```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

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

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
65-971                     WASHINGTON : 2000

                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVE CHABOT, Ohio                   EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE P. RADANOVICH, California     JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    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                  GARY L. ACKERMAN, New York
CASS BALLENGER, North Carolina       MATTHEW G. MARTINEZ, California
CHRISTOPHER H. SMITH, New Jersey     ROBERT MENENDEZ, New Jersey
ILEANA ROS-LEHTINEN, Florida         ROBERT WEXLER, Florida
MARSHALL ``MARK'' SANFORD, South     STEVEN R. ROTHMAN, New Jersey
    Carolina                         JIM DAVIS, Florida
KEVIN BRADY, Texas                   EARL POMEROY, North Dakota
PAUL E. GILLMOR, Ohio
               Vince Morelli, Subcommittee Staff Director
           David Adams, Democratic Professional Staff Member
               Kelly McDonald, Acting Professional Staff
                  Jessica Baumgarten, Staff Associate

                            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

 
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--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:
    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 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.
    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, 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 Nino, La Nina, 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 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 
averages 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 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 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 creatively 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 well-targeted 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 trafficking, 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 international 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 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.
    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 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 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.
    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.
    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 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 
pro-growth 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.
    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 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!
    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.
    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 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, several-fold.
    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 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.
    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 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, 
therefore, 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.
    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 medium-sized 
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.
    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 reliance 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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