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78–187 PS 2002

THE STATE OF THE INTERNATIONAL

FINANCIAL SYSTEM AND THE

INTERNATIONAL MONETARY FUND

HEARING

BEFORE THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 28, 2002

Printed for the use of the Committee on Financial Services

Serial No. 107–58

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

C O N T E N T S

Page

Hearing held on:

February 28, 2002 ............................................................................................ 1

Appendix:

February 28, 2002 ............................................................................................ 33

WITNESSES

THURSDAY, FEBRUARY 28, 2002

O’Neill, Hon. Paul H., Secretary, U.S. Department of the Treasury .................. 7

APPENDIX

Prepared statements:

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

Bereuter, Hon. Doug ........................................................................................ 36

LaFalce, Hon. John J. ...................................................................................... 39

Waters, Hon. Maxine ........................................................................................ 42

O’Neill, Hon. Paul H. ....................................................................................... 44

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Weldon, Hon. Dave:

Written questions for Secretary Paul H. O’Neill ........................................... 58

(1)

THE STATE OF THE INTERNATIONAL

FINANCIAL SYSTEM AND THE

INTERNATIONAL MONETARY FUND

THURSDAY, FEBRUARY 28, 2002

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The committee met, pursuant to call, at 1:05 p.m., in room 2128,

Rayburn House Office Building, Hon. Michael G. Oxley, [chairman

of the committee], presiding.

Present: Chairman Oxley; Representatives Leach, Bereuter,

Lucas, Paul, Gillmor, Weldon, Ose, Biggert, Tiberi, LaFalce, Frank,

Waters, Sanders, Sherman, Inslee, Gonzalez and Lucas.

Chairman OXLEY. The hearing will come to order. Good afternoon. This hearing of the Committee on Financial Services will

please come to order. Pursuant to the Chair’s prior announcement,

I’ll recognize myself for 5 minutes for an opening statement, as

well as the Ranking Minority Member, the Chair and Ranking Minority Member of the Subcommittee on International Monetary

Policy and Trade for 3 minutes each.

All Members’ opening statements will be made part of the record

and it is so ordered.

Today, the Committee is meeting to hear testimony from the Secretary of the Treasury, Mr. Paul H. O’Neill, on the state of the

international financial system, IMF Reform, and compliance with

IMF agreements. This hearing is mandated by the fiscal year 1999

foreign operations appropriations bill, which provided for an $18

billion increase in U.S. funding for the International Monetary

Fund—IMF. To ensure that the IMF would effectively use these

funds, Congress included as a requirement, authored by Representative Castle, a senior Member of our Committee, that the Treasury

Department submit an annual report on the progress of IMF reforms and that the Treasury Secretary testify before this Committee on the state of the international financial system.

As I am sure you are aware, Mr. Secretary, this Committee

heard from Federal Reserve Board Chairman Alan Greenspan just

yesterday about the conduct of monetary policy and the state of the

domestic economy. Inasmuch as economic growth in the United

States is necessarily intertwined with that of the remainder of the

world, our Nation’s economic growth is greatly impacted by disturbances and/or crises in the international economy, such as that currently occurring in Argentina. As a result, this Committee welcomes this opportunity to both oversee U.S. international economic

2

policy and at the same time looks very much forward to your insights into where that economic policy is heading.

At your appearance last year, you testified that reform of the

international financial institutions was a key priority for this Administration and emphasized the need for the IMF and the World

Bank to focus more narrowly on their core objectives.

You highlighted a number of issues, among them transparency,

accountability, IMF crisis prevention, converting loans to grants,

increased education in poor countries, and the use of results-based

performance indicators. The Department’s October 2001 report provides a helpful review to your testimony, as well as an early insight

into the success the Administration has had in pursuing congressional directives codified in Section 1503 of the International Financial Institutions Act related to market-oriented reforms, trade

liberalization, sound banking systems, work-out systems for sovereign debt and a host of other issues.

With a year as Secretary under your belt, the Committee looks

particularly forward to your assessment of progress on these fronts.

In light of the almost daily news on Argentina’s financial turmoil, and the IMF’s more than 20-year relationship with Argentina, I would expect that you will receive quite a number of questions about this long-term relationship and how Argentina could

possibly find itself in the financial plight that it currently faces.

Turkey is also a subject of interest, although perhaps less so

than Argentina, since it has not faced suspension of IMF assistance. There is also a very strong interest in the Japanese economy.

Although the Japanese are not recipients of IMF assistance, the

IMF is conducting a Financial Sector Assessment Program in

Japan. We would certainly welcome your thoughts on the prospects

that Japan will finally address the long-term problem of non-performing loans in its banking system.

While I am personally not of the opinion that the IMF and World

Bank have done their jobs in ways that call for radical changes in

the manner in which they undertake their responsibilities, I do

nevertheless feel that the Treasury Department’s annual review, as

it relates to IMF reform, is and will be of particular importance on

a going-forward basis, and I look very much forward to receiving

your views on this and other matters of import that you would like

to discuss this afternoon.

Let me just take a moment in closing to say how much I personally appreciate the strong leadership skills that you have frequently exhibited during your service at Treasury to date. Please

also know that this Committee appreciates the good work that you

and other members of your team have accomplished, such as reform of the Multilateral Development Banks and the International

Monetary Fund; combating the financing of terrorism, and working

very closely with us on our money laundering legislation; the reconstruction of Afghanistan; attempts to raise the level of sustained

global economic growth; and lastly, ongoing efforts to strengthen

the bilateral economic relationship between the United States and

Russia.

With all that being said, Mr. Secretary, let me welcome you to

your third appearance before our Committee. It’s good to have you.

3

And I now yield to the gentleman from New York, the Ranking

Member, Mr. LaFalce.

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

on page 34 in the appendix.]

Mr. LAFALCE. Thank you very much, Mr. Chairman.

Secretary O’Neill, welcome. You appear before us at a very important time for the global economy and for United States policies

as they relate to the global economy. Today, I would like to highlight two areas. First, the on-going negotiations to replenish the

World Bank’s International Development Association, so-called

IDA, and the discussions related to the creation of a mechanism for

handling debt crises, particularly in the aftermath of the Argentine

debt default.

First, I’d like to offer my support for your efforts to shift more

of IDA assistance toward grants. The grants initiative is a natural

extension of our debt relief efforts which are already bearing some

fruit in the heavily indebted poor countries, never enough, but they

are freeing up some budgetary resources in those countries to devote to critical social spending. Yet, each year that we continue to

provide 99 percent of IDA assistance in the form of loans, particularly for non-economic expenditures, such as AIDS relief, nutrition

and education, we chip away at the benefits that debt relief provides to these countries. So, in effect, we forgive debt with one

hand and pile on new debt with the other.

You don’t think and I don’t think that this is a viable long-term

development strategy. Few of the objections that critics to the

grants proposal have ring true to me. In particular, that a shift to

grants inappropriately moves the World Bank onto the United Nations turf as the international grant making institution. I think

those arguments smack of defending the status quo at the expense

of doing what’s best for the world’s poor. So that’s where I agree

with you.

Now, I do think though that the intransigence of the Europeans

on this issue may reflect some other problems with the United

States’ position when it comes to funding for IDA and for official

development assistance in general. Some individuals who I greatly

respect, for example, David Beckman of Bread For the World, has

said that these critics are suspicious of the grants proposal because

they’ve long perceived the United States to be stingy when it comes

to development assistance. And I think that perception is correct.

You’ve attempted to counter that perception by offering increases

in the IDA contribution over the next 3 years, starting at $850 million in 2003 and increasing it to just over $1 billion by 2005. So

far, so good. But then you condition those on what I think you call

performance targets. And here’s where I begin to have reservations

and doubts, Mr. Secretary. Now, I believe that the United States

should commit, at a minimum, to the upper range of the funding

levels you’ve proposed independent of what I think are artificial

performance targets. As you know, Nobel economist Joe Stiglitz has

said that—and he used to be the Chief Economist for the World

Bank and Chairman of the Council of Economic Advisors, I have

great regard for Joe—that even if the United States doubled its

IDA contribution, we could be confident that the money would be

well-spent absent performance targets. His point is that the World

4

Bank has already come a very long way in evaluating successes

and failures and in using that information to improve development

assistance. As a result, a large number of viable development

projects go unfunded for lack of adequate donor support.

Of course, we should look to benchmarks for progress as we allocate funds to all of the MDBs, but here’s where I’m concerned. I’m

concerned that the performance target initiatives will encompass

areas that are inherently difficult to measure and do not lend

themselves to use as annual benchmarks. For example, you’ve rejected school enrollment as an appropriate metric in favor of outcome-oriented measures such as ability to read and write. Well, I

share your desire to focus on outcomes, but one only needs to consider the painfully slow process of seeking education performance

measures in the United States of America to recognize the very

practical problems with doing the same in the world’s poorest countries.

Rather than a finely-tuned matrix of empirical measures, I fear

that what we will really get is a highly subjective judgment from

Treasury officials about whether a target has been met or not,

something akin to the OMB scorecard for agency performance that

was unveiled in this year’s budget. And with Mitch Daniels desperate to find cost savings around every corner, there will be enormous pressure to keep U.S. funding for IDA as close to the baseline

as possible. And so while I do not dismiss and absolutely reject the

use of benchmarks or performance targets entirely, I have great

reservations and doubts and concerns. I’m willing to await the details before final judgment, but you’re going to have to convince me

on that one.

Let me go very briefly to the so-called international bankruptcy

regime, and I’ll only take a minute. I’ve been a long-time advocate

for the creation of a debt workout mechanism. I’ve put provisions

in the 1986 and 1988 trade bills along those lines. Argentina has

demonstrated, once again, such a need. There’s always a country

almost every year. But I think now we have some momentum. Ann

Krueger is the new Deputy Director of the IMF, and she has been

advocating some type of bankruptcy mechanism.

Now I know that John Taylor—is John here today? No.—made

some recent comments, and it would appear that his comments are

reflective of the Treasury’s, that you part ways with the IMF on

how best to structure the proposal, not how to get to the end, but

on the means to the end. I’m eager to move the discussion beyond

the academic and toward a concrete plan. I think it’s very important. And perhaps it might be desirable to advance this through

legislation too, but not necessarily. It’s something I would dialogue

with you on, and with the Chairman, of course. I thank you very

much, Mr. Secretary.

[The prepared statement of Hon. John J. LaFalce can be found

on page 39 in the appendix.]

Chairman OXLEY. The gentleman’s time has expired.

The Chair is now pleased to recognize the Chairman of the International Monetary Policy and Trade Subcommittee, the gentleman

from Nebraska, Mr. Bereuter.

Mr. BEREUTER. Mr. Chairman, thank you and thank you for

scheduling these hearings. And Secretary O’Neill, thank you for

5

your appearance today. I have a particular concern I didn’t bring

to your attention today, but I want to recognize and state my respect for you and the leadership you’re bringing to the Department,

and may I also mention preliminarily that our subcommittee recently held a hearing on IMF as it relates to Argentina, and Secretary John Taylor was very cooperative and very helpful to us in

that hearing, and we will shortly be having another hearing with

critics and supporters of current IMF policy, and if I have the time

and questions, I’ll pursue a few things in that area.

I wanted to mention to you specifically though today that last

year, the subcommittee not only passed important legislation related to the regional multilateral development institutions, specifically the Asian Development Fund and the International Fund for

Agricultural Development, but also passed policy changes and on

a wider variety of the regional development banks.

For tactical reasons, important tactical reasons, we have linked

that legislation with the reauthorization of the Export-Import Bank

legislation, wanting to bring them to the floor at the same time. We

passed those on October 31st of last year. But, because of authorized or unauthorized threats of veto from Treasury because of problems between the Export-Import Bank and the Treasury Department on the use of Eximbank’s Tied Aid War Chest transactions,

we’ve been at an impasse.

Last month, I was finally successful in bringing together Treasury, Export-Import Bank officials and the White House representatives to see if we can’t find some resolution to what I think has

been an arbitrary and inappropriate position and statement on the

part of Treasury officials early in last year on several projects.

I think they violated their own vaguely described criteria, and we

have to have some changes, in my judgment. I understand that

every Administration would like to have a clean, straightforward

reauthorization under most circumstances, but I think reforms are

really essential in this area. The subcommittee has worked well on

trying to bring itself to a conclusion that was acceptable to all, and

I think we have succeeded, but I do need to have a resolution on

this issue. Just because of things that have happened in the last

few weeks, I believe it is now much more difficult, in fact, to pass

an Export-Import Bank reauthorization. We’ve already had it extended to March 31st through an appropriation bill, but I know I

will resist, and I think this Committee would resist an end run

around the Committee through the appropriations process because

we really need to have some reforms. And I would hope that we

might shortly find a resolution.

Mr. Secretary, I sent you a letter on this subject on February

15th. To my knowledge, we haven’t received a reply. However, we

are having significant problems in opening our irradiated mail, so

if you reply, please don’t respond by the U.S. Mail, because we’re

still getting Christmas cards and our people are getting sick as a

result of opening irradiated mail now. So fax, personal delivery or

whatever, but we need to have a solution on this.

I conclude, Mr. Chairman, by mention to the Secretary that I understand we’ll be expecting a significant reauthorization legislation

request on other issues this year from the Administration, African

Development Fund, the Global Environmental Facility, and most

6

controversially and most significant in terms of dollars, the International Development Association. You will need the Committee’s

cooperation and assistance on this, and we will need yours.

Thank you, Mr. Secretary, and thank you, Mr. Chairman.

[The prepared statement of Hon. Doug Bereuter can be found on

page 36 in the appendix.]

Chairman OXLEY. The gentleman’s time has expired.

The Chair is now pleased to recognize the Ranking Member of

the aforementioned subcommittee, the gentleman from Vermont,

Mr. Sanders.

Mr. SANDERS. Thank you very much, Mr. Chairman.

Mr. O’Neill, welcome and thank you for being with us. I just very

briefly in my opening remarks want to touch on three issues that

I hope you will be responding to in questions later on. That is,

number one: the IMF; number two: the Export-Import Bank; and

number three: the huge trade deficit this country currently has and

its impact on manufacturing, something I suspect you know something about.

Mr. Secretary, needless to say, in the United States and throughout the world there has been a lot of concern about globalization

and the impact that globalization has on people in the developing

world as well as working people in this country. My particular concern is that one of the aspects of globalization, it seems to me both

in the United States and abroad, is that it creates a growing gap,

an increased gap between the rich and the poor. In the United

States today we have the most uneven distribution of wealth and

income of any major nation, in which the richest 1 percent of the

population owns more wealth than the bottom 95 percent. I see

that as a very, very serious problem, and that phenomenon exists

increasingly in developing countries, as well, where the elite of

those countries own enormous wealth, while the poor in many

cases get poorer.

Second, as I think you know, I just returned from a trip to Russia which was in the unfortunate position of having been guided in

its transition by the IMF, among other institutions. And some gentlemen in Russia said, ‘‘Well you guys were smart, you ignored

your economic advisors. You sent them to Russia.’’ The result is, in

many ways—not totally I understand—but, has been a disaster

among men in Russia. As you may know, in the last 11 years, life

expectancy has declined by 10 years, which is a-historical, never

happened before in the history of the modern world. You have senior citizens, older people, living on $25 a month in pensions. We

saw in Moscow, which is the wealthiest area of the country, old

people begging out on the streets. It was not a pleasant site.

The IMF also apparently has created disasters in Asia, and according to some people at least, has done a very poor job in Argentina. According to a recent op ed in the Wall Street Journal, the

IMF’s quote was: ‘‘30 programs in Argentina contributed to the collapse of tax receipts, sky high interest rates to compensate for currency uncertainty, and investments stand still and deadline riots

and the fall of the government. The IMF’s policy pattern is as clear

in Argentina as in previous collapses around the globe. It gives

countries bad economic advice, then lends heavily to them, allowing

7

them to waste the new funds, and watches as the government’s

popularity plunges.’’

I would hope that you would agree with me that the IMF is an

institution in desperate need of some structural adjustment itself.

I can remember several years ago at a subcommittee hearing we

had the U.S. representative to the IMF before us. I think we had

to threaten a subpoena to get her, as a matter of fact, but she was

there. And I asked her about some of the votes that had taken

place in the IMF, and later on she told us, to my amazement, is

there are relatively few votes, that kind of consensus agreements

are worked out and it seems to me, for the well-being of this country and for developing countries, that there needs to be infinitely

more transparency, not quiet back room dealings. Very often, the

people who are most effected by these austerity measures, who see

education and health care budgets cut, read about it in the newspaper. In a sense, these measures are forced on their governments

who will not receive loans unless the governments go along with

it.

So, in terms of the United States, the U.S. has a huge role in

the IMF, and if we are interested in winning the support of poor

people around the world, developing countries, I don’t think we

want to be part of a process which imposes austerity programs on

those people which often cause a great deal of suffering among the

poorest people in those countries, so maybe we’ll talk about the

IMF later.

Second issue——

Chairman OXLEY. The gentleman’s time has—can you get to that

in questioning?

Mr. SANDERS. Very briefly, if I can. Export-Import Bank, as you

may know, Mr. Secretary, the Export-Import Bank approved a

$300 million loan for Enron in a project in Dahol, India, to build

a natural gas power plant, even though the World Bank repeatedly

refused to finance that project because it was not economically viable, so we’ll want to be talking about Export-Import Bank, their

loans to Enron, and in general, the non-productive work that that

agency sometimes does. Thank you very much.

Chairman OXLEY. The gentleman’s time has expired.

We now turn to the Secretary of the Treasury, the Honorable

Paul O’Neill. Welcome back to the Committee, Mr. Secretary. It’s

good to have you back, and please feel free to begin.

STATEMENT OF HON. PAUL H. O’NEILL, SECRETARY, U.S.

DEPARTMENT OF THE TREASURY

Secretary O’NEILL. Thank you, Mr. Chairman, Congressman LaFalce. We prepared a fairly long statement which I’d like to have

included in the record, which tries to summarize and then develop

in some detail the things that we’ve been doing over the last 13

months.

Chairman OXLEY. Without objection, the full statement will be

made part of the record.

Secretary O’NEILL. Thank you very much. And, Mr. Chairman,

with that, what I’d like to do is make just a few opening remarks,

and then turn to your questions. Thank you for inviting me here

today to discuss President Bush’s international economic agenda

8

and our efforts at the Treasury Department to advance that agenda.

Before we turn to today’s important topic, I’d like to take a moment on something else. You are all Members of the Financial

Services Committee and you know how important the full faith and

credit of the United States is. You know we’re going to reach a debt

limit in late March. I urge you to act quickly to permanently increase the debt limit. Delay creates uncertainty that can threaten

our economic recovery and undermine U.S. leadership as we pursue

the war on terrorism. You may want to come back to this.

But, with that, let me turn to the subject at hand.

When I accepted the job of Secretary of the Treasury, President

Bush directed me to meet a number of important challenges. One

of those challenges, one I take very seriously, is our Nation’s role

in international economic development. The President’s message to

me was very clear: if we care, and we have simple respect for

human dignity, then we must finally deliver on a half-century of

unfulfilled promises. We must raise the standard of living of poor

people living in the world today.

The leaders of the free world joined together more than 50 years

ago with a commitment to speed the progress in the underdeveloped world. Over those 50 years, we’ve witnessed incredible

feats of human progress. Today, more people than ever before in

the history of the world have the opportunity to reap the benefits

of their labor and creativity in free markets, and to create wealth.

And yet, for many nations, progress has been slow or non-existent.

And it causes a question to be asked often, I think, why are so

many people still poor?

The nations that have failed lack systems that support the realization of new ideas. Most of the building blocks for progress are

not expensive: good government, the rule of law, respect for property rights, a commitment to free markets, and a commitment to

peaceful relations with neighboring countries are the essential ingredients. But for many countries, these foundations for development are out of reach. They lack capital, know-how or encouragement from the international community, and in some cases countries have gone down the wrong road because of the policy prescriptions from the international community or perverse incentives that

our international assistance programs themselves have created.

Let me take a few minutes to discuss some of the ways we’re trying to improve the system. To unleash human economic potential,

it is vital that economies have a sound and stable environment to

grow and attract private business. Capital is a coward. It goes

where it feels secure, and can grow. Cultivating macroeconomic

conditions that support growth and attract capital is the job of the

International Monetary Fund. Rather than serving as a firefighter

for crises, as it has in the past, we believe the IMF should become

more like a gardener, nurturing the seeds of private sector growth.

Thus, our first task is to prevent the eruption of crises that undermine and reverse growth.

With our encouragement, the IMF is taking steps to strengthen

its early warning systems so that it can better preempt crises before they explode. Greater transparency is also fundamental, both

on the part of the IMF and its member countries, so that financial

9

markets can discern the true performance and potential risk of individual economies and the system as a whole.

With our support, the IMF is also narrowing the focus of its involvement in member economies. As the IMF has acknowledged,

the organization has at times allowed its activities to expand beyond the scope of its primary mission, overlapping with the mandates of the Multilateral Development Banks in areas such as promoting agricultural reform and judicial reform. This has diminished the Fund’s effectiveness in pursuing central objectives. We

believe the fund should focus on monetary, fiscal, exchange rate,

and financial sector policies that lay the macro-economic framework for growth. In addition, we’re making clear that there are

limits on official support to countries in unsustainable situations

that have a history of making bad policy choices and avoiding reform.

Despite several recent incidents, there remains no clear consensus approach for dealing with unsustainable situations, and the

uncertainty that remains creates too much pressure for large-scale

lending by the IMF, and may contribute to decreased investor willingness to invest in emerging markets. To help reduce this uncertainty, we’re working to develop a sovereign debt restructuring

mechanism that will provide a more predictable framework for debt

workouts. Having such a workout strategy may help reduce the

pressure for large-scale financing, and it may also create increase

capital flows to emerging markets at lower interest rates.

Let me turn now briefly to the World Bank and the Multilateral

Development Banks. As President Bush has said: ‘‘A world where

some live in comfort and plenty, while half of the human race lives

on less than two dollars a day is neither just nor stable.’’ Poverty

today remains widespread and deep. It’s clear that we can and

must do better. Rising productivity is the driving force behind increases in economic growth and rising per capita income. We are

urging the multilateral development banks to focus more intently

on operations that raise productivity, concentrating on education

and health, promoting private enterprise, promoting good governance and opening economies to trade and investment. Productivity

is now receiving more emphasis in the debate on MDB policies

within the institutions and among the other shareholders. We are

also urging the MDBs to establish monitoring and evaluation systems that measure development results.

Private sector development is crucial to economic growth and

poverty reduction. MDBs should play a larger role in promoting

needed investment climate reform and in channeling technical assistance on project finance to fund viable private sector projects in

countries that have adopted core standards for a sound investment

climate.

Another significant initiative is President Bush’s proposal that

up to 50 percent of the World Bank and other MDB funds for the

poorest countries be provided as grants rather than as loans. It

simply doesn’t make sense to pile more debt on the poorest nations

of the world. Those debts have to be repaid by taking from people

who live on less than two dollars a day. How can such new debt

loads help them develop a vibrant, self-sustaining economy? It

would be irresponsible to assume that some time in the future, doVerDate 11-MAY-2000 15:00 Aug 20, 2002 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\78187.TXT HBANK1 PsN: HBANK1
10

nors will be willing to finance another massive international debt

reduction program for them. We continue to negotiate with our

international partners to achieve a successful agreement on this

initiative.

While increased global trade is vitally important to the U.S.

economy, it’s also the cornerstone of our development efforts. Increased trade raises the standard of living of people here in the

United States and in the rest of the world.

Bilaterally, the United States is negotiating free trade agreements with Chile and Singapore and seeking meaningful commitments from countries seeking to join the WTO. Regionally, we’re

working hard to create a Free Trade Agreement of the Americas

and the Doha Agreement last November gives us the opportunity

to expand trade globally. President Bush feels that U.S. leadership

is essential to meet the challenges of international development.

The United States should be a locomotive of global economic

growth and a champion of economic development in those parts of

the world that have lagged behind. Economic growth produces

peace, stability and democracy. These are important national goals

that have gained significance since the September 11th attacks and

the start of our war on terrorism.

Mr. Chairman, I’d be happy now to take the questions of yourself

and your committee Members.

[The prepared statement of Hon. Paul H. O’Neill can be found on

page 44 in the appendix.]

Chairman OXLEY. Thank you, Mr. Secretary. Let me begin by

asking you a question that started really yesterday with Chairman

Greenspan’s testimony in which he indicated that he did not see a

large spillover effect on the U.S. economy from the situation in Argentina and Japan. He also stated he did not see much potential

of contagion for surrounding countries or regions in either case.

You may have seen some press reference to that. Would you care

to comment on that particular statement?

Secretary O’NEILL. Of course, I always agree with the Chairman,

or almost always.

Chairman OXLEY. He indicated you served on the same board at

Alcoa.

Secretary O’NEILL. That’s right. We’ve been associates and colleagues for more than 30 years now, and it’s true that we do very

often agree with each other. To the specific question of direct effects on the U.S. economy from Argentina and Japan, I agree with

him, though I did not see the press accounts. But I would go on

to say this.

In the case of Japan, they’ve now had 11 years of average growth

of 1 percent, when their economic potential is something on the

order of 3 percent. And while I think it’s very hard to draw a connection between their slow rate of growth over this period of time—

three recessions in the last 11 years—it is nevertheless true that

our world is now so fundamentally interconnected that when a

major economy like Japan, which is the second largest in the world,

runs at significantly less than its potential, it has an effect in two

different important ways. First of all, it has a material effect on the

living conditions and the average income of the Japanese people

themselves. I think that’s the most important and telling. But secVerDate 11-MAY-2000 15:00 Aug 20, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\78187.TXT HBANK1 PsN: HBANK1
11

ond, it means that their economy is creating less capital that could

be used for the purposes of economic development in the broader

world at large. And so, I think it is very important that all economies, especially the very largest ones, act as locomotives for the

rest of the world so that we can together help to overcome the problems I’ve addressed in my prepared statement of so many billions

of people still living in the world today with income levels that are

so small— that it’s almost impossible to conceive being able to live

on less than a dollar a day, which is what billions of people are

doing.

Chairman OXLEY. I want to get back to Argentina perhaps a bit

later, but in my opening remarks I specifically mentioned Turkey,

and I had the opportunity to visit there last June, I believe it was,

May or June right at the time that Gemal Durbesh had been

brought back from the World Bank to become the finance minister,

and I must say I was most impressed with him. Could you give us

a brief update on where Turkey is in their efforts to try to get their

economy back on track?

Secretary O’NEILL. I’d be very happy to do that. Turkey is a very

interesting case, because when I was here last year, I would say

most of us considered Turkey and Argentina to be in the same

place. They were both having enormous problems. They’d had multiple IMF programs. And I think shortly after I was here last year,

the IMF told to Turkey that there were certain preconditions that

it had to meet before more money was sent. President Ecevit and

Minister Dervis set out to get some very difficult legislation

through their equivalent of our Congress and only after they had

met the conditions that were suggested to them,— which frankly

seemed very sensible, and were not about impoverishing the country or squeezing social spending,— the money began to flow.

And while I think they still have a very difficult economic situation, they are markedly different from where they were this time

a year ago, or even where they were nine months ago, in spite of

the fact that their tourism industry evaporated after September

11th for a period of time. President Ecevit was here about 6 weeks

ago, and I had an opportunity to spend some time with him. I was

very impressed by his articulated determination to keep on the

track of a sustainable economic position for his country. I was very

impressed by his quickness of mind and command of the issues. So

this is not a case where just Minister Dervis is a very impressive

person. The president, himself, is a very impressive person, and I

thought some cabinet members that were with him were equally

impressive in their understanding of what needed to be done and

their apparent commitment to do it.

Chairman OXLEY. Thank you. My time has expired.

The gentleman from Vermont, Mr. Sanders.

Mr. SANDERS. Thank you, Mr. Chairman.

Mr. Secretary, I would like to focus on two issues at this point;

the Export-Import Bank, and the trade deficit. In terms of Enron,

the Export-Import Bank approved a $300 billion loan for an Enronrelated project in Dahol, India, to build a natural gas power plant

even though the World Bank repeatedly refused to finance this

project because it was not economically viable according to Human

Rights Watch, Amnesty International, and other groups. Enron

12

subsidiaries paid local law enforcement to suppress opposition to

its power plant, in which they arbitrarily beat and arrested dozens

of villagers.

I wonder if, when I’m finished, if you could give us some information on that, or get some information to us on that.

Second of all, in terms of Export-Import Bank in general, the ostensible purpose of the Export-Import bank is obviously to create

American jobs, right? That’s its theory. Yet, some of the major recipients of Export-Import subsidies, Halburton, AT&T, Bechtel,

Boeing and General Electric, have laid off hundreds of thousands

of American workers over the last 10 or 20 years. So the average

American I think would say, why are we pouring and subsidizing

some of the largest corporations in the world, very profitable, who,

in fact, have announced to the world that they’re shutting down

plants in the United States and moving to Mexico and China, and

we are giving them subsidies in the name of job creation. I think

on the surface it is insane and I wonder if you would comment on

that.

Third point I would like to ask you to comment on. In your remarks you talk about trade, promoting global free trade, and you

say, and I quote: ‘‘trade has created million of jobs that pay aboveaverage wages and has helped promote the global growth upon

which America’s own growth and prosperity ultimately depend.’’

Yes. No question. Trade has created millions of jobs. Yet, there is

another side to that equation. We have a $400 billion trade deficit.

Speak to the people in the steel industry, speak to the people in

the northeast kingdom of the State of Vermont, speak to the textile

workers. When you have a $400 billion trade deficit and $100 billion trade deficit with China, the reality is that China is now our

51st state in our manufacturing sector. Every major corporation in

America has gone to China that pay people 20 cents an hour, rather than hire American workers at a living wage.

Now, I am not against trade. Trade obviously works when it is

based on fair trade. I would hope that you will speak and raise the

issue of what I consider to be a fiasco in terms of our trade policies

which have impacted millions of American workers. Mr. Secretary,

a young person without a college degree who goes to the job market

today is earning 20 percent less than was the case 25 years ago,

because there aren’t manufacturing jobs there; there are McDonald’s jobs there. And I know that you are smart enough to understand this, and I would hope that we could go beyond the rhetoric

the trade is just great. It ain’t great when you have a $400 billion

trade deficit, OK, and we’ve got to deal with that issue, and it’s not

talked about enough. So that’s enough of my rhetoric. I would appreciate your response to those issues, please.

Secretary O’NEILL. Thank you very much, Congressman. To the

first issue of Eximbank intervention or program support for the investment in India, I don’t know anything about this, but from reading the newspaper accounts, I understand this was done sometime

in the Clinton Administration 3 or 4 years ago.

Mr. SANDERS. Right. It’s certainly not a new policy, no.

Secretary O’NEILL. Right. This is not something that the Bush

Administration had anything to do with.

13

Mr. SANDERS. Oh, but they supported it, and they’re actively involved. It’s bipartisan, sir, bipartisan.

Secretary O’NEILL. I’d be happy to find out from the Eximbank

what facts they looked at in making a decision.

Mr. SANDERS. I would appreciate it if you could get back to me.

Talk a minute about Export-Import, the general philosophy on the

issue that I raised.

Secretary O’NEILL. You know, I do think the Eximbank is there

to support job creation and protection for companies in the United

States. You know, I didn’t honestly come prepared to defend the

Eximbank today in great detail. But I’m sure there must be thousands of programs that they have supported over time, not only for

big firms, but small firms. As a matter of fact, I think the issue

of contention that Congressman Bereuter was speaking about had

to do with a fairly small firm or transaction,— it was a very small

transaction involving a company from his district.

Mr. SANDERS. That’s all true. But, does it make sense to you that

if General Electric announces to the world that it is part of their

program, they’re going to be moving companies to China and to

Mexico, and then they come in and ask for an Export-Import loan,

does that make sense to you?

Secretary O’NEILL. I don’t know. I guess I’d like to look at the

circumstances. Maybe we can couple these together and I can talk

to you from personal experience. When I was in my previous incarnation, or previous two, I made investments in China. I didn’t

make investments in China so that I could pay people, as you said,

20 cents an hour and be in competition with U.S.-based industry.

I made investments in China because it was a market of 1.2 billion

people and I thought my duty to my shareholders was to make sure

that they participated in world economic growth, and I wanted to

be an on-the-ground supplier of valuable goods in the Chinese market. And I did the same in 36 different countries, Congressman. It

was not so that I could hurt my workers in the United States,

which numbered 50,000 and I more than tripled in the time I was

there. It was so I could make good on the idea of being the very

best company in my industry everywhere in the world.

Mr. SANDERS. Look, I respect that, but there are many companies who have done some very different practices, laid off American

workers, moved to China, no question about that. Maybe you and

I can discuss that at some point.

Last question——

Chairman OXLEY. The gentleman’s time has expired.

Mr. SANDERS. Trade deficit $400 billion, $100 billion with

China——

Chairman OXLEY. The gentleman’s time has expired.

The gentleman from Nebraska, Mr. Bereuter.

Mr. BEREUTER. Thank you, Mr. Chairman. I wasn’t going to

bring up the Export-Import Bank again, but I would say to you

that when Treasury steps in and reverses the decision of the Export-Import Bank on two transactions, one of which has, by the

company’s estimate, follow-on sales of $100 million a year on a

manufactured product, this is not a small issue for me or my constituents.

14

I want to go, however, to two questions, Mr. Secretary. One, I

don’t expect you to be necessarily familiar with the details of this,

but there’s a small institution, relatively speaking, International

Fund for Agricultural Development. They are not reimbursed for

their contributions to the highly indebted countries, the HIPC Initiative. All the other development institutions are.

I sent a letter to Deputy Assistant Secretary Schurs February

4th, because he or someone from the department was headed for

a donor’s conference in Rome on February 7th. And I know that the

U.S. was going to discuss this issue. At least it was on the agenda,

as to why IFAD cannot be treated like the other multilateral institutions with respect to HIPC.

Second, I think it’s actually courageous and perhaps very good

policy to move part of the loan activities of the World Bank and

other multilateral institutions to a grant basis. There will be a lot

of questions raised about it in Congress, but at least it’s an issue

that has reason for support. And I’d like to know the reactions that

you’ve received from other countries that, to this point, have not at

least appeared to be supportive.

Finally, I want to share a story with you about the IMF. How

at times I think their policy can actually be very counterproductive

and how I think that the social costs created by some of the conditions, entirely appropriate conditions, have to be better met in coordination with the World Bank or the regional development

banks.

I chaired the Asian-Pacific subcommittee for 6 years, and I was

chairman during that period of time when the Asian financial crisis

started, which began, as you know, in Thailand. Thailand had a lot

of problems in bank regulation and incestuous relationships between the private sector and commercial and public banks. Crony

capitalism, in short, but they were not a fiscal basket case by any

means. They had fiscal resources.

Then it spread to the Republic of South Korea. They also did not

have fiscal problems, but when Senator Roth and I met with the

finance minister in Seoul, who was also, I think, the deputy prime

minister, we asked him if he was considering accelerating public

works projects, given the fact that they had the fiscal resources, financial resources to do so. Port development, highway constructions, things that were ready to go. And he said, ‘‘Oh, I don’t have

that option under the IMF Directive.’’ Even though they knew they

were going to have unrest on the streets, high unemployment rates

at a time when they could have financed it early-on in Thailand

and in South Korea, they were told they were not allowed to do

that. I think that is exactly counterproductive advice, and, of

course, soon they did have fiscal problems and they had unemployment problems. So there is one example.

You could go back to what happened in Latin America on the advise that was probably appropriate in a macro-economic sense, but

not accompanied by the cooperative work of the World Bank, or the

international development institutions in a regional nature. So I remember how the Treasury, in a previous Administration, actually

led the effort to give bad advice through the IMF to Thailand and

the Republic of Korea. And then to top it off, when Thailand got

in deep trouble, the United States, its ally, was not there to help

15

them. They got money from Hong Kong, they got money from the

PRC, and from many countries, but we weren’t there.

Secretary O’NEILL. Well, I appreciate your questions on the first

issue. Bill is here with me, and we will get you something on the

agricultural development funds.

Your other two questions are wonderful questions. On the response that we’re getting to proposing that we move from loans

from the multilateral development banks to grants, many of you

know we had some initial reactions that said that this was a very

bad idea. And as we prepped them, the people who had voiced their

opposition, tell us their reasons. One reason was ‘‘Well, these are

banks and banks don’t make grants,’’— didn’t have anything to do

with what’s the right thing to do for world economic development.

It was institutionally couched. And when people saw that wasn’t a

very useful argument,— I mean, they were embarrassed after a

while to make that kind of an argument,— they started saying

more directly what I think they really thought, which is ‘‘We’re

really worried that you’re using this as a way to reduce U.S. financial participation for helping the low-income countries to develop.’’

And, as was noted by the Chairman, in the President’s budget,

we’ve proposed that we increase the amount of money that’s available for these multilateral institutions to make the point that this

is not about being stingy, this is not about cutting back, this is

about getting performance and getting results for our money in

terms that are meaningful to the people in these countries,— which

is to say that their living standard goes up, not that we just send

more money, but that something very important happens.

And in the last couple of months, I would say we’re making more

and more progress with other countries on this issue to the degree

that the Development Minister from Norway, Minister Hilde Johnson, has put forward a proposal that says we should identify things

like aid to post-conflict countries, aid for HIV prevention projects,

aid for countries that have average incomes of less than a dollar

a day,— and we would say aid for primary education,— that these

things should be done as grants, they should not be done as loans.

And the response now has improved, and that would make a substantial difference in the level of money distributed through grants

instead of loans.

I won’t tell you which one, but one of the European finance ministers said that was all fine as long as the total didn’t exceed 10

percent,— to which I said, tell me why 10 percent. And if you agree

that these human-driven ideas are the right ideas, why do you say

10 percent is as far as we can go? There’s not a good answer to that

question. And so I would say we are making progress. It’s slower

than I would like, but we are making some progress.

On the question of IMF—and I’ll do this quickly, Mr. Chairman,

as I see you’re looking at the time—I agree with you that the IMF

has in the past insisted on some policies that taken broadly and

from the point of view of the leadership of a country don’t make

any sense. We’ve been working with the IMF over the last year to

hopefully cause them to rethink how they relate to the world. Let

me just to take a specific area, which makes great good sense to

me, where I think we need to change our idea of what’s acceptable

in the world. For the longest time, I would say for 50 years,

16

through our practice and our words and our loans, we have basically taught the developing world that if you’re a low-income country, it’s OK to be,— in fact, we encourage you not to be an investment-grade country. What that means is that your debt is very,

very suspicious and you have to pay a very high interest rate in

order to get people to take your sovereign paper. Now if you think

about it, it is the worst of all possible things to say to people who

are living on less than a dollar a day, that you get the treat of paying 18 or 20 or 25 percent interest rates on your sovereign debt,

because we’re encouraged to do that by the development community. It is a very bad idea.

And I think the only reason that we’ve permitted this to happen

is because we constantly forget who pays the interest rate charges

on sovereign debt. The people who make and live on less than a

dollar a day pay it. The government doesn’t have any money it

doesn’t apart from the people. And so we’ve been working to change

the standard of what it means to be a developing country and to

say therefore we should not ask developing countries to take more

debt burden, which means the interest rates they have to pay go

to 20 or 25 percent.

Chairman OXLEY. The gentleman’s time has expired. Before I

yield to the gentleman from Massachusetts, Mr. Secretary, there

was an article in the Wall Street Journal talking about the same

issue you were talking about, particularly Norway’s minister of

international development and the 10 percent issue. You were more

outspoken in your speech. Let me quote from the Wall Street Journal:

‘‘Mr. O’Neill’s response was scornful. ‘Europeans say more than

10 percent is too much,’ he told a couple of hundred guests at the

Institute for International Economics and Center for Global Development. ‘I say the hell with it. Tell me a good reason.’ ’’ So I think

we know where you stand on that issue.

The gentleman from Massachusetts.

Mr. FRANK. I thank the Chairman. Without a little scornfulness,

Mr. O’Neill, people might not have recognized you, so I’m glad that

he gave us a little context.

I was pleased to see you single out aid to Afghanistan in your

statement. We obviously have a moral obligation. I think—like everyone else here, I agreed with what we did there, but having, in

self defense, engaged in that military action in which tragically, innocent people got killed and I do wish the Pentagon was a little

less grudging in acknowledging that and a little more careful about

it, but it’s inevitable. Obviously, we have a moral obligation to help

rebuild, but I’m a little troubled.

What’s our contribution for the first year to the Afghan reconstruction fund?

Secretary O’NEILL. I’ve forgotten.

Mr. FRANK. I’m told it was about $200 million, and the total

we’re talking about here is, well, I just heard that it’s going to cost

us $30 billion a year for the war, and I’m troubled by the 150-to1 disparity. I think frankly we are not meeting our moral obligation as a Nation to provide more funding. Obviously, you don’t

want to provide money that people can’t use, but everything I read

says we have people who are hungry, we have police officers and

17

others not being paid, and I was impressed, Mr. Secretary, and I

appreciate the passion of your rhetoric about the unsustainability

of a world with such enormous disparities where people, through

no fault of their own, are living so degraded.

To be honest, I think we can do more, and I like the direction

that you talk about going in. But let’s start with Afghanistan.

There was really no moral justification for a 300-to-1 disparity or

150-to-1 disparity. I have trouble with my math. Between $30 billion and $200 million, in terms of what we contribute.

Now let me say with regard to the grants, and I agree, and I’ve

read some of these arguments. One of the ones that seemed to be

silly to me was well, if we make it a grant instead of a loan, the

country won’t have ownership of the program. I think that’s the

kind of thing people say when they have nothing else to say. But

there is one legitimate question here. And I must say, I appreciate

the care with which the Administration has differentiated its approach on the grant versus loan from the Meltzer Commission. The

Meltzer Commission was an intellectually respectable operation,

but it was far more critical of these institutions than I think that

I am, and I believe, I was pleased to see, the Administration was.

So, what is important, and I think that gives rise to some of the

fear that this is the way to get rid of these things. The problem,

as you know, is that some of the financing that we do for future

projects comes out of the reflows, and it would seem to me if the

U.S. Government would just commit to making up any gap in financial availability of funds, that would come from the lack of the

reflows, we could do away with that and we would have virtual

unanimity. Can’t we just say that, Mr. Secretary? That we would

agree to make up, through an appropriation process, any gap

caused by the cessation of reflows?

Secretary O’NEILL. I think the amount of money that we’ve suggested over the next 3 years stepped up through this performance

idea would more than take care of the reflow associated with the

U.S. proposal.

Mr. FRANK. Well, I agree, although we do understand that in the

first couple of years, the reflows are fairly small, so would there be

any objection in principle, or let me put it this way. Shouldn’t we,

to advance—because I think moving to grants is a very good idea—

but, wouldn’t it be helpful if we said that we, to the extent that

you and I and others can commit people yet to come, that our policy would be that in the future, to the extent that there continued

to be a need, we would continue to make up for any loss through

the lack of reflows?

Secretary O’NEILL. The concept—I don’t see anything wrong with

that. I’m not sure about your rules and what that means for 10-

year commitment for scorekeeping and——

Mr. FRANK. Well, one thing we’ve learned is anything we say

today we could all undo tomorrow. But it does help, I think, to set

the policy. After all, the move from loans to grants isn’t binding.

It could be undone. But we committed ourselves.

Secretary O’NEILL. I agree with you.

Mr. FRANK. Thank you. Let me then just make the last point.

Again, I was struck, and I appreciate your passion on the issue and

I think that is appropriate. Part of the problem we have, of course,

18

is—and I guess when you talked about capital being a coward; I

love that phrase, I think that’s true. Capital is very mobile. Unfortunately, that gives capital an awful lot of sway in the world that

it can sometimes beat down other considerations. One of the problems is that when countries are told to do the things that make

them investment safe, the money to help alleviate the short-term

social pain isn’t there and that makes it harder to get these things

accepted in a democratic society. Let me cut to the bottom here.

I believe that as the wealthiest Nation in the history of the

world, given the way you have framed this issue, even though

you’re talking about more, we’re still not doing enough. We found

$48 billion, we’re going to find $48 billion over my objection to increase military spending. I think it’s more than we needed. But,

when we were threatened, we found $48 billion.

I think we could do more with regard to precisely the issues you

talk about. Now obviously we don’t want to send money where it

can’t be well-spent, but alleviating hunger, dealing with AIDS,

these are precisely the areas you talked about where grants could

do some good, would you not agree that the world could absorb a

significantly higher level than we’re talking about, and can’t we try

to find somewhat more than we are doing? And that includes, I believe, just to close, Mr. Chairman, further pressing the international institutions fully to fund the HIPC. I think we as a bilateral effort have done more than they’ve done. We’re not talking

about an enormous amount of money; maybe it’s billions more, but

I think it would go pretty far. And as far as the rest of the world,

you know, they’ve been critical of us because we’re not doing

enough; let’s call their bluff, let’s see them and raise them and see

what they do in this poker game.

Chairman OXLEY. The gentleman’s time has expired.

Does the Secretary wish to respond?

Secretary O’NEILL. Maybe just to say one thing. One reason for

wanting to be very, very forceful with the IMF and the World Bank

in developing performance measures is so that we can create a

basis for saying to the American people, not only should we do

more, but we can assure you we’re going to get real value for all

of the money that flows through these institutions. My own view

is that as we can demonstrate that we know what we’re doing, we

can make a case the American people will believe in and the Congress will be able to act on.

I’ve asked Jim Wolfensohn of the World Bank to do something,

which he’s in the process of doing and hopefully we’ll have before

the Monterey conference, which is to write a report that learns the

lessons of the last 50 years and says precisely and specifically what

has worked and why it has worked. And even more precisely and

specifically what hasn’t worked and why it hasn’t worked. Because

I believe we have done a pitiful job of learning from experience,

and as a consequence, our Government and other governments

have not been believable when they say that they know what

they’re doing in this area of economic development. After 50 years,

not only are people living on less than a dollar a day, there are

places in the world where the living standard is worse now than

it was 50 years ago when we began this effort. I believe we can do

19

better, and then I believe we will command the resources to expand

and improve what we’re doing.

Chairman OXLEY. The gentleman’s time has expired. The

gentlelady from Illinois, Mrs. Biggert.

Mrs. BIGGERT. Thank you, Mr. Chairman. Mr. Secretary, in wake

of the terrorist attacks on September 11th, I think world leaders

have been examining and reexamining the whole issue of global

poverty and the fact that it does provide a breeding ground for terrorist movements. Some have argued for a renewed effort by developed countries to commit .7 percent of the GNP to global assistance

and it certainly is a standard that neither we nor our allies can

begin to meet. So could you take a moment and share with us how

you feel the events of September 11th have changed the focus of

our international development policy?

And could you talk about U.S. assistance to the World Bank and

the multilateral banks within the context of the battle between democracy and these radical groups?

Secretary O’NEILL. Well, I think if you go back and look at what

the President said at the World Bank in July, you will find that

he said how important it is that we fulfill our responsibility in the

broader world to work on meaningful economic development. So I

would say, yes, all of us were affected in lots of different ways by

the events of September 11th. I don’t think the President’s view,

and frankly my view, of the importance of working on these issues

was changed in a marked way by September 11th. I thought for a

long time, it’s not worthy of civilized people who live like we do not

to be concerned and making some progress in helping other people

to improve their living standards.

I think it is also true that, as I was saying earlier, that the IMF

and the World Bank have fallen short of what they can do, and

therefore there is a real need for a reassessment and redirection

and realization of turning rhetoric into reality for people on the

street.

Mrs. BIGGERT. Well, certainly you know this Committee has

played a role in the formulation of the Patriot Act and certainly

looking at money laundering, and that’s been linked again to the

terrorist activity and trying to suppress them.

What role then do you think that the IMF should play in the

money laundering issues?

Secretary O’NEILL. This is a subject that we’ve worked on with

Horst Ko ̈hler and his people at the IMF, and they’ve been very responsive to our request in being supportive and helping to encourage the association of all the countries in the IMF with our efforts

on a worldwide assault on terrorist finances. We’ve been talking

with them. As a matter of fact, I had breakfast with Horst K ̈ hler

and Ann Krueger a week or 10 days ago and talked about them becoming a clearinghouse where countries would report on the actions that they’ve taken to establish appropriate mechanisms, and

I think we’ll get that done fairly quickly. And to connect back to

your earlier question about how we’re changed by the events of

September 11th, I must tell you it never occurred to me when I

came here that I would be spending a significant fraction of my

time designing systems to interdict and confiscate the funds of peoVerDate 11-MAY-2000 15:00 Aug 20, 2002 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 C:\DOCS\78187.TXT HBANK1 PsN: HBANK1
20

ple who would do the horrible things that were done on September

11th.

I would also say to you, I think we’ve done a good beginning job

of connecting the world and the institutions of the world to help us

in this worldwide fight. In that regard, on Sunday morning I’m beginning a 5-day trip to the Gulf states to meet with the leaders of

the Gulf countries to work with them to further tighten our ability

to deal with terrorist financing. This is not a finished piece of business. We’re in the early stages.

Mrs. BIGGERT. Right. Thank you, Mr. Chairman.

Chairman OXLEY. I thank the gentlelady. The gentleman from

Texas, Mr. Gonzalez is recognized for 5 minutes.

Mr. GONZALEZ. Thank you very much, Mr. Chairman.

Good afternoon. My question has to do with NADBank, which is

headquartered in my district, and for the past few weeks or months

there’s been discussion from Treasury about plans that would significantly restructure it and narrow its focus. My concern or course

is great. Our problem has been, Mr. Secretary, that we have not

been able to obtain from Treasury anything in writing as to what

the proposal consists of. So, I would ask you today if you would

provide me with that within, let’s say, the same time next week.

Do not mail it, that is true; email or fax. But it’s my understanding

that we have not been able to obtain anything that specifically outlines what Treasury has in mind, and further any time line.

And my second request would simply be, I know there would be

discussions in Mexico, and prior to any finalization of any agreement with Mexico relating to NADBank, could you again provide

me, prior to finalization, the specifics. And when I say, prior, you

know, what would be appropriate, I would just simply ask you to

put yourself in my shoes as to what would be that appropriate

courtesy. And that’s the only thing I have right now is NADBank

because that’s still a very hot issue, when I get back this weekend,

as a matter of fact. Thank you.

Secretary O’NEILL. We’ll be happy to do that.

Chairman OXLEY. Thank you, Mr. Gonzalez. The other gentleman from Texas, Mr. Paul is recognized for 5 minutes.

Mr. PAUL. Thank you, Mr. Chairman, and welcome, Secretary.

I’m glad that we’re here talking about reform of the IMF. Of

course, my belief is it’s probably beyond reform, and that someday

we might look at a more appropriate position on the IMF, and that

is just for us to get out of the IMF. I have never seen anything that

can morally justify our participating and taking money from poor

people in this country to pump into the IMF. I’ve never yet seen

any economic benefit come from the IMF, and I have not yet found

anybody who can give me constitutional justification and authorization for us to belong to an international organization which serves

special interests.

I’ve never had a constituent in my district come up and say:

‘‘Ron, I really want you to vote for the IMF funding this year.’’ It

has never happened. I’ll bet it hasn’t happened in anybody’s district. But we do get lobbied for it. We get lobbied for the IMF appropriation by the banks and large corporations. So there must be

a special reason they come to us and ask us for this appropriation

and for us to stay in the IMF, especially in the midst of a crisis.

21

You mentioned in your testimony that you would like to head off

these crises, but I don’t see how that’s going to work either because

sometimes when there are maladjustments in an economy, the crisis is really the market telling you you’d better do something. If

there’s something wrong with currency balances or imbalances,

then you really need a crisis.

But to try to prevent this by micromanaging, you get into a situation where you’re becoming the biggest economic interventionist

conceivable. So I think we’re more or less trapped.

But I do have two brief questions. You favor debt relief for some

of the Third World countries. Why is it that we always have to appropriate that money? You know, if they owe us the money or we

loan them the money, why don’t we just say, you don’t have to pay

us? It obviously, or somewhat implies that this money goes to a

corporation or to a bank and that’s why they lobby us for it. They

can’t pay it anyway, so just relieve them of it, but don’t appropriate

the money. But, we always have to appropriate the money.

Now, I have a quick question on the Exchange Stabilization

Fund because it works so closely with the IMF. I believe the Exchange Stabilization Fund has more than $35 billion, which is

more or less a slush fund, and it can come to the rescue, along with

the IMF, to bail out these large corporations and the banks. I have

a bill that would make the Exchange Stabilization more responsible, whether they are dealing in gold, or whether they’re participating in a bailout, why can’t they do that like it should be done

through a direct appropriation or direct approval by Congress.

Would you support something along that line where Exchange Stabilization Fund would be more responsible to the Congress?

Secretary O’NEILL. Let me start with the broadest question that

you asked about the IMF. As I’ve already testified, I think there

is a need for reform of the IMF and the World Bank. I think there’s

a very good case to be made for U.S. participation in the IMF and

in the World Bank that goes directly to the self-interest of the people of the United States. It is evermore true that the world is interconnected. The affairs that were remarked on earlier—when Thailand and Malaysia and that part of the world, Korea, saw a rolling

financial collapse—was not of transient interest to the people of the

United States. They may not have known it and they may not have

understood it, but when the rest of the world verges on losing its

position as a market for U.S. goods, believe me, that’s a real issue

for U.S. farmers, because a huge part of the product of our great

farm community goes offshore, and it’s true of lots of our other

goods.

And so I think we have a decided, clear interest in the economic

improvement of and stability in the rest of the world. And saying

that, I would also join you in saying I don’t want U.S. taxpayers’

dollars to be thrown away. I want them to be used for leverage to

create more stable conditions, so that those markets that we are

ever—increasingly dependent on are there and they’re stable and

they pay good prices for our products. So I think there is a very

good reason to have these organizations.

Chairman OXLEY. The time of the gentleman’s expired, but you

certainly may continue.

22

Secretary O’NEILL. May I just say one word in response to his

Exchange Stabilization Fund question. In the 13 months that I’ve

been at the Treasury, we have not used the Exchange Stabilization

Fund to bail out anyone. And the flexibility that exists in the Exchange Stabilization Fund has been around for a very long time.

In reviewing the history of the use of the fund, I think almost without exception, it has been used for a good public purpose. I’d be

happy to discuss individual instances with you if you think there’s

some evidence to the contrary. But I do think that in a world that

can turn on a dime, it makes sense for Administrations, both Republican and Democrat, to have some flexibility to respond to crisis

conditions. And so I think the Exchange Stabilization Fund has

served us well as a country, and I would hope that we don’t put

restrictions on it that make it more difficult to act when we must

act in a hurry.

Chairman OXLEY. Thank you, Mr. Paul.

The gentleman from California, Mr. Sherman, is recognized for

5 minutes.

Mr. SHERMAN. Thank you, Mr. Chairman. There are those who

think that the war on terrorism is just an overblown rhetorical

flourish. I hope they’re wrong, because Iran and Iraq are right now

trying to develop nuclear weapons. If they’re successful, I believe

they’ll smuggle them into this country, and I believe that the equation is simply millions of dollars flow to the Iran or Iraq regimes

this decade and that leads to millions of dead Americans next decade.

But right now it seems as if we’re doing business as usual with

the IMF and the World Bank. Iran has received $232 million from

the World Bank, $145 million for a ‘‘sewer system’’ and we at least

opposed that, and $87 million for health and nutrition which we

have not really bothered to oppose. Now you can say health and

nutrition, these are wonderful things, but what if an American,

through an intermediary, had sent $232 million to the Nazi Regime, and said well don’t prosecute me for treason, here’s a letter

from the Fuhrer that says the money is going to be spent on sewers

and health care systems. When you look at the IMF, Iran has borrowed $530 million, Syria another $100 million. Now we’re told they’re simply borrowing back their own capital, but look at the incredible benefit

they’re getting. They are members in good standing of the IMF, but

they don’t have to sacrifice liquidity, they get their money back.

Imagine a partnership where some partners have to contribute capital and others contribute capital and then they get it back.

So clearly, hundreds of millions of dollars of benefit going from

the IMF and the World Bank to those that the Administration calls

the ‘‘axis of evil,’’ but are actually the receivers of subsidies from

the American taxpayer. Now we can just make some mild protests,

easily ignored, so mild that nobody even heard them. I believe that

there are Members of this Committee that don’t know that the IMF

and the World Bank is distributing funds, dispersing funds due to

previously-granted loans to Iran while we speak. Our protest was

so soft it didn’t even reach this room.

Or we can instead threaten to pull out of these institutions, create a U.S. Bank instead of a World Bank so at least we can tell

23

our constituents that our money is not subsidizing those that the

President calls evildoers.

Are we going to continue to do business as usual with these institutions and tell the American public in the surface we’re at war

with terrorism, and then somewhere deep in the financial pages,

our money goes to the IMF and the World Bank, their money goes

to the axis of evil.

Have we told our European and Japanese friends that we hold

them responsible for hijacking our money and sending it to those

who are doing everything possible to develop weapons of mass destruction so that they can kill millions of Americans?

And are we going to hide behind the idea that, oh, gee, there’s

nothing we can do. We were outvoted and there’s just no replacement for these institutions. And if we hide behind that, can we at

least go on the front page? Can the President of the United States

at least explain to the American people that their money is gone

to Baghdad, and especially that their money is going to Teheran,

it is going to Damascus, and that when 10 years from now, God

forbid, millions of Americans are killed by an Iranian or Iraqi nuclear weapon, and we hold hearings in this room, if it’s still here,

who financed the Iran or the Iraq nuclear bomb, and unfortunately,

part of that may be us.

I’d like your comments. Are we going to continue to do business

as usual?

Secretary O’NEILL. I must tell you I’m just staggered by that representation. It’s simply not true.

Mr. SHERMAN. The IMF and the World Bank do not make loans?

Secretary O’NEILL. You said the American taxpayers, your constituents were sending money. That’s just not true.

Mr. SHERMAN. No, my constituents, we have capital at risk.

Secretary O’NEILL. I’m sorry, Congressman. I tell you I care

about these issues really deeply.

Mr. SHERMAN. As do I.

Secretary O’NEILL. And I care a lot about what we say to the

American people out there about what we’re doing. We have never,

ever supported sending the American taxpayers’ funds to Teheran,

or to Damasacus.

Mr. SHERMAN. We have allowed our funds to be hijacked by others and sent there. It’s our money mingled with European money

that is going to Teheran right now.

Secretary O’NEILL. I’m sorry, that’s not true.

Mr. SHERMAN. The money isn’t being——

Chairman OXLEY. The gentleman’s time has expired.

[The following information was subsequently furnished by Secretary O’Neill for the record.]

Secretary O’Neill was correct in stating that Treasury

has never ‘‘supported sending the American taxpayers’

funds to Teheran, or to Damascus.’’ It is true that the U.S.

has not supported World Bank Group projects for Iran and

Syria. The following offers greater detail.

World Bank Group borrowing countries are divided into

IBRD-only; therefore, they are ineligible to receive IDA assistance and receive none of the funds the Congress annually appropriates to IDA. To meet its lending requirement,

24

the World Bank uses paid-in capital from its shareholders

to raise funds in the market. That borrowed money is lent

to countries as ‘‘IBRD loans,’’ which they repay with interest and an overhead charge.

The U.S. has opposed all World Bank Group projects for

Iran or Syria, consistent with U.S. law and policy. IBRD

lending to Iran resumed im May 2000 with the approval

of two IBRD loans to Iran—a $145 million IBRD loan for

the Teharan Sewerage Project and an $87 million IBRD

loan for the Second Primary Health Care and Nutrition

Project. The U.S. voted against these projects, but other

shareholders voted in favor. There have been no loans to

the Syrian Government. It should be noted that Syria has

been in arrears to the World Bank since 1986.

Chairman OXLEY. The gentleman from California, Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

First, Mr. Secretary, I want to thank you for coming. I know

you’re very busy. I appreciate your taking the time. I’m especially

appreciative of the effort that the Administration is putting toward

establishing partnerships both within and without the North American Development Bank, with our good friend, Mexico, to the south.

The old real estate saying with which I’m familiar, is ‘‘you only

want to own that which touches yours.’’ Frankly, dealing with the

problems in our backyard, are the height of leadership and I want

to compliment you and your colleagues for doing that.

I want to go on to another question. We’ve had a lot of conversation today about the highly indebted poor countries. There are basically two classes of borrowers at the IMF. There’s the HIPC countries and there’s everybody else. I believe in a previous appearance

here, you made a very clear that people who borrow money should

repay it.

Secretary O’NEILL. Right.

Mr. OSE. Could you give us some sense of the borrowers, for instance the large borrowers not in the HIPC group, but everybody

else and the status on their loans, please?

Secretary O’NEILL. Bill is reminding me there are almost no arrears in those that are not in the HIPC countries. You know, and

I think to your point, we’re making real progress on the idea that

we should expect even very low income countries that they should

be moving toward investment—grade sovereign debt. What that

status would provide is a significant cushion against bad times in

sovereign countries that have investment—grade debt. They would

have in effect a balance sheet that lets them deal with unfortunate

circumstance. We’re moving in that direction. It’s part of the reason

we’ve been so forceful in saying we don’t want to make loans to

countries that are already saddled with debt that they can’t pay because we’re creating the next HIPC round.

Mr. OSE. I do think your point is very well made in the sense

of creating a, if you will, a pit that you both throw money into forever. Let me go back to my first comment about the relationship

with our good friend to the south. Could you give us some sense

of the partnerships, both private and public, that are undertaken

to date by the Administration with Mexico?

25

Secretary O’NEILL. I would say we’re making wonderful progress.

Both President Bush and Vincente Fox have worked hard at this

relationship since the very beginning of the Administration. We

had a conference about 10 days ago, chaired by Deputy Secretary

Dam, and we’re in the process now of pulling together a whole

array of ways that we can strengthen the relationship between the

U.S. and Mexico, and the economic integration between the U.S.

and Mexico, to the benefit of both sides of the border. It’s very interesting as we work this issue. Maybe one could argue that these

should not be new discoveries, but to discover the amount of fees

paid by people who are working on the U.S. side, and have relatives and family in Mexico that they’re sending money back to. It’s

surprising to learn that often times they’re paying 20 or 25 percent

fees to financial intermediaries to move their money back and forth

across the border. You know, it just cries out for a solution and

we’re in the process, I think, of making those connections that will

make a huge difference in the value of funds earned in the U.S.

and repatriated to families back in Mexico.

Mr. OSE. If I may make one observation on that particular point

there have been discussions amongst us, particularly between me

and the Chairman about trying to craft some statutory language

that would facilitate the transfer of funds back and forth across the

border between family members, and I look forward to interacting

with you on that particular issue.

Thank you, Mr. Chairman.

Chairman OXLEY. Thank you and thank you for your leadership

on this issue.

The gentlelady from California.

Ms. WATERS. Thank you very much, Mr. Chairman. I’d like to

thank you for the time and I would like to thank Secretary Paul

O’Neill for his willingness to testify before the Financial Services

Committee today. I would also like to thank Chairman Bereuter for

his comments on the International Fund for Agricultural Development and its contributions to HIPC.

To the Secretary. Unfortunately, the HIPC Initiative has failed

to provide a lasting solution to the problem of poor country debts,

because the IMF and the World Bank have refused to provide their

fair share of debt relief. While the U.S. and the G7 countries

agreed to cancel virtually all of the bilateral debts that poor counties owe them, the IMF and the World Bank are reducing these

countries’ debts by less than half. At least 18 of the 24 countries

that have received debt relief are still spending more money on

debt payments than they are on health care.

Zambia provides an excellent illustration of why deeper debt relief is necessary. Zambia is a deeply impoverished country with a

per capita income of only $330. The infant mortality rate exceeds

1 percent of live births, and 27 percent of Zambian children under

five are malnourished. Almost 10 percent of the population is infected with the AIDS virus and 650,000 children have been orphaned by AIDS. The HIV/AIDS epidemic has also ravaged the

educational system by causing a shortage of trained teachers. Yet,

Zambia’s debt payments have actually increased following the receipt of debt relief. Moreover, Zambia still spends more than twice

as much money on debt payments as it does on health care.

26

The President’s budget includes a request for $850 million to replenish the International Development Association—IDA—through

which the World Bank provides concessional loans to poor countries. The Financial Services Committee is expected to consider legislation this year to authorize a replenishment of IDA. IDA replenishment provides this Committee with an excellent opportunity to

evaluate the progress of the HIPC Initiative and consider legislative language to provide deeper and more effective debt relief to impoverished countries.

Mr. Secretary, are you willing to consider expanding the HIPC

Initiative to provide deeper debt relief? Do you think that the expected replenishment of IDA this year will provide an appropriate

opportunity to consider additional debt relief legislation? How

much debt relief do you believe the IMF and the World Bank

should provide?

Secretary O’NEILL. Well, thank you for your questions. As you’ve

indicated, and I think we had a little bit of a conversation last year

about HIPC, there are still significant debt loads in many countries. That’s part of the reason the President has said that we

should not pile more loans on low—income countries, that we ought

to move toward grant funding, especially for the lowest of low—income countries. And there’s still much more to do. I think there’s

no doubt about that. One could think about expansion of HIPC as

we see performance under the HIPC Initiative. Again, I think I

said to you last year, one of the concerns I have about what we’ve

done, or what the agencies have done, with HIPC is that they have

presumed that having a forgiveness of certain kinds of loans, that

countries are then in a financial condition that they can use the

money that’s theoretically freed up in interest payments and principle to go do other things of our determination. This is of great

concern to me because it makes a presumption, I think, as you said

in your own remarks, which is too often not true. The fact that certain debts have been forgiven doesn’t mean that a country suddenly has a balance sheet that can support additional spending. It

may not, in fact, be the right thing for the people of the country.

So one of the things that we’ve worked hard on is to try to get

not just the Fund and the World Bank, but the so-called NGOs, the

non-governmental agencies, to take a broader perspective on how

we all think about what we’re doing, so that in effect, we’re not

saying to the president of a country, do our bidding and we don’t

care what your other circumstances are. We’ve forgiven the part of

the debt that you owed to us and therefore you must do our bidding

for something else. I think this is a mistaken notion which we’ve

been working hard to try to overcome.

But I think I agree with you, as I said earlier, that we should

be building a case for more on the back of demonstrated performance that shows we know what we’re doing, and we know what

we’re doing in a way that shows up in the average income levels

of the people in these countries, not in some other measure that

may be satisfying to us, but doesn’t do any good in terms of the

human living standards.

Ms. WATERS. Mr. Chairman, if I could get unanimous consent for

30 seconds?

Chairman OXLEY. Without objection.

27

Ms. WATERS. Thank you. Mr. Secretary, I would like to get back

to the conversation that we had about technical assistance to some

identified countries to have some demonstration of how we can help

countries use some of their resources to deal with the problems of

poverty. I just asked my staff if we had followed up. I think there’s

a letter in to you about that, and I’d like to get on the road in helping to make that initiative a possibility.

Secretary O’NEILL. I’d like very much to do that.

Ms. WATERS. Thank you.

[The prepared statement of Hon. Maxine Waters can be found on

page 42 in the appendix.]

Chairman OXLEY. The gentlelady’s time has expired.

The gentleman from Columbus, Ohio, Mr. Tiberi.

Mr. TIBERI. Thank you, thank you, Mr. Chairman. Mr. Secretary,

with respect to Argentina, I have some constituents who are U.S.

citizens who are natives of Argentina who work at Ohio State University, have expressed a dire concern about what’s happening in

South America and that they believe Argentina is a key to stabilizing the entire region. What’s your view on that theory and how

we should proceed to the IMF?

Secretary O’NEILL. Well, I must tell you I’ve spent a good deal

of time with the people at the Treasury and the State Department,

spent a good deal of time being engaged with Argentina. In the 13

months that I’ve been at the Treasury, Argentina represents a

measurable fraction of what I’ve spent my time on, because we join

you in believing Argentina is a very important country. It’s been

a great friend and ally of the United States for a long time. About

2 months before we arrived, the Clinton Administration before us,

had worked with the IMF to agree to a program for Argentina that

at the time I think was judged to be the largest ever including both

what the IMF was doing and what private resources were doing.

As I recall, the amount of money that was in the first program, the

Clinton Administration program, was $43 billion.

In April all of that was gone, and we worked with the IMF and

agreed a new program with Argentina that was some $20 billion.

In August, that was all gone. And at the end of August, we agreed,

quite reluctantly I might say, to one more round which encompassed $8 billion. And as you know, it didn’t save the government

of Argentina because they couldn’t pay their bills.

It’s not for want of trying on the part of the United States and

the IMF that this failure has occurred. It was a long time in the

making and there are difficult circumstances in Argentina which

can only be fixed by the responsible officials in the Argentinian

government. One of those problems is an ability on the part of the

provinces, the equivalent of our States, to make binding obligations

on the national government without the national governments having any say—so whether that’s OK or not. As a consequence, the

debt at the national level is so large that the revenue system only

produces maybe 60 percent of the money that’s required to pay the

interest on the debt. This is a problem that can only be fixed in

Argentina. We’ve had continuing conversations with President

Duhalde and with the Finance Minister. I must say I am encouraged, that I think they are working in the right direction. Floating

the peso was a good judgment.

28

Today’s newspapers report that they think they’ve fashioned a

solution to this provincial/national government issue. I haven’t seen

any details yet, but I’m hopeful because it is also clear that before

more money shows up in the form of IMF assistance, the holes in

the bottom of the bucket must be fixed.

Mr. TIBERI. Thank you, Mr. Secretary. Just to follow up, a number of Latin American countries are in a similar boat to Argentina.

Ecuador is one that is trying to negotiate with IMF right now. Can

you update us on that particular negotiation? And how does the

proposed cut in the Andean Regional Initiative impact that negotiation?

Secretary O’NEILL. I’m happy to say—and as I do I knock on

wood—that because of the way the Argentinian situation has been

handled, that we’ve at least accomplished a pushback on the notion

that existed in Washington a year ago or a year-and-a-half ago that

we and the world were hostages to so-called contagion,— both economic and political contagion,— and that if there was a problem

in one country, no matter if it was on the other side of the world,

that it spelled doom for emerging countries and developing countries all over the world.

You know, I said at the beginning of this Administration I

thought contagion was a man-made phenomenon and that it was

possible for us to prove it wasn’t necessarily so. We’ve worked hard

to do that. And you know, I think as long as we are consistent—

by we, I mean those of us in the developed world whose money is

at risk or involved with IMF and the World Bank—as long as we

are true to principles that we will help people with sustainable situations, and we won’t bail people out who don’t have sustainable

situations, contagion doesn’t need to exist in the world.

Chairman OXLEY. The gentleman’s time has expired.

The Chair is pleased to recognize the gentleman from Iowa, Mr.

Leach.

Mr. LEACH. Thank you, Mr. Chairman. And I know it’s been a

long day for the Secretary. Let me just make a couple of comments.

One, your statement is unusual in the sense that you’ve talked

about many subjects that weren’t asked by the Committee and I

think that’s to be very much respected. You’ve gone beyond the

Committee request.

Second, your leadership in terms of the grants issue is very impressive, and in terms of the European dissent from our position,

based upon the lack of support the U.S. may have in the future for

the international financial institutions, I will only say that obviously these institutions are always controversial. But I think Congress would be sympathetic to Treasury leadership, and that there

is clear growing understanding in the United States, which will be

reflected in Congress, of the need to balance the terrorism approach with the cause of terrorism remedies.

And one of the impressive aspects of the creation of the World

Bank and the IMF was not that they were necessarily created after

the War, which they were, but the design at Bretton Woods was

during the War, 1944 and at the same time, the United States was

enmeshed in War, it was attempting to deal with the issue of the

causes of war as well as the causes of the Great Depression. And

these are things that we can’t skip. I would also say that I’m very

29

appreciative that the Treasury has come down in favor of support

of the World Bank AIDS Trust Fund, and I would only suggest that

I think there would be more support in Congress for a higher funding level, and I hope you keep an open mind to that extent.

And the big picture is that we lost Americans on 9/11, but in Africa every two days more children die of AIDS than were killed in

9/11, and if there’s an international world emergency, it has to be

AIDS. And so I really think at this time, when we think of the

international financial institutions, that has to be the forefront.

Finally let me say with regard to these that, as you know,

George Soros has come forth with a program involving special

drawing rights. It’s fairly complicated. It may not have perfect support in lots of places, but I think it’s the type of initiative that people ought to keep a little bit of an open mind and try to work with

and see if there are modifications. At least it has some hope for

producing more resources on an immediate timing basis. So I hope

Treasury is not fixed in cement completely and totally on that

issue.

Finally, because time is a little problem, I was really pleased in

your opening statement that you mentioned the tax issue and

international dimension of the tax issue. This Committee, as other

committees of the Congress, have looked at aspects of Enron and

to me, one of the obvious facts is that some of the legal aspects of

Enron are in some ways deeper and more troubling than some of

the illegal. And in particular, what appears to be a growing tendency of American corporations, not just Enron, to seek tax havens

for that reason, to avoid taxation and to avoid American regulation.

The United States Treasury has historically been the bedrock institution that should lead concerns in this area. So I hope that the

Treasury has task forces that are looking at this issue. I think Congress would be very sympathetic to initiatives that look at the tax

have issue in as serious a way as possible. I don’t know if you’re

prepared to comment on that. I hadn’t intended to raise it, but you

raised it in your testimony. Do you wish to comment on that?

Secretary O’NEILL. I’d be very happy to if you’d like.

Mr. LEACH. Please.

Secretary O’NEILL. Let me just say one quick word about George

Soros and his idea about special drawing rights. I have a lot of respect for George Soros. He’s someone I’ve known, and I’ve seen him

quite a bit in the last couple of months. I have a lot of respect for

George because he’s spending $750 million a year of his own

money, not somebody else’s money, his own money, to work on

these issues of economic development. So I have a lot of time for

him and for his ideas. I must say, and I’ve said this directly to him,

I’m concerned about the special drawing rights idea, because it’s

first of all complicated and I’m one who believes that as we work

on these issues of economic development, we should do it in a way

that’s very transparent. If it’s our intent to give more resources, I

would like for us to appropriate the resources and say to the American people, we know what we’re doing, and here’s the evidence for

what we’re doing, and we’re not using some clever devices to avoid

direct engagement with the people, because I think this is so important it needs to be a direct conversation.

30

Now to the issue of so-called tax havens and tax structure. All

the Members of this Committee are well-schooled in these things,

and you know these two important things: that every aspect of the

tax code was voted by the Congress and signed by some president.

It’s also true that there are characteristics of the tax code that a

well-educated tax lawyer can look at and see, under a certain set

of circumstances, that a company or a whole industry or many companies can reduce their legitimate tax bill by applying provisions

that are in the tax code. There’s no doubt about that, we all know

that, and we call it tax avoidance.

There are other things that are done that people do that are illegal and they’re called tax evasion. And in cases where people are

doing tax evasion, I’ve got to tell you I am really dedicated to the

proposition that the IRS and the law enforcement organizations of

the United States pursue to the ends of the earth people who would

cheat their fellow citizens by not paying their determined tax bill.

Having said those two things, I would say again what I say repeatedly. Our tax code is an abomination. It is just unbelievable

how complex we have made these issues so that it’s fairly difficult,

I think even for the well-intentioned to figure out their tax bill. As

I said the other night in a speech in Chicago, it’s true there are

five different definitions of a child in the U.S. tax code. You would

think it would be easy to know whether or not, for taxpaying purposes, you have a child in your house. Not so easy. And the most

complicated definition of a child is the definition having to do with

the earned income tax credit, which means the lowest income people in our country are being asked to figure out the most complicated definition of what a child is when they apply for their entitlement to the earned income tax credit.

The Commissioner of Revenue has said to me, if he had to make

this application, he would need assistance to do it, and I give you

that individual—what I think is a real hole in the way we’ve got

our tax code structured,— because I think people can connect to it.

But the same kind of thing exists on the corporate side. Unbelievably complicated we made it, and I think we need to unmake it.

In the next few weeks we at the Treasury are going to be presenting to Members of the Congress white papers on these subjects

about what we can do for tax simplification to reduce the possibility that people will have the excuse that they didn’t understand,

so that the law can be clear and companies are very clear in what

their tax obligation is to the rest of the American public.

Mr. LEACH. I appreciate that. My time has expired, but I hope

that your statement is not implying that the issue of tax avoidance

isn’t serious, and the issue of American corporations going offshore

to avoid American taxation isn’t something the Treasury isn’t going

to be looking at, because I don’t think you intended to, but when

you make this distinction between evasion and avoidance, I hope

you’re not implying that the avoidance issue isn’t serious too.

Secretary O’NEILL. I think it’s a very serious issue and I think

it’s something we should look at together. What I was saying was

that all of the opportunities for avoidance were enacted by the Congress and signed by a president. I’m not saying the Executive

Branch doesn’t have a hand in this. All of the opportunities for

legal avoidance were enacted by Members of the Congress by a maVerDate 11-MAY-2000 15:00 Aug 20, 2002 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\DOCS\78187.TXT HBANK1 PsN: HBANK1
31

jority vote. I would be happy to work with you not only to eliminate

the opportunities for avoidance but to make the tax code understandable.

Chairman OXLEY. The gentleman’s time has expired.

The Chair would say I hope the Ways and Means Committee

doesn’t get a copy of this transcript.

[Laughter.]

Chairman OXLEY. We could have some problems.

Mr. Secretary, we appreciate your appearance again, your testimony and your insightful answers to a number of questions that

obviously covered a wide range of issues. The Chair thanks you.

The Chair notes that some Members may have additional questions

which they may wish to submit in writing. Without objection, the

hearing record will remain open for 30 days for Members to submit

written questions to the Secretary and to place his responses in the

record, and it’s so ordered.

Mr. BEREUTER. Mr. Chairman, I ask that my opening statement

be made a part of the record.

Chairman OXLEY. Without objection, so ordered.

And again, Mr. Secretary, with our best wishes, thank you for

being here. The hearing is now adjourned.

[Whereupon, at 2:55 p.m., the hearing was adjourned.]

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A P P E N D I X

February 28, 2002

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