCH. It seems we have a dynamic that, for better or

for worse, certainly needs to be reversed. The way you pass a bill

in the House specifically is by cutting a foreign aid bill. People

need to work together. In a shrinking pie, every region is squeezed,

and some are squeezed less than others, obviously, and Latin

America has been caught in quite a difficult circumstance.

Mr. BALLENGER. As you might gather, foreign aid is not the thing

you win elections with back home. Somehow in the election years,

it gets shrunk back.

One thing I would like to ask, because it was brought up, about

the population, the growth in poverty in areas almost across the

board it appeared coming up, and I was also wondering if the birth

rate in this particular area could have some effect on—I keep

thinking of Brazil where all the kids seem to be—you read about

them all the time. We said something, a large percentage of the

whole growth in that was in Brazil.

Mr. SCHUERCH. Yes. It is not just the birth rate. It is also life

expectancy. People are living longer. Improvements in health result

in longer life expectancy. You have a population growth that reflects both birth rate and longer life.

But the population growth rate has been consistently declining

for the region. In the 1970’s, you were up around an average of 2.2

percent, obviously with some countries quite a bit higher than that,

but in the 1990’s, we are down to 1.5 percent. The replacement rate

is about 1.2 percent.

Mr. BALLENGER. When your population gets to be 500 million

people, the percentage of growth doesn’t take much to create a New

York City every year. What is the actual—does anybody have a

number for the actually——

Mr. SCHUERCH. I don’t have the fertility rate, or desired family

size.

Mr. LEONARD. I don’t have the aggregated numbers for the region, but birth rates have been declining, and that correlates very

closely with improvements in infant mortality, child mortality. As

the birth rate declines, as child spacing has occurred, things have

improved. The total population of the Latin America and Caribbean

region reached $515 million in 1999. The growth rate is now an estimated 1.53 percent, down from 2.5 percent in 1970. Countries

where population growth rates exceed two percent include Haiti,

Honduras, Guatemala, Nicaragua, Bolivia, and Paraguay.

17

Mr. BALLENGER. I appreciate it because it would make a fair

amount of sense. One thing I would like to say before I shut up

is I have been trying to tell my friends down there that the education system is going to be the basis for whatever happens, and

when Intel decided to pick a place in the world to locate their big

assembly plant and they picked Costa Rica, I talked to people with

Intel, and the pure and simple reason they located in Costa Rica

was, peace, but the education system was so much better than any

of the other ones. If somebody could somehow pass that word down

there, put more money into education and less into whatever they

are trying to put their money into.

Mr. LEONARD. I agree fully, Congressman. Costa Rica is an excellent example of the importance of investments in health and education over a sustained period, of developing human capacity, and

they have achieved both growth and equity as a result.

Mr. SCHUERCH. I would say in some cases it is not just the

amount of resources for education. It often also is how you utilize

the resources. In many cases, when you look at education budgets—because this is an economy and a region that is upwards of

$2 trillion a year, a little bit short of that for the region. There are

lots of internal resources, although many countries, smaller countries are quite short—you will find that there is significant money

being spent on education, not an inappropriate level, but it is being

aimed at higher education, university education, and it is not being

aimed sufficiently at primary education where there have been has

improvements in terms of enrollment, or secondary education. One

has to focus now on improving quality as well.

Mr. BALLENGER. I would like to say one thing. Venezuela, with

all of its oil wealth and so forth, the lower grades are not particularly interested as far as their government is concerned, and I

agree with you 100 percent. The money could be wisely applied to

trying to develop the lower class into some educated people since

they have such a large number of people that are in poverty.

Mr. GALLEGLY. Thank you very much, Mr. Ballenger. Thank you,

Mr. Secretary and Mr. Leonard. Again, I apologize for the tardy

start. It is going to continue to be a long day for all of us.

Mr. BALLENGER. Those of you who would like to stick around

until late tonight, we will still be here.

Mr. GALLEGLY. I found it kind of amazing. Many of my colleagues today are coming to me, and probably you as well, asking

have you heard whether we are going to be in on Friday? We are

not really going to be here Friday, are we? I said, it depends on

the action of some of you that are asking the question. It may be

Saturday, it may be Sunday, it may be Tuesday.

Anyway, thank you very much, gentlemen.

Mr. SCHUERCH. Thank you, Mr. Chairman.

Mr. LEONARD. Thank you.

Mr. GALLEGLY. Our next panel is Dr. Colin Bradford and Ms.

Sylvia Saborio, if they would come forward.

Our next panel is Ms. Sylvia Saborio, who is a senior fellow at

the Overseas Development Council, and Dr. Colin Bradford, Professor of Economics and International Relations at the American

University. Welcome.

18

Ms. Saborio, if you would like to make your opening statement,

we look forward to hearing from you.

STATEMENTS OF SYLVIA SABORIO, SENIOR FELLOW,

OVERSEAS DEVELOPMENT COUNCIL

Ms. SABORIO. Thank you very much.

Mr. Chairman, first of all, let me thank you and the Subcommittee for inviting me here this afternoon. I welcome the opportunity to discuss development assistance effectiveness in the context of our hemispheric partnership. Let me just say before I begin,

that having heard what was said here today, I am very proud to

acknowledge that I am Costa Rican.

My presentation will start with a synopsis of the state of development in the Latin American and Caribbean region at the turn of

the century. I will then discuss some of the major challenges facing

the region in the years ahead and consider ways in which external

actors can help the countries in the region effectively meet those

challenges.

At the risk of oversimplifying the regional picture by abstracting

from the tremendous diversity that it contains, in the interest of

time, I shall focus instead on the common threads that characterize

the region at the turn of the century.

First, the rate of economic growth has been sluggish in comparison to world patterns. Average per capita income is currently

around $3,100—less than a third that of industrial countries and

lower than that of East Asia, the Middle East, and Eastern Europe.

This wasn’t always so. At mid-century Latin America’s per capita

income was higher than that of all other developing regions and

half that of industrial countries.

Second, despite great strides in taming inflation in recent years,

the region remains more volatile than other areas in terms of unemployment, job insecurity, and real income variability. Indeed, the

growth rate in any Latin American country typically fluctuates four

points in either direction in any given year. People who have not

experienced such a roller coaster must find it hard to fathom how

anybody can live with such insecurity and vulnerability. The answer is, of course, not very well.

Latin America also has the worst distribution of income in the

world. A fourth of national income goes to only five percent of the

population; the corresponding figures for Southeast Asia and developed countries are 16 percent and 13 percent, respectively.

In contrast, in terms of the United Nations Human Development

Index, Latin America is on a par with East Asia and Eastern Europe and surpassed only by industrial countries, and this gap has

been narrowing over time. Indeed, the region has made important

strides in the area of health—issues such as the eradication of

polio—and also registered some modest gains in education. It has

entirely closed the gender gap, although it continues to have some

problems in terms of quality and incompletion, especially at the

secondary level. This, of course, fits right back into the lack of economic opportunity.

In terms of social development, another paradox: Latin America

has moved to the forefront of the developing world in terms of civil

liberties and respect for democratic rights, but individual violence

19

has skyrocketed and crime rates today are higher than those almost everywhere else, except Africa.

Finally, the initial enthusiasm with democracy has begun to

erode on the face of disappointing economic and social outcomes.

While democracy has increased people’s freedom to criticize unresponsive bureaucracies and inefficient spending, it has not necessarily helped to solve those problems; nor has it succeeded in

stemming new threats, such as terrorism, corruption, and gun and

drug trafficking.

It is clear from the mediocre record of accomplishments noted

above that the region faces major challenges in the economic, social, and political spheres.

In the economic sphere, the so-called first generation of reforms—that involve things like import liberalization, opening of the

capital account, domestic financial liberalization, privatization of

public enterprises, and tax reform—have produced outcomes that

fall far short of expectations. A recent study by the Economic Commission for Latin America concluded that, ‘‘Overall, . . . the reforms have had a surprisingly small impact..a small positive effect

on investment and growth and a small negative impact on employment and income distribution . . .’’

They found that the reforms did not solve, and quite probably increased, two problems: that investment continued to be concentrated among large enterprises that have few linkages with

smaller firms, and that supplier chains were destroyed by increased imports.

They also found that the majority of foreign direct investment actually went to purchase existing assets—either through the privatization of public firms or takeover of private firms—rather than

creating new assets.

Clearly, then, the next generation of reforms must be more progrowth and more pro-poor. At the macro level, stability needs to be

consolidated and the resource allocation improved, and at the micro

level, the tendencies toward polarization and concentration have to

be constrained, if not reversed.

In the social sphere, there are at least three areas where further

action is needed. The first is, as Mr. Ballenger mentioned, employment generation. Employment has been squeezed on two fronts.

Recent shifts in relative prices have favored capital-intensive production and import competition has wiped out a host of small, relatively labor-intensive producers. The ‘‘informalization’’ of employment is not a socially desirable option. Alternative employment opportunities in the formal sector must be developed. In this regard,

affirmative actions to create an environment where efficient, small

production units can thrive is the most promising way to generate

employment and improve the primary distribution of income.

Second, social spending. Latin America has a lot of catching up

to do in terms of human capital accumulation. Ensuring greater

and more efficient social expenditure, especially in education, must

be a priority. Mechanisms must be found to improve the delivery

and financing of social services in ways that do not segregate access and quality according to social strata and that protect social

expenditures from cyclical downturns.

20

Finally, social protection. In a region subject to as much volatility

as Latin America is, safety nets are simply a necessity.

Last, but certainly not least, in the political realm, issues of governance and institutional development are a major and urgent

challenge. Indeed, in my view, this is where Latin America has the

greatest deficit.

Far-reaching institutional reforms are needed to enhance both

economic efficiency and social equity, as well as to facilitate the

interface with others in the hemisphere and beyond, in a rapidly

globalizing world. This is a societal issue that transcends the government itself. In the public domain, mechanisms for decisionmaking, conflict resolution, and accountability need to be improved

and the institutional capacity to carry them out enhanced. In the

corporate sector, socially responsible entrepreneurship must replace the clientelistic, rent-seeking behavior of yesteryear. Civil society must find a coherent voice and a constructive role to play in

this new scheme of things.

Now, while Latin America must remain the main protagonist of

its own development, external actors can and should play an important supporting role, basically in three areas:

First of all, by providing an enabling environment. Now that the

region has embraced an outward-oriented, market-based development strategy, open markets and a stable international financial

system are critical to its success.

U.S. leadership is essential in this regard. On the trade side, it

should secure fast-track authority so that it can engage in serious

negotiations with regional partners toward the completion of the

FTAA by 2005, and so that it can credibly push for global trade negotiations in the WTO—here I would like to acknowledge the recent passage of the CBI legislation which, for the countries in the

Central American and Caribbean regions, will provide increasing

opportunities in the trade area. On the financial stability side, the

U.S. should bring its considerable weight to bear on the G–7 and

on the IMF in order to improve both the mechanisms for crisis prevention and for crisis management. The U.S. should also weigh in

on the private financial sector to improve risk management practices and exercise corporate responsibility.

The second is the area of development finance. Meeting the region’s hefty needs in terms of physical, human, and social capital

is going to require the mobilization of considerable resources, both

from domestic and external sources. The particular resource mix

needed will vary widely from country to country, depending on size,

stage of development, and particular circumstance. But in most

countries, public funding is still needed to crowd in private funding.

The IDB and the World Bank have important roles to play in

supplying some of those funds. Recent analyses suggest—and my

own experience with both of these institutions confirms—that there

is vast room for improvement in the way they perform their development finance function. In my view, this is true of the way they

allocation their corporate resources and their loan portfolio, as well

as of the way they handle the project cycle. Corporate incentives

are skewed in favor of loan approval, and partly as a result of that,

especially smaller borrowers tend to get short shrift in terms of the

21

allocation not only of funds but of high-quality personnel. These are

not arguments for closing down these institutions but, rather, for

improving them. To be fair, the mounting criticism is beginning to

have an impact. I myself am not a great believer in the Comprehensive Development Framework and the way it is being applied: I find it a bit too grandiose, involving too many actors, and

prone to overload existing institutional capacities. But, clearly,

some organizing principle is needed to set development priorities

and see to it that they get financed. Time will tell whether the

CDF is the answer. . . or the problem. I have similar misgivings

regarding the poverty reduction strategies that are being linked to

the HIPC Initiative.

Second, there is the area of bilateral development assistance,

which also has an important role to play in some countries in the

region. Clare Short, the British Secretary for International Development, recently declared that the European Commission is ‘‘the

worst development agency in the world.’’ That may be so, but it has

company.

A study of USAID I recently conducted led me to conclude that

the system of resource allocation is vastly over-determined; it is

micro managed in myriad ways rather than obey a strategic concept, and this I have to say largely reflects the many ceilings,

floors, and earmarks imposed by the Congress itself. But the effectiveness of U.S. development assistance is further compromised by

the fact that a large portion of U.S. bilateral aid is tied: three-quarters of it versus just one-quarter for the Development Assistance

Committee as a whole. A recent World Bank study concludes that

tied aid reduces the value of development assistance by some 25

percent. Last, but not least, of course, is the fact that at 0.1 percent

of GNP, the U.S. has the lowest development assistance ratio in

the DAC. This I find unconscionable at a time of unprecedented

prosperity.

[I have brought some material from my colleagues at ODC who

have done an immense amount of work in this area, but in the interest of time, I will not read it.]

Finally, a very important component of the development assistance package is not money but ideas. Here we need to be creative

and eclectic. Development paradigms come and go, but in the process, they affect real people. We need more research and more technical assistance to share best practices and best policies more widely and, in so doing, reduce the overall cost of development.

In closing, I would like to thank the Subcommittee for this opportunity to share my views and concerns regarding Latin America

and at the same time make an appeal to give the region more than

the intermittent attention it usually gets, except for such perennial

issues as Cuba, drugs, and immigration. After all, Latin America

is already the U.S.’s most important trading partner, accounting

for 45 percent of U.S. exports and 36 percent of its imports. We are

engaged in the process of creating the largest, and hopefully most

prosperous, partnership in the world. We know that development

assistance works best within a strategic long-term framework. The

framework for hemispheric cooperation is already there, agreed at

the Miami and Santiago Summits. Now all we have to do is make

it happen!

22

Thank you.

[The prepared statement of Ms. Saborio appears in the appendix.]

Mr. BALLENGER. [Presiding.] Yes, ma’am, I liked your finish

there.

Dr. Bradford?

STATEMENT OF COLIN BRADFORD, PH.D., PROFESSOR OF ECONOMICS AND INTERNATIONAL RELATIONS, THE AMERICAN

UNIVERSITY

Mr. BRADFORD. Thank you, Mr. Ballenger. I appreciate your patience and endurance. I think one remark I would like to make before I begin is that I think it was impressive, really, the number

of people that were in this hearing room for the first hour and a

half or so.

Mr. BALLENGER. Again, I apologize.

Mr. BRADFORD. No, I think that was a good sign, and as a couple

of people have remarked, the number of people that were here were

mostly younger people. That is, a very good sign to have a hearing

on the Hill in which the next generation is showing some considerable interest, and I just would like to remark on that.

I would appreciate it if you would agree to put my written remarks in the record.

Mr. BALLENGER. Without objection.

Mr. BRADFORD. Thank you. I would like to follow on Sylvia’s excellent presentation and just make a few remarks to you. Sylvia

just said a very important thing that actually goes to the heart of

the contribution that I wanted to try to make to your thinking, and

that is, she said there needs to be some organizing principle to set

priorities. As I sat here and listened and tried to put myself in your

shoes, listening to the excellent presentations by Carl Leonard and

Bill Schuerch, I realized the welter of detail that is being thrown

at you in 12 minutes and the difficulty there is in trying to understand what in the dickens this is all about, and how can we get

a handle on it so that we can tell whether we are doing what we

should be doing and whether we are effective in achieving the goals

that we have.

The international community has made more progress in this

area, I think, than is generally realized. I brought with me—and

you may have it in front of you—a copy of this report that was just

issued on Monday. It is called ‘‘2000: A Better World for All;

Progress toward the International Development Goals.’’ This is an

unprecedented report which is published and signed by the—I have

extra copies here if you need one.

Mr. BALLENGER. OK.

Mr. BRADFORD. This is signed—I am told that this is the first

document ever signed by the heads of the United Nations, the

World Bank, the IMF, and the OECD together.

Mr. BALLENGER. Sounds like a put-up job, doesn’t it?

Mr. BRADFORD. No, I think—I was afraid you might think that.

I think what it shows is a great deal of coordination and common

purpose behind these institutions, and let me tell you a little bit

the story of what this is really all about.

23

In the period after the former Soviet Union collapsed, there was

a concern that the whole aid business was going to simply disappear and that all of us who have been concerned about development, had a problem of communicating with our parliaments and

congresses and our publics about what, in fact, the enterprise was

about. So there was a long process that was begun in the DAC, the

Development Assistance Committee, which Sylvia and others have

referred to, which is the coordinating body for bilateral donors but

in which the World Bank, the UNDP, and the IMF are observers.

There was a year-long process which got going to discuss what kind

of vision do we have now in the post-Cold War period, and this involved senior people in agencies and ministries of development and

cooperation throughout the OECD world, and it involved the ministers themselves and heads of agencies, like our own Administrator of AID. In fact, Brian Atwood at the time was very involved

in this.

What happened was we came out with, the international community came out with, after a long discussion, six goals which I guess

I—if you have the single-spaced version of my testimony before

you, it is on page 3. If you have the double-spaced version, I will

steer you somewhere else. But the goals basically are—the primary

goal, the first goal, and certainly the most important one, is reducing by half the proportion of people in the developing world living

in extreme poverty by the year 2015. So the reduction by half of

the proportion of people living in extreme poverty by 2015 is certainly the most important one and the one that is most relevant

for the topic of this hearing.

But, of course, you just aren’t worried about people’s incomes.

You are worried about their health, their education, their environment they live in and so on. So the rest of the goals are: achieve

universal primary education, reduce mortality rates for infants and

children, reduce maternal mortality rates, demonstrate that

progress toward gender equality and the empowerment of women,

especially in primary and second education, provide access to reproductive health services—one of the questions that you asked earlier

on about population growth rates and the management of family

planning—and then an environmental objective which is to put in

place national strategies for environmental improvement to reverse

the deterioration in resource sustainability in countries by 2015.

Then a quite important one that is not quantifiable is the idea

that democratic accountability, protection of human rights, the rule

of law, of course, are fundamental to achieving these goals, but is

not so quantifiable as to be able to be monitored in the same way

that these other goals can.

This report, which was issued on Monday, this week, in Geneva

by the four international organizations in the followup to the Copenhagen Social Summit, what this report does, as you flip through

it, you can see it takes the seven goals and it follows the progress

of each region toward those goals as we go toward the year 2015,

which is the target date for most of the goals.

I have reviewed for you here how Latin America is doing on page

five, but Sylvia and others have already mentioned that. But I

think the thing I would like to bring to your attention is more the

process of this than the content. The process is that these goals

24

were distilled out of the many hundreds of recommendations and

goals that came from the U.N. Summits that began in Rio and on

through five or six summits on various issues like the environment,

population and development, women, human rights, et cetera. It

distilled off only seven of these. They are quantifiable goals. They

relate to each other and reinforce each other. So it is, a strategy.

It is, to use Sylvia’s word, an organizing principle. It is an organizing principle to set priorities. It is a strategy that the development community now has, and the significance is, I think, severalfold.

First, these are priorities which are established by governments.

These were not generated by a think tank somewhere or even by

the international organizations themselves. They came out of the

summits, which meant that the political leadership in countries approved of them.

Second of all, they were endorsed by not only development cooperation ministers but also finance and foreign ministers of OECD

countries in the OECD Ministerial in 1996, but more importantly,

became prominent in the communique of the Denver G–7 summit

and even more prominent under British insistence in the Birmingham summit in the U.K. in 1998.

So these have political salience, then, and they aren’t just technical things that come from the development community, but these

came out of a political process by people who were political appointees or elected officials in the cases of heads of state.

Furthermore, since they came from the U.N. Summits, they have

involved also the developing countries, so that the developing country leadership has also been—it isn’t as if this was something that

was generated by industrial countries to foist on the developing

world; rather, they had agreed to these as well, and in the Development Assistance Committee, there was a considerable effort in the

course of developing this strategy to include leaders from the developing world as this process went forward.

The second thing that I would like to point out about this is that

it has become a strategy for development agencies, both bilateral

and multilateral, all around the world. The importance of this report is that this demonstrates that the UNDP and the other U.N.

agencies, the IMF—in his concluding speech in the IMF/World

Bank this last fall, Michel Camdessus handed everyone a card that

had the seven pledges, the seven goals on it, and to have the head

of the IMF, which is criticized roundly for not caring about the environment, not caring about social matters, having the head of the

IMF be handing out this card for everybody to see how important

he thought these goals were, he featured it in his speech at the

Bank/Fund meetings.

The World Bank is thoroughly behind this. They have a staff of

people that generate now a World Development Indicators Report,

which began in 1997 after the goals were established, which reports annually in the framework of these targets.

So what you have is the multilateral institutions and the bilateral donors are on the same page, so that we are all going now for

the first time ever in the aid effort in the same direction, bilateral

donors and multilateral donors, NGO’s are aware of this, private

25

sector groups are aware of this strategy. We have a unified strategy.

The third element of it which I think is important from the point

of view of your concern in this hearing is that because these goals

are quantifiable and because the World Bank and the group of

agencies that are represented in this report are together in doing

a statistical monitoring of progress toward the goal, so you can tell,

so the world community can tell, are we actually progressing or diverging in terms of achieving the goals—are we making progress

or are we not? Do we need to do more or can we let up?

There was some discouragement, for example, in 1998 after the

Asia crisis, those indicators went backward. But the point is we

had benchmarks so we could tell and we didn’t have to go into long

orations. This is pretty telegraphic stuff. It gets across relatively

easily what it is trying to say.

So I just submit to you and really hope that it can make some

difference in your deliberations as a Subcommittee and in the full

Committee itself and in the Congress that I think we haven’t really—those of us who have been involved in this inside and outside

the Government have, I think, not been as helpful to you as we

should be in bringing this particular effort to your attention, because I think it can help you decipher—to organize detail and to

figure out how to group things so we can understand a bit what

we are doing, why we are doing it, and whether we are doing it.

So that is the first point.

The second point I would like to just talk to you about just briefly is the issue of chemistry, really, if I can put it that way—I hope

you won’t mind—between the Congress and executive branch on

this issue. It relates, of course, to the issue of volume, which Congressman Menendez was nice enough to bring up. I had just had

a concern—while I played a role as chief economist in AID in the

whole period—I was, for most of the time there the chief person in

AID dealing with donor relations. I just became aware that one of

the reasons why there was so much convergence around these targets was because the Europeans especially, and the Japanese also,

because the Japanese went ahead of us for a year in terms of overall volume, were very concerned that we had a problem back home

that we couldn’t—that the Congress and the executive branch

weren’t together on what we were trying to do in the development

assistance, development cooperation area. I just think we need to

mend that fence. The reason I think we need to mend it is because

we owe it to ourselves to be together about what we are doing rather than to be divided about it. We owe it to our partners.

I began to feel badly in relation to my colleagues in Europe and

the Pacific because they were really concerned about—they wanted

us to lead, and we weren’t able to. We were falling behind because

the volume was dropping. The reason was that we didn’t have the

kind of relationship of dialogue, discussion, and consensus between

the Congress and the executive branch about development cooperation. I think in order for us to live up to the leadership which we

owe ourselves, in order for us to live up to the leadership which

others expect of us, we have really got to follow the Europeans,

who really have managed to work out their executive/parliamentary relations in a way that is better than we have.

26

I cite here that we have lost in the last several years the chairmanship of the Development Assistance Committee for the first

time in 50 years, the External Relations Vice Presidency in the

World Bank being handled now very expertly by former Minister

of Development Cooperation Mats Karlsson from Sweden, but we

used to hold that position, and the UNDP in New York has also

traditionally been American, now held by Mark Malloch Brown, a

senior British person, who is also excellent. I don’t have any problem with the best people serving in these positions. I have a problem with us losing the positions because of volume only. I think

that we, therefore, owe it to ourselves to reconnect with the Congress and the executive branch in a different chemistry, in what I

call positive circularity, picking up on a DAC report of 20 years

ago, and really try to get our act together here in River City and

see if we can’t put ourselves back on the map in this field.

The final thing I would like to say is just to point out to you

some figures, some little calculations that I did yesterday as I was

working on this, which, stunned me. What I did was I just took the

figure that you are considering here of $736 million for AID’s programs for Latin America, and I said to myself I wonder how much

that was back in the 1960’s when we had the Alliance for Progress

going and when it was a great priority in the Kennedy administration and there was considerable support in the Congress for what

President Kennedy and, after him, President Johnson were trying

to do.

As you may have figured out, as you deflate these numbers, $736 million in 1960’s dollars becomes about $150 million, we are doing

30 percent today of what we were doing back in the 1960’s. Then

I began to think, I wonder how population growth and GDP growth

have been in Latin America. I don’t think the issue really is per

capita aid to Latin America, in other words, how much does each

Latin American get from our aid program. That is not the point.

The point is, we are trying to leverage through these goals, we are

trying to leverage major national societal, political, and economic

change. We are trying to do it with financial resources. Yet Latin

America is bigger in population today and Latin American GDP is

very much bigger today than it was then because they have experienced substantial growth.

So if you take that into account, we are, in per capita terms and

in share of GDP, our aid to Latin America has dropped to 15 percent today of what it was in the 1960’s, and yet we have these ambitious goals that we are trying to achieve.

So I just think that we are going to have to worry about volume—if we are going to worry about aid effectiveness, as much as

I would rather not bring it up, it almost seems impolite, but it

seems to me that we have to confront the volume issue, and that

we need to think about it in wholly different terms. I really wonder

whether we couldn’t—whether there hasn’t been a sea change

enough in the way the American people feel about these things to

be able to think in terms of very different orders of magnitude and

a different kind of leadership.

I have one other small suggestion for you at the very end of my

paper, which may or may not be worthwhile, but I thought since

your Subcommittee is focused just on Latin America, it might be

27

helpful, since this process goes on at the global level, it just might

be interesting to encourage a biannual meeting to correspond to the

Western Hemisphere summits, which happen every 2 years in

Latin America, to have the senior officials in the Inter-American

Bank, the World Bank, the IMF, the UNDP and other agencies get

together, have a paper written which reviews patterns and trends

and policies over the last 2 years, put them in some context the

way this publication does, but by region, and have a report which

could be reviewed and discussed by them and some critics and analysts from Latin America. That discussion and regional report

would then funnel into the summit process and which, as we do

now with these kinds of reports, go to the G–7 summit every year,

and to the ministers of development cooperation, so that you can

tell what is going on specifically in the region and you can make

some judgment using the organizing principle idea that Sylvia put

forward, and that this could be useful to you here in Congress,

could be useful in other parliaments around the world, and maybe

we could change the whole dynamic here where foreign aid isn’t

such a bad world after all, that people really think this is important, we need to do it as a nation, the world expects it of us, we

should expect it of ourselves, and we just need to do it.

[The prepared statement of Mr. Bradford appears in the appendix.]

Mr. BALLENGER. Thank you. I would like to say one thing that

specifically seems to fit with the discussion, which is the fact that

our Foreign Affairs Committee, which is basically the group of people here that are interested in whatever we do around the world,

is broken up into five different areas, and I think those of us that

are on the Western Hemisphere are finally interested in what is

going on here. But when you end up with 10 people out of 435,

somehow you don’t build very big fires with those numbers.

In fact, as I remember, my wife and I have been involved in Central America at least for 35 years, and we found that you couldn’t

change the world, but you could pick a little piece of it and see

what you can do with it. I am not sure that we weren’t more effective before I got to Congress than I was after I got here. Somehow

it appears that our Government gets in the way of being able to

do it.

One of the ways that I think this—really I like about it, and I

think it would be a very positive approach to be able to somehow

measure—one of the reasons, the money—we look at—a lot of

times we get in arguments here with throwing money at a problem,

big government, we just throw money at it and forget whether we

have accomplished anything. If there was a way to measure

progress, which I think is what you are talking about here, we

would have something to work with and say we are accomplishing

this and so forth. You mentioned the effectiveness of aid, ways to

increase the effectiveness of aid. Do you have in the back of your

mind to measure it? I think difficulty we have with the American

people is, first of all, we are very insular. If you lived in Europe,

you would speak three languages and go to different countries all

the time, and sometimes we don’t even leave the State that we are

in because we are very insular. You like it where it is. So, thereVerDate 11-MAY-2000 10:19 Aug 17, 2000 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 65971.TXT HINTREL1 PsN: HINTREL1
28

fore, you don’t develop the need or the purpose of what is going on

in the rest of the world.

I think one of the biggest changes you can see about the effectiveness of doing something as far as the Western Hemisphere is

concerned is the fact that I don’t know of an area of this country—

and I know where in live in North Carolina, we are having explosive growth of the Hispanic population—Mexican, Costa Rican

Guatemalan and so forth—and all of a sudden you realize you have

to—I have got a business, a manufacturing company, and in it we

now have two Salvadorans and ten Mexicans and two Guatemalans

and two Costa Ricans. All of a sudden these people in my plant are

working with people that they didn’t even know existed, probably.

You ask them where is Guatemala, and before these people came,

they wouldn’t have the slightest idea where it was. If somehow in

your mind you could work up a way of increasing the effectiveness

of aid, I think I like the micro enterprises that I have seen working

in El Salvador and in Nicaragua. Those are things that you actually are creating an atmosphere of a free enterprise system, which

in my considered opinion develops democracy. At the same time, we

might be able somewhere along the line to measure.

Your idea of maybe getting—I hate to have studies because usually it is a bunch of eggheads that don’t go there very often that

put a study together and they don’t know what they are talking

about when they are through. But you used the words ‘‘asset inequality.’’

Mr. BRADFORD. Yes.

Mr. BALLENGER. How would you approach that? How do you go

about—it is a term we don’t use. I just wonder what you mean by

it.

Mr. BRADFORD. Yes, I was mulling over this problem that you

had articulated yourselves about why is it we have had policy reforms in Latin America and a return to democracy and why the results have been so meager, especially on the poverty reduction and

economic growth front. I think what happens is people think that

the distribution of income in Latin America is bad. Why is the distribution of income bad? You are a businessman. You have probably figured it out before everybody else. The reason it is bad is because the distribution of assets is hugely skewed in Latin America

in terms of capital, certainly financial capital, in terms of education. That is extremely important.

I think Latin America is moving quite nicely on this front, needs

to move quicker, has further still to go. But it is impressive.

As Sylvia mentioned, the gender balance in education in Latin

America is actually the women; there are more girls in school in

Latin America than there are boys, which may or may not—maybe

the problem now is to get the boys back in schools, but still——

Ms. SABORIO. I wouldn’t worry about that.

Mr. BRADFORD. I wouldn’t worry. I don’t know. But the point is

that the educational investment has got to be really a crucial thing.

I think for a long time, to be very frank as an economist in saying

that for a long time economists just didn’t realize how—we spent

too much time thinking about financial capital and not enough

about human capital. We didn’t think enough about investing in

people. We always thought about investing in plant and equipment.

29

Then the final thing, which is probably the most sticky wicket of

all in Latin America, is land. There just isn’t a market for land in

Latin America in the way that there is for other things, and the

concentration of ownership of land really pushes out and excludes

a lot of the rural population where a lot of the poverty is that I

think Carl Leonard or Bill Schuerch mentioned in their testimony.

So I just think that—and what I really was trying to get at there

is the—and I am not just trying to get at it for reasons of sustaining budget levels, but in a way I suppose that is the bottom

line. This is a long process, and the fact that, we have reforms in

the early 1990’s and they don’t pay off in the end of the 1990’s, let’s

just hold on a little longer. The problems are deeper, and as Sylvia

said, we need to go into second generation reforms, more social content. But the truth of it is these asset inequalities are much more

difficult to deal with, take much longer than changing policies or

changing income in a given year.

So I think that asset inequality really drives the politics, also.

One of the reasons why you are not getting more socially responsive policies in Latin America is if you have got concentration of

assets, you have got concentration of power, you don’t have full democracies working, the majority doesn’t have a voice, a real voice,

can’t really affect resource allocations in a fundamental way. So we

have got a long way to go in democracy, too. Even though we may

have elections, we don’t have really strong representative systems

where the poor can get their due. I think it is going to take decades, really, and I hate to say it, but it is going to take another

10, 20, or 30 years before—under circumstances where people are

trying to rectify this to get this done.

Ms. SABORIO. I just wanted to add that development is a complex

and an extremely long-term process. It requires patience, persistence, perseverance. But throughout all of this, you really need to

have clear objectives so that over time you are building toward

something. This is why a framework is absolutely necessary, so

that at the end of the day you get results, however long it takes.

But I do think it is very troubling what we are seeing in some

of these trends in Latin America, and it is the delinking of growth

from poverty reduction. I don’t want to be technical, but now it

takes a lot more growth to produce the same amount of poverty reduction than was true in the 1970’s and before.

I think it has partly to do with what you were saying in terms

of asset allocation. But I think we really have to make a concerted

effort to improve the primary distribution of income—that is, economic opportunity, how the production process actually happens—

because I do not think that we have the political resolve in that

region to do a lot of redistribution. So the best hope is to improve

the primary distribution, to make room for small- and mediumsized enterprises to competitively participate in the production

process.

Some of the Asian countries have developed very interesting supplier networks so that larger enterprises can pull along the smaller

ones, which cannot really be expected to jump into a globalized,

very competitive world on their own. But these things have to be

fostered. We have to have that as a goal. If we do not pursue it,

it is not going to happen on its own.

30

Mr. BALLENGER. In each of those situations—and I won’t string

this out a whole bunch, but one of the things that was so effective

in the 1960’s when we first started being involved in Central America was the International Executive Service Corps. I don’t know

whether we still have a very active group there or not, but that is

how—I got involved through my wife’s father, and not only did we

send people down there, but in my own particular case, I brought

several of the people that we were working with up to my place

just to see how we ran a manufacturing company in the United

States. They went back—and I am not saying we did a good job,

but I still think El Salvador probably has done a good development

of nice light economy, light industry, with jobs for most people. I

don’t know how the poverty level stacked up there, but that is the

country I spent most of my time in until Mitch came along and

then that aimed us in a different area.

But one of the things—and you recognize this—every time I see

one of the Presidents back home, they are talking about you all are

about to redraw your INS laws, your immigration laws up there,

and in El Salvador and Mexico and places that will speak very

strongly to you, say, please don’t send those people back. I think

just about every country down there, their second largest cash-flow

of money comes from the people that are working in this country

sending it back. That is an aid that you can’t really measure, but

you don’t know how effective it is. If the people are still living in

a poor little place and they are not going to create new jobs, they

just have money to keep them at the same level of humanity, if you

want to call it, have you accomplished a great deal? Except there

is substantial funds flowing in that direction.

Mr. BRADFORD. Right. Sylvia mentioned the fact that there is—

the informalization of the labor market, I think was what you said,

is not actually a good thing. It is better than—if there is no room

in the formal market, it is better to have an informal economy than

none at all. But I think what she was pointing to was the fact that

we really need to be aware that there is a limit to that, and we

need—it is interesting that we didn’t consult at all in our testimonies, but we both used this term, ‘‘pro-growth’’ and ‘‘pro-poor’’

economic policies, which I think really does mean shifting the emphasis not just—I was a little bit concerned about the discussion

earlier, and I am not necessarily against it, but about focusing attention on the composition of lending by the international institutions and shifting more toward social programs.

That will help. Pressure on the governments to shift their budgets toward social programs and away from defense would help

probably more. Altering economic policy so that economic policy is

more pro-growth and pro-poor, for example, having a more progressive tax system, things like there, where, in other words, it isn’t

just a question of taking the social agenda and saying, we have an

economic agenda which is represented now by the Washington Consensus, which you probably heard about, but it is really about

going back into the orthodox Washington Consensus macro policies

and putting social content in them so that, the macro policy of the

country that matters really is moving the country in a direction of

greater employment in the formal sector, more incomes and less reVerDate 11-MAY-2000 10:19 Aug 17, 2000 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 65971.TXT HINTREL1 PsN: HINTREL1
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liance on foreign aid and less reliance on remittances from immigrants here back to Central America.

Mr. BALLENGER. I don’t want to keep you all here forever, and

this conversation with three is probably not what either I planned

or you planned.

Mr. BALLENGER. But I would like to say that I think it has been

a very constructive hour that we have spent here, and the reality

is I like this. I think I probably ought to look at it really seriously

and be frank with you. My interests will continue to be in Central

America and South America, and anything that I can do here, if

you come up with some fabulous idea that we can assist with, I go

to Central and South America, on your tax money, excuse me,

about four or five times a year trying to figure out better ways to

do things. In reality, you need somebody that has practically approached and knows the problem there to be able to do anything

about it.

What I do with the problem, somebody calls me up on the telephone after Mitch and says—this is a funny story, quickly, and I

will shut up. It is a friend that we had worked with in Guatemala

who helped us build hospitals there. They had gone over—he was

with an NGO in Honduras, and he calls up and says, the clothes,

the drugs, that is really nice, but we really need something a little

bit more permanent than that, what can you do? I said, I don’t

know, what do you want me to do? He said, how about corrugated

galvanized steel for roofing for the houses? They all got wiped out.

I said, I don’t know, I will check. My son-in-law is in construction.

He said, sure, I can get you some.

So I called him back, and I said, yes, we can get you some, how

much would you like? He said, How about a hundred tons?

Now, that kind of blew my mind.

Mr. BALLENGER. But when you get Rotary International and you

have a steel gathering here, and just because of the location, we

had U.S. Steel and AK Steel, Bethlehem Steel and another steel

company, and each of them pledges 20 tons, so we got 100 tons. I

think somewhere along the line it was about 2,000 houses that we

helped build.

Then our friends in Nicaragua said, Mitch hit us, too, what are

you doing?

Mr. BALLENGER. So we had to do the same thing for them.

When you see Habitat for Humanity—I don’t know anyplace in

the world that doesn’t see a Christian ethic at work when we are

all trying our best to give people a home. I don’t know how you all

feel about that, but that to my way of thinking is the ultimate in

democracy. If everybody had a house worth living in, we would

have a good base to begin with.

I will shut up. I would say thank you for this, and I greatly appreciate your participation in the program.

Ms. SABORIO. Thank you.

Mr. BRADFORD. Thank you.

Mr. BALLENGER. With that, the hearing is adjourned.

[Whereupon, at 4:05 p.m., the Subcommittee was adjourned.]

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A P P E N D I X

JUNE 28, 2000

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