U.S. GOVERNMENT PUBLISHING OFFICE

31–284 PDF WASHINGTON : 2018

ADMINISTRATION PRIORITIES FOR THE 

INTERNATIONAL FINANCIAL INSTITUTIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 8, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–57 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

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(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

ANDY BARR, Kentucky, Chairman 

ROGER WILLIAMS, Texas, Vice Chairman 

FRANK D. LUCAS, Oklahoma 

BILL HUIZENGA, Michigan 

ROBERT PITTENGER, North Carolina 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

WARREN DAVIDSON, Ohio 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

GWEN MOORE, Wisconsin, Ranking Member 

GREGORY W. MEEKS, New York 

BILL FOSTER, Illinois 

BRAD SHERMAN, California 

AL GREEN, Texas 

DENNY HECK, Washington 

DANIEL T. KILDEE, Michigan 

JUAN VARGAS, California 

CHARLIE CRIST, Florida 

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C O N T E N T S 

Page 

Hearing held on: 

November 8, 2017 ............................................................................................. 1 

Appendix: 

November 8, 2017 ............................................................................................. 25 

WITNESSES 

WEDNESDAY, NOVEMBER 8, 2017 

Malpass, Hon. David, Under Secretary for International Affairs, U.S. Department of the Treasury ........................................................................................... 4 

APPENDIX 

Prepared statements: 

Malpass, Hon. David ........................................................................................ 26 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Malpass, Hon. David: 

Written responses to questions for the record submitted by Representative Heck ........................................................................................................ 37 

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ADMINISTRATION PRIORITIES FOR THE 

INTERNATIONAL FINANCIAL INSTITUTIONS 

Wednesday, November 8, 2017 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MONETARY POLICY AND TRADE, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Andy Barr [chairman 

of the subcommittee] presiding. 

Present: Representatives Barr, Williams, Huizenga, Pittenger, 

Hill, Emmer, Davidson, Tenney, Hollingsworth, Moore, Sherman, 

Heck, Kildee, Vargas, and Waters. 

Chairman BARR. The committee will come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time, and all members will have 5 legislative 

days within which to submit extraneous materials to the chair for 

inclusion in the record. 

This hearing is entitled ‘‘Administration Priorities for the International Financial Institutions.’’ I now recognize myself for 5 minutes to give an opening statement. 

Today, we welcome the testimony of Mr. David Malpass, Under 

Secretary of the Treasury for International Affairs. This is the 

under secretary’s first appearance before the committee since his 

confirmation this summer. We congratulate you on your confirmation, and our subcommittee looks forward to working with you. 

Mr. Malpass is responsible for overseeing U.S. participation in 

the international financial institutions, which includes the World 

Bank, the IMF (International Monetary Fund), and regional development banks. This subcommittee has emphasized that these organizations need to focus on clear objectives and demonstrable results, not chase money at every turn or reward their employers for 

just pushing funds out the door. Take the World Bank as an example. For at least a quarter century, the bank’s own management reviews and evaluations have pointed out that staff incentives 

prioritize churning out loans, not producing results for the poor or 

generating useful lessons to help them grow their way out of poverty. 

This subcommittee has also examined, on a bipartisan basis I 

might add, shocking lapses in basic project management, as well as 

the use of World Bank assistance in support of governments that 

are contemptuous of their citizens’ economic freedom. In addition, 

the bank keeps lending to middle income countries that have easy 

access to resources. Two and a half billion dollars have already 

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been committed to China this year, even as Beijing has set up rival 

development institutions. 

Meanwhile, the World Bank’s leadership is now suggesting it 

needs a capital increase to spend more money in this fashion, despite their receiving a capital increase as recently as 2010. All of 

this leads to the impression that the World Bank is more excited 

about fundraising than it is about showing its shareholders what 

it has actually achieved. A case in point, the media reported earlier 

this year that the bank has stripped its chief economist of control 

over its research division due to his critique of the bank’s communications style. 

As anyone who has suffered through the bank’s endless jargon 

knows too well, this just underscores how out of touch the World 

Bank risks becoming. Earlier this year, the Financial Services 

Committee passed a World Bank Accountability Act, which attached some of the most significant reform requirements ever to an 

IDA authorization. It had been more than a decade since the committee acted in this manner, underlining the weight we place on 

seeing changes at the bank. 

Mr. Malpass, Congress has better uses for limited funds than 

empty rhetoric and budget support. I, therefore, look forward to 

hearing how you propose to exercise leadership at the bank. 

At the same time, the World Bank is not alone in its lack of 

focus. Looking to the IMF, we have seen a 7 year long involvement 

with Greece that has tarnished the fund’s reputation as the IMF’s 

own evaluation department has shown in detail. 

I am pleased that the IMF has recently expressed skepticism toward committing additional resources to the Euro zone’s bailout of 

Greece. As we look ahead, I hope that the Treasury Department 

will use the Greek disaster in order to push for clearer guidelines 

governing the IMF’s interaction with regional financing arrangements. 

As we all know, the international financial institutions coexist 

with an increasing number of multilateral organizations, including 

the Asian Infrastructure Investment Bank, the European Stability 

Mechanism, and others. While some have used the emergence of 

these organizations as an argument for more U.S. Funding to fight 

back potential rivals or to push for a more expansive mission at the 

international financial institutions, I would point to an alternative 

conclusion. It seems to me that exerting U.S. leadership in the 

world and ensuring that the IFIs (international financial institutions) preserve their legitimacy means advocating that they concentrate on clearly defined objectives and are held accountable for 

results. 

Leadership at these institutions doesn’t boil down to who can 

open their checkbook the fastest. Leadership means demanding 

economic growth, institutional transparency, and responsible 

project management that puts its beneficiaries first. In short, we 

need a back-to-basics approach. I am optimistic that the Trump Administration views things similarly. 

Looking beyond the IFIs, I am also hopeful that the under secretary and his colleagues will provide new energy in advancing 

U.S. interests with our international partners. It is encouraging to 

have an Administration that looks at economic diplomacy through 

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the lens of economic growth. We have an opportunity to rein in the 

regulatory overkill of the past 8 years. I am confident Mr. Malpass 

will help us seize this opportunity in the talks he leads with his 

counterparts around the world. 

I look forward to working with the under secretary to advance 

these priorities, and I thank him again for his testimony. 

The Chair now recognizes the Ranking Member of the subcommittee, the gentlelady from Wisconsin, Gwen Moore, for 5 minutes, for an opening statement. 

Ms. MOORE. Good morning. Thank you so much for joining us. I 

am very eager to hear your testimony. I have had the opportunity 

to peruse some of your comments. 

Under Secretary, I want to say first that your discussions of the 

benefits of private capital flows over development finance seems to 

misstate, perhaps, my view or the nature of development finance. 

Former World Bank president James Wolfensohn testified to this 

difference. As an investment banker, he said he never once had a 

conversation with the government about their social policies or 

their economic policies. But when the World Bank comes in, it 

looks at what is happening to the people in the country, what is 

happening to social stability, and what is happening on issues like 

governance and inequality. So I think it is important to not just 

look at these types of finances as always interchangeable. 

Your discussion of private capital is the engine of many of the 

innovations that have produced the greatest measurable results in 

fostering growth and lifting people out of poverty. Stems from, I believe, an outdated belief that unfettered markets, laissez-faire, of 

kind of the discussions we are having in Congress now, trickle 

down, will only create wealth and stability, but also solve almost 

any social problem through a trickle-down benefit to others in society. 

I am struck that in all of your discussion about global and domestic growth, you never mention the growing problem of inequality. Excessive inequality not only undermines social and political 

cohesion, it has also been shown to have negative effects on growth. 

We can go back, Plato, Adam Smith, Brandeis, Plutarch, as far 

back in history as you want to, and we hear some of the greatest 

minds talk about a destabilizing impact of inequality. 

Our current Fed chair, Janet Yellen, has been before this committee many times, and talked about inequality being a huge problem. I would appreciate hearing from you what you believe would 

be an appropriate set of public policies that we would need to have 

in place, both domestically and internationally, to rein in the excesses of the market, maintain stability, and assure that the benefits of capitalism are broadly shared. 

Thank you so much. I yield back my time to Mr. Sherman. 

Mr. SHERMAN. Mr. Barr, I enjoyed working with you on the 

World Bank Accountability Act, which passed the committee unanimously, and look forward to bringing it to the floor. I would point out that the World Bank loaned some $880 million 

to Iran from 2000 to 2005. Finally, we were able to get that 

stopped. But it is important that we not let that happen again. 

Even for those of us who are advocates of the bank, you can imagine how painful it is to then go back to your district and say, we 

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put money in here, and Iran takes money out of there. That is a 

pain I experienced last decade, and I don’t want to experience it 

next decade. 

I join the Ranking Member in belief that World Bank finance 

plays an important role that cannot be substituted for just by the 

private sector. I look forward to learning what we are doing so that 

the World Bank is not financing middle income countries that can 

afford to do it themselves, but particularly those middle income 

countries like China that are expanding and competing for jobs or 

unfairly taking jobs from the United States. 

With that, I would yield to any member. Seeing none, I yield 

back. 

Ms. MOORE. I yield back. 

Chairman BARR. The gentlelady yields back. 

Today, we welcome the testimony of the Under Secretary for 

International Affairs at the U.S. Department of Treasury, David 

Malpass. 

Under Secretary Malpass oversees policies in the areas of international finance, trade, and financial services, investment, economic development, and international debt policy. He also coordinates financial market policy with the group of 7 industrialized 

countries. 

He previously served as Deputy Assistant Secretary of the Treasury under President Ronald Reagan; Deputy Assistant Secretary of 

State under President George H.W. Bush; and Chief Economist at 

Bear Stearns. In addition to his Treasury and State Department 

positions, Malpass served as Senior Analyst for Taxes and Trade 

at the Senate Budget Committee and Republican Staff Director of 

the U.S. Congress’ Joint Economic Committee. 

He holds a bachelor’s degree in physics from Colorado College 

and an MBA from the University of Denver, and studied international economics at Georgetown University, School of Foreign 

Service. 

Without objection, your written statement will be made part of 

the record. Under Secretary Malpass, you are now recognized for 

5 minutes to give an oral presentation of your testimony. 

STATEMENT OF THE HONORABLE DAVID MALPASS 

Mr. MALPASS. Thank you very much, Chairman Barr and Ranking Member Moore. It is a pleasure to be here with members of the 

Financial Services Monetary Policy and Trade Subcommittee. So 

thank you for holding this hearing. 

One of the Trump Administration’s top objectives is to achieve 

faster U.S. and global growth in ways that improve after-tax wages 

for American workers. Median income we would like to see go up. 

This involves ambitious reforms for taxes, regulation, trade, energy, financial regulation, infrastructure, and the budget. 

A key driver of growth is the effectiveness of the financial regulatory framework so that small- and medium-size businesses are 

able to get the working capital they need to be more productive and 

create more jobs. As Secretary Mnuchin said in October, our agenda is aimed at restoring much needed dynamism to the U.S. economy. 

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In today’s testimony, I will focus primarily on the World Bank 

and the IMF, but each of the international financial institutions, 

the IFIs, presents its own set of challenges and opportunities. The 

context for today’s discussion is an improvement in global growth 

in recent quarters, though it remains well below its true potential. 

Following the 2008 financial crisis, there was an unusually weak 

recovery, both in the U.S. and abroad. Per the IMF, world GDP, 

which stood at $73 trillion in 2011, was stuck at just $74 trillion 

in 2015, and $75 trillion in 2016. We welcome the recent U.S. acceleration to 3 percent growth in the second and third quarters, 

and believe faster U.S. and global growth rates are possible, sustainable, and will be a key factor in improving wages for American 

workers. 

With growth accelerating and the world financial system relatively stable and liquid, now is an opportune time to discuss the 

appropriate role of multilateral development finance in global 

growth and in prosperity. As a preface, I want to make clear the 

distinction between isolationism, which we oppose, and our view 

that globalism and multilateralism have gone substantially too far 

to the point that they are hurting U.S. and global growth. 

In his remarks to the United Nations General Assembly in September, President Trump articulated a vision of international affairs in which each country’s government has a responsibility, first 

and foremost, to its own people. Out of this self-interest emerges 

a constructive international order in which nations and their people are enriched through trade, cooperation, and innovation. 

The President is traveling in Asia this week promoting growth, 

investment, security in the Indo-Pacific, and trading relationships 

that are fair and reciprocal. It is very clear that the U.S. benefits 

from freer, more prosperous neighbors, trading partners, and likeminded societies around the world. We recognize that successful 

international relationships include multilateral institutions. But 

the challenge for them is to have a clear, focused mission, and deliver results effectively, and with accountability to the participants. 

Three important transformations have occurred in international 

finance since I was last at Treasury. The securitization of 

sovereigns, the lengthening of maturities for local currency debt, 

and the decline in the structure of interest rates. These foster market-based capital flows that should add materially to global growth 

and prosperity. As a result, the role of the MDBs (multilateral development banks) has to change dramatically so that they focus 

less on the volume of finance that they provide and more on the 

goal of providing high-quality services that are not available elsewhere. 

The World Bank has asked the current Administration to work 

toward large capital increases for the IBRD and the IFC. Treasury 

believes that the World Bank currently has the resources it needs 

to fulfill its mission and that the bank should develop proposals in 

which the bank’s organic capital accumulation alone could be sufficient to support future lending targets. 

The state of the world, that of capital markets, and that of countries is vastly different today than when the World Bank’s capital 

structure was developed. We think now is an opportune time to 

rethink the structure and mission. 

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In the interest of time, I want to mention the other topic, the 

IMF. It operates in the same global context as the World Bank. It 

is an improving global outlook with an unusually high availability 

of private sector capital. It faces the challenge of redefining its role 

at a time when it currently has ample resources, but faces unknown future challenges. 

So, in conclusion, the uptick in global growth and the relative 

calm in international markets has presented us with an opportunity to advance policies to further stimulate both domestic and 

global growth. Notably, we included new language in recent communiques citing exchange rate stability as a goal of sound policies 

and as a contributor to strong and sustainable growth and investment. Exchange rate instability has been a major cause of investment uncertainty and the cost of cross-border investments. Currency stability supported by strong fundamentals should encourage 

investment and growth worldwide. 

I look forward to working with you to improve the growth trajectory for the global economy and for the benefit of all Americans. 

Thank you. I am pleased to take any questions, Mr. Chairman. 

[The prepared statement of Mr. Malpass can be found on page 

26 of the appendix.] 

Chairman BARR. Thank you, Mr. Under Secretary. 

The Chair will recognize himself for an initial round of questioning for 5 minutes. 

You just touched on this but, Mr. Malpass, I do want to revisit 

this issue of capital for the World Bank. As you know and as you 

just said, the World Bank is considering a request for a general 

capital increase, or GCI, in the amount of up to tens of billions of 

dollars. But the bank has just had a capital increase in 2010. Prior 

to the 2010 increase, it had been 21 years since the previous GCI. 

So let me repeat that. Twenty-one years. 

Mr. Malpass, why should Congress even entertain the idea of a 

World Bank capital increase just 7 years after the last one? 

Mr. MALPASS. So the World Bank has asked members to comment to them, and so at this point it is not before your committee. 

We have notified the committee last week, I think, that it qualifies 

under the law as the potential for a negotiation with the World 

Bank. 

My view is that there needs to be substantial amount of information from the World Bank on what they are thinking. Specifically, 

there was the mention of the graduation policy. You know, the 

World Bank has 25 countries now above the per capita limit or 

trigger point for their lending. China itself was the biggest borrower in 2017. It has a per capita income of nearly $12,000 versus 

the trigger point of under $7,000 for the World Bank. 

So I think the World Bank has a lot of work to do before we are 

at the point of discussing with the committee an actual capital increase. 

Chairman BARR. To that point, the subcommittee has examined, 

in addition to the China issue, management failures of the World 

Bank that really are unacceptable to any development organization, and that is why this committee marked up, out of this committee, the World Bank Accountability Act by a unanimous vote of 

60 to 0. 

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One of the problems we found was that, for decades, the bank 

faced criticism for incentivizing staff to generate loans as opposed 

to actually evaluating the results of reducing poverty. These aren’t 

even external critiques, they come from the bank’s own management reviews and internal evaluations. 

So why should Congress put more money into the World Bank 

if it doesn’t even evaluate staff according to its impact on poverty? 

Mr. MALPASS. Yes. The metrics—these are, I think, areas that 

need to be discussed firmly with the World Bank. One metric that 

they should be looking at is how many countries actually graduate 

from borrowing status at the bank. Instead, their track record has 

been to try to keep countries borrowing as long as possible as part 

of the effort to raise the loan totals. 

Getting that mindset changed, that success at the World Bank 

means countries do well enough to not need borrowing from the 

World Bank, that change alone would be huge and I think is necessary. 

Chairman BARR. Final question, and this is shifting to a different 

topic related to the Administration’s efforts to advance U.S. interest in international negotiations. Two distinguished former members of this committee, Scott Garrett and Spencer Bachus, have 

been nominated by the President to the board of the Export-Import 

Bank. As you know, many supporters of EXIM state that foreign 

export subsidies make the United States export credit agency a 

necessary evil. On the other hand, the Obama Administration 

showed no interest in taking a hard line to negotiate these subsidies down. 

So what are your priorities as the new under secretary for global 

export subsidy negotiations, and how will the Administration go 

about advancing the interests of U.S. businesses? 

Mr. MALPASS. In the ideal, and to Ms. Moore’s well-articulated 

points, if we are going to get to a situation where there is a higher 

real median income for people around the world, which is a way 

to address income inequality, if you can bring up the median, that 

usually means you have brought up most of the people in a society, 

and that is very important. I think the best way to do that is to 

have markets functioning. A challenge here is governments like to 

function even when markets are functioning. 

So for the World Bank, we want it to be very careful not to be 

crowding out the private sector. One could say the same about the 

Export-Import Bank. Just this week, the African Development 

Bank is considering equipment financing for the purchase of airlines—of airplanes in Africa. That raises very real concerns, because equipment financing, which is at the shorter end of the 

curve, is available in plentiful capacity around the world. 

So you have a government organization, in effect, moving into an 

area where private sector could operate. So I will make the same 

point on EXIM Bank. It is going to be a real challenge to have it 

provide financing where financing would not otherwise be available. I have questions whether that can really be done effectively. 

Chairman BARR. Thank you for your answers. 

The Chair now recognizes the gentlelady from Wisconsin, the 

Ranking Member, Ms. Moore. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

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Sir, I want to start at the United States before I go globally here. 

I was looking at your testimony, and you said that the IMF forecast that was released earlier this week talked about the growth 

in the global economy that is gaining momentum. But the outlook 

for the United States’ economy has weakened. 

Back to some of the comments that I made on opening, I am just 

asking, what occurs to me is that what might help our growth is 

a comprehensive immigration policy where people are not working 

undercover, but they are actually openly contributing. Maybe a trillion dollars over the next decade from immigration reform. Infrastructure, which I understand the World Bank has been advising 

the Trump Administration on how to go forward with that. Certainly, taking these students out of debt as opposed to giving the 

wealthiest people in our country a tax cut that they don’t need. 

What about helping people get out of debt so that they can buy 

homes, so that they can use money in other ways, so that we can 

incentivize kids to go into physics and create the next generation 

of whatever, instead of being—not being able to do it? 

Why don’t you see investing in people as being the number one 

method of growing our economy? 

Mr. MALPASS. Thank you. Well, I do see investing in people as 

being very important for countries to grow, and that can be done 

in many ways. That is done at the home, that is done in schools, 

in primary schools, in secondary schools, and so on. I think some 

countries around the world are making good progress in that area. 

I met— 

Ms. MOORE. Do you think it would help the U.S. economy, for us 

to do that? 

Mr. MALPASS. Well, we invest, in dollar terms, probably more 

than almost anyone in the world. So a challenge also is making it 

effective, making it effective so that literacy is higher, so that people have skills that can be used in the current economy. That is 

one of the— 

So as we think about where the Administration is trying to get 

reforms, these include reforms in the education area that would 

allow skills to be added to. 

But I want to go back to your original point of the IMF’s forecast 

for global growth accelerating, which is good, and looking at the 

U.S. not accelerating in their forecast view. That gets right to the 

core of where economics is. There is, at the IMF, sometimes, the 

view that taxes don’t matter so much in how people allocate capital 

or how they choose their education, how they interact with companies. My view is that tax systems matter a lot. 

So the IMF has explicitly said that the tax reform being considered in the U.S. won’t be that instrumental. I think that goes— 

Ms. MOORE. All right. Let me move on. I have 1 minute, 30 seconds. 

Mr. MALPASS. Yes. 

Ms. MOORE. Trickle down historically has not worked, so if it 

works this time, I will be happy to say we are wrong, but it hasn’t 

worked. It has just created deficits. 

I was here in 2008 when Lehman Brothers collapsed. What are 

the most serious risks facing the global economy today, and what 

should we do to ensure stability in the global economy? 

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Mr. MALPASS. Yes. Thank you. So that was a terrible period for 

the world that hurt not only financial markets, but they had hurt 

real people, and so I share that concern. That is part of what government does and should do in terms of looking for vulnerabilities 

in the world economy. 

I guess one that is relevant to us today is overindebtedness by 

countries around the world. 

Ms. MOORE. We are overindebted in the United States. So is this 

a time to give tax breaks to rich people, considering that we are 

in debt, $1.5 trillion? 

Mr. MALPASS. So I think it is time to push for faster growth than 

what we have been experiencing. So the U.S. has been in a very 

slow— 

Ms. MOORE. Faster growth. Maybe infrastructure instead of tax 

cuts? 

Mr. MALPASS. I think the biggest obstacle to faster growth right 

now is the corporate tax rate is 35 percent. 

Ms. MOORE. People don’t pay that. Some corporations pay nothing. 

Mr. MALPASS. Yes. But even if their effective rate is below the 

35 percent, they are often employing rafts of lawyers in order to 

reduce that effective rate. The statutory rate of 35 percent blocks 

investment in the U.S. and job creation in the U.S., and it is a powerful deterrent. 

Chairman BARR. The gentlelady’s time has expired. 

The Chair now recognizes the Vice Chair of the subcommittee, 

the gentleman from Texas, Mr. Williams. 

Mr. WILLIAMS. Mr. Secretary, thank you for being here this 

morning and for your testimony on the Administration’s priorities 

for international financial institutions. We appreciate your service. 

The International Monetary Fund’s bailout in the aftermath of 

the Greek debt crisis has left Greece in a predictable situation. 

They are still hundreds of billions of euros in debt, and there is an 

unlikely repayment for the IMF and the European partners. As you 

are well aware, when a country joins the International Monetary 

Fund, they are assigned a quota, which dictates the percentage of 

their GDP that they can borrow annually or cumulatively. The 

rates allow for a country to borrow 145 percent of their quota each 

year and up to 435 percent of their GDP. These guardrails are in 

place to protect a country from being overcome with debt and 

foreseeably an inability to repay. However, in Greece, the IMF authorized over 3,000 percent in the wake of the government debt crisis. 

So, Mr. Secretary, using Greece as an example, what are the lessons learned in terms of the IMF lending to a member nation during a financial crisis? How might the United States use its voting 

power within the IMF to ensure that a similar bailout never occurs 

again? 

Mr. MALPASS. Yes. Thank you, Mr. Williams. That was an exceptional period for Europe, and the IMF provided what they call exceptional financing. Those rules, to some extent, have changed 

since then. If we look back on that period, my concern and criticism 

was that the program that was prescribed for Greece wasn’t focused and wasn’t implemented very well. So you ended up in this 

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very difficult situation of people lending huge amounts of money, 

new money, to Greece, without the growth reforms that would actually make it worthwhile. 

I guess a good response is, I don’t expect that to happen again 

under the current rules that are at play in the IMF. There has 

been a change in the IMF’s thinking about whether that would be 

a good idea. So we can look back on 2010 and say, mistakes were 

made, but one of those was the amount of money lent. But I think, 

very importantly, the structural reforms simply were not focused 

and were not implemented in Greece. So that we can do a better 

job into the future if there is another crisis. 

Mr. WILLIAMS. Thank you. Mr. Secretary, in your testimony you 

state that the U.S. benefits from freer, more prosperous neighbors, 

trading partners, and like-minded societies around the world. I 

fully agree with your statement that highlights the importance of 

acting in the self-interest of the United States to unlock all of these 

benefits. 

So the previous Administration did not prioritize the reform and 

modernization of things like NAFTA or World Bank. So as we 

begin to do so under the Trump Administration, can you briefly 

summarize why negotiating these agreements are so important to 

the American taxpayer and business? 

Mr. MALPASS. Yes, sir. As I mentioned in the testimony, there is 

a place for multilateralism. So as we think about cooperation on a 

world basis, it is vital that the U.S. play a leadership role and be 

involved, and that is what we plan to do. The question is, how do 

you keep those organizations focused? That is a tough challenge 

that their tendency is to grow as much as it can, and that ends up 

costing money to the U.S. taxpayer and diluting their mission so 

they are not actually accomplishing what they were set out to do. 

So the way I can try to influence that is in the work of Treasury. 

My group in Treasury alone has nearly 100 organizations and 

workstreams that we have staffed that travel to, spend time on, 

work on—and so one of our goals is to downsize the sprawl, the 

sprawl that has occurred in this particular area of government. 

That allows us then to focus harder on the things that really matter. 

One of them that is important to me is that programs, country 

programs, focus on how do you bring up the median income. You 

know, these organizations have often prescribed programs to countries, and you could look at the program and say, if the country 

does that program, the median income, the average guy in the 

country is going to go downhill, not uphill. Why would you want 

to do that? 

We can look at actual programs and try to have them focus on 

raising real median income. That is one of my goals. 

Mr. WILLIAMS. Thank you for your response. I yield my time. 

Chairman BARR. The gentleman yields back. 

The Chair recognizes the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Mr. Under Secretary, we do have a stake in economic growth worldwide. On the other hand, the World Bank can 

cost us money, at least we have to put money into it. One way we 

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11 

can promote economic growth worldwide is for us to sign tax treaties with countries that stand ready to do that with us. 

I realize this is an inch outside your portfolio, but I hope you will 

go back to the Treasury Department and reiterate that the Republic of Armenia is ready to sit down now and sign pretty much our 

model tax treaty. The fact that we can’t get a tax lawyer to take 

a meeting is hurting the very efforts you are here to promote, 

which—and, by the way, would not only cost us nothing, but would 

actually add to the U.S. economy. 

As the Export-Import Bank was mentioned, and I will point out 

that the Export-Import Bank has a different mission; it is promoting American exports. Very often it will make a loan where the 

buyer could get a loan somewhere else, just the lower rate on the 

Export-Import loan is designed to get them to buy the American 

goods. 

I am disturbed that China is borrowing from the World Bank. 

Are these loans to the sovereign government or do they tend to be 

to entities? Because I have seen U.S. businesses do business in 

China, and once an entity owes you money, it goes out of business, 

and then you go bankrupt—so is there this credit risk from lending 

to shell entities or what could become shell entities in China? Do 

you know? 

Mr. MALPASS. Mr. Sherman, those are all very good points. So, 

in China, my understanding is quite a bit of the bank’s lending 

now is below the sovereign level. That means to what in the U.S. 

would be State and local governments, in China it is different terminology, but some— 

Mr. SHERMAN. Does the national government guarantee these 

loans? If they are not willing to take the risk, why should the 

World Bank? 

Mr. MALPASS. Yes. So—China has been through waves of, call 

them bailouts or crises at the sub-Federal level. In the 1980’s and 

1990’s there was a big one called the IDIX. There was a JEDIC 

failure, and there was a partial bailout by the Federal Government. 

In terms of the loans that are now being made by the World Bank, 

they are often guaranteed by a big enough entity that the credit 

risk is bought down in effect. But then that gets into the point of 

what benefits is there— 

Mr. SHERMAN. If these— 

Mr. MALPASS. —If you have a good borrower, right? 

Mr. SHERMAN. If these are good projects, the national government of China can borrow an awful lot of money on the U.S. markets and lend it to its own local entities. 

Mr. MALPASS. To take the World Bank’s side just for a moment, 

they would say, yes, but think of all that they learn at the local 

level by having us come and visit them. Our role and your role and 

the committee’s role is to say, wait a minute, can the U.S. taxpayer 

really do that, and why does that country need? 

Mr. SHERMAN. If the Chinese want the World Bank to visit them, 

they will pay for the airplane ticket and listen to the advice. If the 

visit is imposed upon them—I have had a lot of clients where the 

banker needed to talk to them before they made the loan, but they 

weren’t listening, they just took the loan. 

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12 

Currency manipulation. One of our objectives in renegotiating 

NAFTA deals with currency manipulation. Has Canada or China in 

recent memory manipulated the currencies? 

Mr. MALPASS. I am sorry, sir, what is the question? 

Mr. SHERMAN. Has either Canada or Mexico manipulated its currency in recent memory? 

Mr. MALPASS. So the Treasury does a twice-a-year report on currency manipulation and did not find that either had manipulated 

their currency. But the point is part of trade promotion authority. 

Congress passed authority to the Federal Government—to the Executive Branch, and that includes a requirement that we look at 

currency manipulation. 

Mr. SHERMAN. Well, one country that does manipulate its currency, according to many, is China. Is that the same report that 

says that China isn’t manipulating its currency and hasn’t recently? 

Mr. MALPASS. Yes, sir, same report. 

Mr. SHERMAN. We are paying money for that report? 

Mr. MALPASS. That report is generated by Treasury, and, yes, the 

taxpayer is paying money for people to generate that. But to your— 

Mr. SHERMAN. You know, with Amazon, I can download fiction 

for like a buck or two a book. A report from the Department of 

Treasury saying that China is not and has not recently manipulated its currency would be in the fantasy section of the fiction offerings of any bookstore online or brick and mortar. 

Mr. MALPASS. So in the past, China did manipulate its currency. 

It becomes important in your question of what is recently. So the 

report that comes out from Treasury is within this last year. Our 

finding is, under the way that report is set up, China did not manipulate its currency. I— 

Mr. SHERMAN. That is slightly less fanciful than perhaps some 

other reports, but it is still in the fiction section. 

I yield back. 

Mr. MALPASS. Thank you, sir. 

Chairman BARR. Thank you. The gentleman’s time has expired. 

I appreciate members’ indulgence in allowing me to allow that exchange to continue a little bit longer. 

The Chair now recognizes the gentleman from Michigan, Chairman Huizenga. 

Mr. HUIZENGA. Mr. Malpass, good to see you again. 

Mr. MALPASS. Very good to see you, sir. 

Mr. HUIZENGA. Yes. Actually, if you want to take 30 seconds, if 

you want to finish that thought out. I think there is bipartisan concern about China’s past, certainly attempts at currency manipulation and the charges that they have been out there. So if you wanted to finish that thought, we can take a few moments here. 

Mr. MALPASS. I think relevant to us now is President Trump is 

very aware of the past problems that burdened our trading relationship with China, and that’s a subject of his visit to China, 

which is coming up later this week. 

To Mr. Sherman’s point, I think we could all agree that there are 

problems that were occurring. Our goal now is to avoid that kind 

of problem going forward. China, I think their currency practices 

have changed a lot in recent years. 

mcarroll on FSR431 with DISTILLER

13 

Mr. HUIZENGA. I am going to move on to a couple of other things 

here in the remaining few moments. In a report on the European 

Stability Mechanism earlier this year by Transparency International, a report that the ESM welcomed, one should add, the 

ESM is twice described as a lender of last resort. The report concludes that during its interventions, and this is a quote from the 

report, ‘‘The ESM emerged as a lender of last resort for euro area 

sovereigns facing serious bond market pressures.’’ 

So if the ESM is truly the lender of last resort in Greece or other 

places, then presumably the IMF wasn’t. In addition, the fund’s involvement in the country over the course of 7 years showed it is 

not in the business of quickly resolving balance of payments crises. 

So my question is this. How does the Trump Administration get 

the IMF back to its core mission ensuring that its programs are 

independent, effective, and, maybe more importantly, temporary? 

Mr. MALPASS. Yes. Good point. So at the peak in 2011, the IMF 

had committed 70 percent of its quota, and that included the exceptional access that we discussed to Greece. Now, that number today 

is under 25 percent. So the IMF is much more liquid, because 

Greece has repaid a lot of those loans. So I think our challenge is— 

Mr. HUIZENGA. But they were not the intended target, correct? 

European nations like that were not the intended target of the 

IMF? 

Mr. MALPASS. That is correct. So that was done in 2010, and we 

can look back and say, maybe that wasn’t the way to go. So our 

challenge today is, going forward, would we do that again? I think 

the answer is no. Then, do we have the capability to help the IMF 

figure out that decision properly this time around? I think the answer is yes. 

Mr. HUIZENGA. I know that there is a reluctance. I know that 

there is a reluctance with the IMF. They did not feel good, or many 

within the organization didn’t feel good about that. 

But I am kind of curious also, I want to talk very briefly about 

the regional financing arrangements. You know, the latest entry is 

the contingent reserve arrangement, which is China, Russia, India, 

South Africa. What kind of rules or principles do you think that the 

IMF should follow and put in place as it determines limits of future 

cooperation with these regional groups? 

Mr. MALPASS. The IMF is trying to think about what its role is 

with those regional groups, and so we can help them think about 

that. As you think about a global crisis, and we discussed earlier, 

I think we want to look for vulnerabilities in the world system. We 

can wonder what order—if there were a crisis, in what order would 

people tap their emergency reserve? 

So, a first reserve, often is a central bank, a second reserve is 

international reserves of a country, and then in these regional relationships, they can tap that fund that has been set up. This gets 

into your point, the lender of last resort is the ESM, the European 

Stability Mechanism, truly the lender of last resort in Europe. 

Well, it is a finite fund. It is not large, compared to the debt of Europe. In reality, I think there are more lenders of last resort in Europe. 

mcarroll on FSR431 with DISTILLER

14 

So as we look at each of the individual regional relationships, I 

think we want to look at what is in U.S. National interest and our 

role in the IMF in seeing inside those regional groupings. 

Mr. HUIZENGA. Mr. Chairman, with your indulgence, I just— 

maybe we can follow up in writing on a few of those sort of rules 

and principles. I would love to learn more where Treasury is headed with that. 

So, with that, I yield back. 

Mr. MALPASS. Thank you, sir. 

Chairman BARR. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Chairman Barr. Thank you Under 

Secretary Malpass for being with us today and providing your testimony before the committee. 

Mr. Under Secretary, according to remarks given by the World 

Bank president, Jim Yong Kim, quote: ‘‘The World Bank group 

very proudly supports the Government of China’s ambitious, unprecedented effort to light up that night sky,’’ end of quote. 

Referring to the Chinese efforts to the One Belt, One Road initiative. 

The One Belt, One Road initiative connects China with over 60 

nations on a transcontinental scale that collectively accounts for 62 

percent of the world’s population and 30 percent of global GDP. 

This initiative, if completed, will result in the expansion of China’s 

trade and global influence at, frankly, an alarming rate. 

Does the Administration support President Kim’s praise of the 

One Belt, One Road initiative? 

Mr. MALPASS. No, sir. So the problems with One Belt, One Road 

are several fold. One is that a lot of the financing that China is 

providing is coming from its State-owned institutions and is not 

provided at terms that are reasonable to the borrower, and that 

will be arms-length in terms of the relationship. An even bigger 

problem is many of the contracts that come out of those projects 

are not—not market-based contracts, meaning, you are often going 

to see Chinese suppliers putting the money in for excessive government money, Chinese Government money that is setting up the 

contracts. So you end up with projects that are not in the best interest of the countries that are the borrowers. 

What we would rather see the World Bank talking about is creating good quality projects. I think Mr. Barr, in his opening statement, made the point that the quality of the development finance 

and the projects has to be improved. That is where I would put 

that. 

Mr. PITTENGER. Yes. Back in the 1990’s, as you would well recall, 

we granted China most-favored nation trading status. Looking 

back, do you believe that this was the right response, the right initiative? It was a bipartisan effort. It was something that was initiated by Jimmy Carter many years ago, and advocated by many 

Presidents, and finally with President Clinton and the Republican 

House, they consummated that. 

At the end of the day, we took a fledgling country and that was 

basically a garden snake and made it into a boa constrictor. We 

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15 

have a $350 billion annual deficit with them, at least in 2016 that 

was the number. 

How do you relate to our role and our responsibility relative to 

China and concerns that many of us have regarding human rights, 

religious liberties, freedoms of conscience, things that we believe 

are an anathema to our society and our culture, and yet we have 

allowed that to go unabated, in essence, in our continual support 

for them? 

Mr. MALPASS. So if we roll the dial back into the 1970’s and 

1980’s as that process started it was called most favored nation, 

but what it often meant was normal trading relations. I think, as 

the U.S. was— 

Mr. PITTENGER. They applied for it every year until they were 

granted that. 

Mr. MALPASS. Until they were granted. We were in the midst of 

the cold war. There was the idea that China could be an offset, and 

so there was a process toward MFN that was set out. 

I guess what I would—if we look back, I think mistakes were 

made at many points in the relationship with China. One of the focuses now is, as it entered the World Trade Organization, which 

that was done in the 1990’s, and we ended up with a relationship 

that is not reciprocal. 

The President will be discussing that this week a lot; that we 

have ended up in a situation, in part, due to their entry into the 

Word Trade Organization and how that was done, that is unbalanced. That ends up with them having better access to the U.S. 

Market and better ability to invest in the U.S. than we have. 

Mr. PITTENGER. I think this gets back to the point that I made 

at the beginning, that their ability to launch this major initiative 

that connects 60 countries, frankly, was generated by our support 

and our efforts on their behalf. 

Mr. MALPASS. Yes. It is troubling that the multilateral development banks or the heads of them, and it is not just Mr. Kim, but 

some of the others have made similar statements currying favor 

with China, and that is troubling. Because I think there are better 

ways to do development than that. 

Mr. PITTENGER. Thank you. My time has expired. 

Chairman BARR. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Washington, Mr. Heck. 

Mr. HECK. Thank you, Mr. Chairman. 

Under Secretary Malpass, thanks for coming today. Although I 

believe the international financial institutions are tremendously 

important, I want to use my time today to discuss the Committee 

on Foreign Investment in the United States, or CFIUS. 

I raised this issue when Secretary Mnuchin came to talk to us 

in July, and I was pleased to see him agree that CFIUS reform was 

a pressing issue, and that he was prepared to work in a bipartisan 

manner to fix it. When I met with Assistant Secretary Tarbert a 

few weeks ago to discuss this issue, he affirmed your intention to 

work in a bipartisan way on CFIUS. 

So I have heard a lot of commitments thus far for bipartisanship, 

but so far, I have been extremely disappointed in you. You have not 

followed through on those commitments. I have offered constructive 

suggestions and asked technical questions about Treasury’s posimcarroll on FSR431 with DISTILLER

16 

tion on a number of CFIUS-related issues for the last 2 months, 

and never received a single substantive response. Not one. 

If Treasury wants to move forward with this issue in a bipartisan way, you need to do a better job of following through on your 

commitments. I plan to file several CFIUS-related questions for the 

record after today’s hearings, as I want to be sure any future committee action is informed by Treasury’s views. 

So, Mr. Assistant Secretary, will you commit to providing a response to my questions by December 8th, 1 month from today? 

Mr. MALPASS. Hello and good morning, Mr. Heck. So with regard 

to the process that is going on, as I understand it, Senator Cornyn 

and Senator Feinstein have— 

Mr. HECK. Again, completely unresponsive to my question. Will 

you answer my questions in a substantive fashion within 1 month, 

or just admit for the public record you are not interested in working in a bipartisan way? 

Mr. MALPASS. We are interested in working in— 

Mr. HECK. Will you provide substantive answers within 1 month? 

Mr. MALPASS. You know, there will be a full committee process 

with the Banking Committee on the Senate side and the Financial 

Services Committee on the House side. 

As far as the 1-month deadline, I haven’t seen how many questions you are going to do, and that is my—I will commit to doing 

our best efforts with the questions that you provide, yes, sir. 

Mr. HECK. I think it is urgent that we address this issue, and 

I hope we can move forward in a bipartisan way. You have not performed to date. Full stop. Period. 

I believe we should stay laser-focused on passing legislation, 

which addresses our core national security vulnerabilities, before 

we talk about or if ever we talk about asking CFIUS to weigh economic questions. 

I believe both Congress and the Administration have a responsibility to make sure that CFIUS is adequately resourced, both to 

make sure we can identify a risk with particular transactions, but 

also to ensure that transactions, which are not problematic, can 

flow smoothly. 

Given the tremendous power the CFIUS statute vests in the 

President and the Executive Branch, and the bipartisan concerns 

which have been raised about how that discretion has been used 

in the past, I believe it is important that any CFIUS legislation ensure accountability and transparency to Congress, and to the greatest extent possible, by extension, to the public, for how that power 

is actually being used. 

At the same time, while I am concerned about giving the Executive Branch too much discretion on a transaction-by-transaction 

basis, at the strategic level, I do recognize that the Executive 

Branch can move more quickly in reacting to new tactics used to 

evade CFIUS review. I want to make sure you have the appropriate tools to do that because, frankly, I see a disturbing trend in 

the use of those tools to evade CFIUS evasion—or review, rather. 

This issue is only going to get bigger going forward. I would caution you that, if we want to adopt the reforms necessary in order 

to most safeguard or best safeguard our country, the sturdiest way 

to do that is by working in a bipartisan way, and you haven’t. 

mcarroll on FSR431 with DISTILLER

17 

So I believe that the principles provide a strong basis for us to 

work together, which is, frankly, why I find it inexplicable that 

your department has not engaged in any substantive way. I hope 

you will do better. I think the country needs for you to do better. 

This isn’t about partisanship. This is about doing the best by the 

people of this country to help keep us secure. You have a role in 

that. 

Thank you, Mr. Chair. With that, I yield back the balance of my 

time. 

Mr. MALPASS. Thank you, sir. 

Chairman BARR. The gentleman yields back. 

The Chair recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Welcome, Mr. Under Secretary. 

I want to take a little different approach. I want to go back to 

your written testimony. Just to put it in context, I am a big supporter of foreign assistance, and I recognize the humanitarian and 

national security benefits. However, when we have more than $20 

trillion in debt, the assistance that we provide must be smart and 

effective. I think that is what you were trying to outline, or at least 

that is what I got from your written testimony. 

In your written testimony at page 4, you have a paragraph that 

begins with a statement that: The role of the multilateral development banks has to change dramatically so that they focus less on 

the volume of finance they provide and more on the goal of providing high-quality services that are not available elsewhere. 

Then you continue that the MDBs must improve the tools and 

methods they use to analyze additionally, guard against crowding 

out, maximize development impact, and you have some other suggestions there. 

When I went to the next page of your testimony, it looked to me 

like what you were suggesting really was they should provide, in 

an efficient and smart method, assistance to allow customer countries in need to develop projects that are going to improve their 

economic position. But the policies that the Trump Administration 

is trying to put in place would wean them off, hopefully, of the public assistance so that they could start to not only become self-sufficient, but access private capital. Do I have that correct? 

Mr. MALPASS. Exactly right, sir. That was better put than I included in my testimony. The difficulty with that—so as we talk 

about the quality of the services provided by the MDBs, one thing 

is they are often very expensive. So you are hiring people from 

around the world and paying them very high salaries, and then 

trying to have them interface with countries that are far away, 

that are very different from their own countries, and that proves 

to just be a difficult task. How do you add value? 

That gets into this idea, especially as more and more of the value 

that they are doing is not infrastructure finance, the way it was 

in the old days, but it is actual technical services on how they can 

do a better job with their accounting system for their pension, for 

their social safety net. Those are plain hard to do. It raises the 

question, can you really have a government—if my government advises your government, are you really going to get the value that 

you are charging? 

mcarroll on FSR431 with DISTILLER

18 

Mr. EMMER. So how would you fix that? 

Mr. MALPASS. One is the graduation policy. So one of the things 

that we have to get the World Bank to do is let countries stop borrowing so that those resources are more available to the countries 

that actually are in need. It has resisted doing that. 

You know, from their standpoint, they are trying to get their 

lending totals up, so they want to lend to China and to big borrowers. Brazil is a big brother. Getting them to break that circle 

is one of our goals. 

Then another is simply the pipeline of loans. You know, right 

now, it is not very transparent, and there was some discussion of 

that. So I think actually getting people to dig into the loans and 

say this kind of loan isn’t actually going to help the country. 

I mentioned earlier the IMF role—they work together, IMF and 

World Bank—and having it be focused. If you look at a country, 

what are the two or three things that are most important for them 

to do, and then let’s see a program that actually operates on them. 

Because, for example, the World Bank recently made a $400 million loan to Turkey. When you look—and we opposed the loan, but 

it goes forward anyway. When you look at the loan, it was diffused. 

They doled out money to a lot of different government agencies in 

Turkey, and you can just imagine what happened to that money. 

Mr. EMMER. Not necessarily for infrastructure? 

Mr. MALPASS. That was not infrastructure. That was what they 

call assistance—government assistance loans. So then you wonder, 

from the taxpayer—U.S. taxpayer standpoint, how is that in our 

national interest, and how do we create an organization that won’t 

bring forward that kind of loan? 

Mr. EMMER. Well, I see my time is running out. We look forward 

to your recommendations as you go forward, and we look forward 

to working with you on trying to put them into effect. Thank you. 

Chairman BARR. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Ohio, Mr. Davidson. 

Mr. DAVIDSON. Thank you, Chairman. 

Mr. Malpass, thank you for being here. Thanks for your expertise. It is good to know you are onboard there at Treasury, and I 

look forward to the work that you guys can accomplish, particularly 

with our international relationships with IMF and the World Bank. 

As we put capital into this—and we continually hear calls for 

more capital, from donor nations, like the United States, to help 

others. So at some form it is redistributive across the global system. 

We have talked a little bit about—our Ranking Member talked 

about income distribution around the world. Have you had a 

chance to assess how effective the World Bank and the IMF have 

been doing at improving things? 

You just mentioned Turkey distributed capital, but really fundamentally promoting capitalism versus socialism. At some point, 

are we subsidizing failed economic models in some of the developing economies we are helping? 

Mr. MALPASS. I think the answer is yes to that, and so then a 

question is how do we change that. The problem is—now, not to get 

too ideological, but we can think of a spectrum from capitalism to 

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19 

socialism and say different types of loans would fall in different 

spots along that. 

If we define socialism as the idea of either ownership or operation by a government of various services, a lot of the lending is 

going in that direction. My analysis of that or the way you can 

quantify that is real median income doesn’t go up under those circumstances. Real median income is the middle—the amount earned 

by the middle of the society. 

A primary goal should be getting that to go up, as opposed to the 

rich going up, as opposed to—so getting that to go up. A lot of these 

loans are simply not doing that, and so we see, I think, a lag. 

Now, to be self-critical of the U.S., we saw the odd situation in 

the 2009, 2010, and 2011. We had an economic recovery going here, 

but real median income was actually falling in the U.S. So we had 

programs in place that are high tax rates that the rich can avoid 

better than average people can avoid. So you end up having a bias 

in the system that caused real median income to actually go down 

in the U.S., which is the first time in history that we have seen 

a recovery where the average guy did worse. So we can work to 

avoid that in other countries. 

Mr. DAVIDSON. So in 2012, the IMF’s charter expanded to take 

into account all issues, all financial sector issues that bear on global stability of the financial system, originally more focused on a 

system of exchange rates, international payments. Do you see any 

issues with that shift in focus, or what are the implications as that 

shift has occurred? 

Mr. MALPASS. Sir, I am not as familiar with that shift. One of 

the things going on often is the institutions often say what they 

think the donors want to hear in—and then that was part of—if 

that was an IMF shift, you remembered they were trying to get the 

U.S. to put money in. At that time, there was a major quota increase that had been negotiated. I think it may be—have related 

to that. But then, as soon as the money comes in, which it did in 

2016 from the U.S., the quota increase was concluded, then the institution loses its focus. So maybe we can discuss that. 

Mr. DAVIDSON. Right. When you look at the effectiveness of some 

of the things they are doing, whether it is the type of capital system they are supporting or the scope of the other metrics they are 

trying to apply—I guess, one of the big things that is at the center 

of this balance of payments that the International Monetary Fund 

helps facilitate is flow of goods and services, flow of capital, intellectual property, via a common means of exchange. Working capital 

is one of those things that is facilitated. Frankly, it is one of the 

things that countries do that distort behavior as well and the fact 

that they—in their trade relationships subsidize some of that trade. 

So how do you view our role in influencing a more market-oriented behavior? 

Mr. MALPASS. I mentioned in my written statement that China 

has—is a critical factor in this. They used to be liberalizing in that 

they have—that has—that seems to have stalled or reversed. 

That gets very much into the question of how do you have the 

world move in a market-based way that allows the payment systems to allow the little guy in countries to actually get access to 

credit? I think the IFIs, in general, could do a much better job on 

mcarroll on FSR431 with DISTILLER

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that, despite the—I am not as familiar with the reform that you 

are talking about. 

They do look at the payment system. They are kind of aware of 

this issue, but my impression is it is not the highest priority. We 

should make it a much higher priority to find a way that small 

businesses and average individuals, even in poor countries, can 

find access to credit or to be part of the financial system. 

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

The Chair now recognizes the gentleman from Indiana, Mr. Hollingsworth. 

Mr. HOLLINGSWORTH. Good morning. Thank you so much for 

being here. I won’t take my full 5 minutes. 

I appreciate very much what you have said. A lot of what you 

have said this morning, I couldn’t agree with you more, both on 

your responses with regard to potential tax reform, as well as the 

continued conversation about how we ensure that these bureaucracies around the world focus on the mission by which they have 

been handed from their members and not their own mission. 

I especially love what you talked about in the sprawl of bureaucracy. It is the duty of members and especially large donor countries 

to ensure that the mission of that bureaucracy isn’t just its own expansion of power, its own expansion of resources, but instead, the 

mission of ensuring, as you put it, that median incomes around the 

world, and specifically in countries that are being targeted, continue to go up in a meaningful way. I certainly appreciate that. 

I also like what you said about how, if we fail to do that and we 

enable mission creep to where then we look at the World Bank and 

the IMF to do a whole host of functions, the primary function for 

which they are each responsible will be eroded because we have resources that are now diversified over very many functions or very 

many missions. 

I certainly appreciate your work and effort toward that end and 

ensuring, what I know Hoosiers back home are concerned about domestically, regulatory bureaucracy that continues to push forward 

its own expansion of power into the everyday lives of Hoosiers back 

home and the businesses that they own, operate, or work in, but 

also internationally how challenging your environment in work, I 

am sure, is. 

One of the reasons you, I am sure, mentioned median income 

versus average is because you’re trying to exclude outliers, right? 

Mr. MALPASS. Yes. 

Mr. HOLLINGSWORTH. You want to push back against some of 

what Ms. Moore talked about with regard to inequality and focus 

on the very middle individual in the income distribution in pushing 

their income up. 

I like what you said as well about making sure we do it in a sustainable way. You can certainly ensure government gives dollars to 

those individuals and their income will go up, but it won’t in a sustainable way, and focusing on those projects. 

Is there anything else that I haven’t covered that you wanted to 

add that you have really pushed in your testimony today? 

Mr. MALPASS. Thank you, sir. With regard to median income 

versus average, you stated it exactly right. The importance of that 

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21 

is, if we look at income inequality, the way it is often done, you 

won’t actually get—it is very complicated to calculate. So allowing 

the IMF, the World Bank to actually calculate median income and 

see if it is going up— 

Mr. HOLLINGSWORTH. Right. 

Mr. MALPASS. —That helps us a lot. 

The one other point I would put is the importance of dependable 

currencies, which I mentioned in my statement. For too long, we 

have had the view and the IFIs allowed the view that you could 

gain competitiveness by weakening your currency. So the central 

bank got in the habit of printing money— 

Mr. HOLLINGSWORTH. Right. 

Mr. MALPASS. —That hurts, desperately hurts the median income— 

Mr. HOLLINGSWORTH. Right. 

Mr. MALPASS. —Because your—the value of the money—so—and 

we can see today, Venezuela, for example, is moving toward hyperinflation. 

Mr. HOLLINGSWORTH. Yes. 

Mr. MALPASS. Median incomes crashing because they don’t have 

money that average people can get to. Only rich people can get to 

U.S. dollars— 

Mr. HOLLINGSWORTH. Right. 

Mr. MALPASS. —Preserve their capital. 

Mr. HOLLINGSWORTH. Agreed. 

I really applaud the work that you are doing and really love the 

fact that you have a clear metric for success, I think, in managing 

bureaucracies and in managing mission creep, ensuring that you 

have a clear metric by which you are going to determine every 

project, right, by which you are going to determine success or failure for that bureaucracy. I think it is hugely important and a very 

big step in the right direction. So I appreciate your work. 

With that, Mr. Chairman, I will yield back. 

Mr. MALPASS. Thank you, sir. 

Chairman BARR. The gentleman yields back. 

The Chair now recognizes the distinguished Ranking Member of 

the full committee, the gentlelady from California, Ms. Waters. 

Ms. WATERS. Thank you very much. 

I have a question for the Honorable David Malpass, Under Secretary for International Affairs, and I thought I would come and 

share with you my concern. 

I am concerned by the statement in your testimony that the 

United States is not expecting to make any future contributions to 

the Global Agriculture and Food Security Program, and that this 

program should be wound down with future reflows returned to donors. 

This program is a unique fund with a clear value added, and is 

on target to reach 12 million farmers in the poorest countries. I am 

struck by your claim that the MDBs could continue these projects 

without separate donor support at the same time that the Administration has proposed cuts across the board at nearly every MDB, 

as well as massive proposed cuts in our bilateral aid programs. 

So this brings me to one strong disagreement I have with your 

reform agenda, and, in particular, with the statement you made in 

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22 

your testimony that reflects the Administration’s approach to international economic cooperation. You said that, quote, ‘‘Globalism 

and multilateralism have gone substantially too far, to the point 

that they are hurting U.S. and global growth,’’ end quote. 

Of course, I disagree with this. I don’t think we have gone too 

far at the international financial institutions. I don’t think we have 

done too much to help feed people in the world who are starving, 

who are experiencing food insecurity. We have not done too much 

to help alleviate desperate poverty and suffering in other parts of 

the world, including that of millions of children and other vulnerable people in Africa, Latin America, and Asia who continue to go 

without food. 

What do you know about the lack of a need for this kind of assistance and that this assistance can be eliminated without causing 

great harm? 

Mr. MALPASS. Yes. Thank you, Ms. Waters. Other parts of my 

statement emphasized and explained how important it is for the 

U.S. to be a leader in the world in finding ways to raise people’s 

living standards. We do that in a number of ways: We do that by 

participating in organizations, by leading by example where we 

can, and by being engaged. The U.S., I think, remains—the U.S. 

is the world’s largest economy and, in many ways, remains the 

world’s strongest leader in the poorest countries, and will continue 

to do that. 

So the sections that you highlighted are ones where we have allowed multilateral organizations to take over that role, and they 

don’t do it very well in a lot of cases. So they spend a lot of money. 

They are not very efficient. They are often corrupt in their lending 

practices, and they don’t get the benefit to the actual people in the 

countries. 

They get the benefit to the people that fly in on a first-class airplane ticket to give advice to the government officials in the country. That flow of money is large, but not so much the actual benefit 

to normal people within poor countries, and that is what I would 

like to see change. 

Ms. WATERS. Do you have an example of that? 

Mr. MALPASS. Well, for example, we have countries such as 

South Africa that are deteriorating rapidly as their government is 

unable to provide efficiency and effectiveness. 

We have, of course, Venezuela. That is not so much an issue for 

the international financial institutions in that they have basically 

blocked themselves off from advice from outside for years and 

years, which is unfortunate. 

In the poor parts of Africa, we just saw Gambia have a—there 

are numerous examples where countries that were closely engaged 

with the multilateral financial institutions find themselves going 

downhill. 

Ms. WATERS. I didn’t understand the example of South Africa. 

What was that? What were you trying to tell me? 

Mr. MALPASS. That South Africa is heavily indebted and not 

making progress and is not being well served by its relationships 

with the international financial institutions. 

Ms. WATERS. Any other examples? 

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23 

Mr. MALPASS. I mentioned a recent government turnover in 

Gambia, which just comes to mind, where the international community is trying to figure out what to do in a country that has severe problems. 

What is one—so we—so I work in countries around the world. I 

am just back from Vietnam where I met with people, with the Thai 

finance minister, and they are all engaged with the international 

financial institutions. I have to tell you that, in many cases, it is 

not benefiting the people of the countries. 

Ms. WATERS. Thank you. I yield back. 

Chairman BARR. The gentlelady’s time has expired. 

The Chair now recognizes the gentleman from Arkansas, Mr. 

Hill. 

Mr. HILL. Thank you, Mr. Chairman. 

David, it is good to see. 

Mr. MALPASS. Hello, Mr. Hill. 

Mr. HILL. Welcome to the committee. It was a privilege to both 

be younger and more handsome many years ago as we were both 

deputy assistant secretaries for President Bush, 41, so it is good to 

have you back in government in this important position. 

Mr. MALPASS. Nice to see you. 

Mr. HILL. I want to start out and talk a little bit about this comment on multilateralism. With your deep experience, I wondered 

if—what conversations you have had in the Administration about 

the future of something like TPP (Trans-Pacific Partnership), as we 

have the President in China today, as a way to ring-fence and 

project American power in Asia. What thoughts do you have there? 

What do you see is the Administration’s strategy on select use of 

multilateral trade aspects? 

Mr. MALPASS. Thank you, sir. One challenge, as you get many 

players involved, as was done with TPP, it becomes a hugely difficult negotiation. I am giving you something on the agreement 

that you are giving Mr. Barr something, and then in TPP there 

were 11 countries each giving each other something, and it became 

abstract. Then in the end, you get a deal that is not going to benefit American workers. 

So what the President has pointed out is that a more likely way 

to get benefits for us is to have a bilateral—so two countries talking together about how they can improve their circumstances. 

That is where we stand today. We are looking for—the U.S. is 

looking for trading relationships that are fair and reciprocal where 

we get benefit and the other trading partner gets benefit for our 

workers and for their workers. That is hard, but it should be doable. There are a lot of areas where we can liberalize our markets 

if the other guy—if the other country liberalizes their market. 

Mr. HILL. Thank you. 

One of my assignments when I was at Treasury, in those dark 

ages, was in the area of technical assistance. This is an area that 

reports to you at the Treasury, but also is so critical in the development bank world we are talking about today. That responsibility 

of effectively providing multilateral assistance, development loans, 

or technical assistance has to be done with the very best people 

and with the very best accountability. 

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24 

This subcommittee has investigated, over the years, this horrible 

World Bank scandal in Uganda that really resulted in sexual abuse 

of children, as well as safety problems, and the World Bank’s loan 

program there that resulted in five deaths. It uncovered a real 

cesspool of management challenges, personnel challenges in the 

World Bank. 

My question for you is, how can the Treasury, as lead director 

there, and America as a major contributor to the bank, ensure that 

the bank’s employment processes are a meritocracy? What is your 

view on that? 

Mr. MALPASS. As I recall, sir, you were—you ran a medium-sized 

bank, right, and so those challenges are ones that—you are actually very well qualified to help give us thoughts on how to do that. 

So within these sprawling organizations, it really is very hard. 

Once they have set their direction on growth, it is very hard to 

keep the governance controls and the personnel controls and so on 

and do them effectively. So my view on it is, if we get the organizations to focus on the graduation policy, meaning have a beginning 

and an end of a relationship with a country that succeeds, if they 

get success, then they move on and try to share that experience 

elsewhere. That will help the focus of their mission. 

So that is one, meaning, if you can simply stop expanding for a 

moment, you can improve the quality of what you are doing. So I 

guess that is where I stand on that. I take your point well on— 

we don’t know how deep the problems that you identified there go 

in other country programs. 

Mr. HILL. Well, there is strong bipartisan support, as evidenced 

by our votes on this committee, to withhold funding for our development banks if they don’t cleanup their mission and deliver on 

what we expect. So we have high expectations. We appreciate your 

oversight, and thanks for being here today. 

Mr. MALPASS. Yes. Thank you, sir. 

Chairman BARR. The gentleman yields back. 

I would like to thank our witness for his testimony here today. 

I appreciate your forthright answers. We certainly appreciate your 

testimony here today, that the Administration views successful 

international relationships that include multilateral institutions, 

but that in order to promote a more free and prosperous world, the 

international financial institutions must have clear focused missions and deliver results effectively and with accountability to participants. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing a now adjourned. 

[Whereupon, at 11:30 a.m., the subcommittee was adjourned.] 

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(25) 

A P P E N D I X 

November 8, 2017 

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Statement to the Subcommittee on Monetary Policy and Trade 

House Financial Services Committee 

David R. Malpass, Under Secretary of the Treasury for International Affairs 

Chairman Barr, Ranking Member Moore, and Members of the Financial Services Monetary 

Policy and Trade Subcommittee, thank you for holding this hearing and for inviting me to testifY 

this morning. 

One of the Trump Administration's top objectives is to achieve faster U.S. and global growth in 

ways that improve after-tax wages for American workers. This involves ambitious reforms for 

taxes, regulation, trade, energy, financial regulation, infrastructure, and the budget. As Secretary 

Mnuchin said in October: "Better policy choices could remove structural impediments and 

unlock the economy's longer-term growth potential. Our agenda is aimed at restoring much 

needed dynamism to the U.S. economy." 

This growth agenda draws on work throughout the Treasury Department, and we welcome the 

opportunity to work with your Committee. For example, a key driver of growth is the 

effectiveness of the financial regulatory framework, so that small- and medium-sized businesses 

are able to get the capital they need to be more productive and create more jobs. This will 

require improvements at multiple U.S. regulators, as well as a more growth-oriented approach in 

multilateral regulatory institutions. 

Today's hearing is focused on global growth and the role of the international financial 

institutions (IFis). These include the International Monetary Fund, the World Bank Group, and 

several other multilateral development banks (MDBs). I've presented a table and partial balance 

sheet of some of these IFis below. 

:\IDB Balance ShE-ets 

International Bank for 

Reconsrm::tion and De•·doprnent 

Intemarional DeYelopment 

As.soci.aticn 

International Finance Corporation 

Asian D~·elopment Bank 

European Bank for Reconstluction 

and De,·elopment 2 

Imer-Americ;m De.,·elopment Bank 

~onh _-\merican De\"elopment Bank 

Assets 

4D5.9 

9:2.3 

29.-:' 

l 78.9 

56.~ 

1.:::6 0 

LS 

Liabilities ~ 

366.1 39.8 

38_6 158.5 

67_2 :5.1 

~0.6 66 

129.5 49.-l 

.+0_2 15--t 

9-+.0 3~.G 

L.:: 0,6 

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Loans 

Investments/Liquid Assets 

Derivative Assets 

Other Assets 

Total 

IBRD Balance Sheet 

2017- Billions USD 

405.9 Liabilities 366.1 

177 

73 

150 

6 

406 

llorrowings 206 

Derivative Liabilities 153 

Other Liabilities 7 

Equity 39.8 

Paid-In Capital 16 

Retained Earnings 24 

406 

In today's testimony, I will focus primarily on the World Bank and IMF, but all of the IFis 

present their own set of challenges and opportunities. 

Global Growth Taking Hold 

The context for today's discussion is a global growth improvement in recent quarters, though it 

remains well below its true potential. Between 1997 and 2007, the global economy grew 4 

percent per year on average; however, average annual growth in the decade since then has 

slowed to 3.3 percent. We believe faster global growth rates are possible, sustainable, and will 

be a key factor in improving wages for American workers. 

However, following the 2008 financial crisis, there was an unusually weak recovery both in the 

U.S. and abroad. Per the IMF, world GDP, which stood at $73 trillion in 2011, was stuck at $74 

trillion in 2015 and $75 trillion in 2016. For the U.S., the post-2008 recovery was the first in 

U.S. history to actually result in lower real median income. IMF projections show that a 

resumption in growth is underway, with world GDP rising to $79 trillion in 2017 and $84 trillion 

in 2018. The acceleration of U.S. growth to 3 percent in the second and third quarters is a 

welcome contributor to this advance. 

Global GDP (Nominal, US$ Terms) 

.\'ource: l!IIF fVorld Economic Outlook October 2017 

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Role of Multilateral Development Finance 

With growth accelerating and the world financial system relatively stable and liquid, now is an 

opportune time to discuss the role of multilateral development finance in global growth and 

prosperity. As a preface, I want to make a clear distinction between isolationism, which we 

oppose, and our view that globalism and multilateralism have gone substantially too far, to the 

point that they are hurting U.S. and global growth. 

In his remarks to the United Nations General Assembly in September, President Trump 

articulated a vision of international affairs in which each country's government has a 

responsibility, first and foremost, to serve its own people. Out of this self-interest emerges a 

constructive international order in which nations and their people are enriched through trade, 

cooperation, and innovation. The President is travelling in Asia this week, promoting growth, 

investment, security in the Indo-Pacific, and trading relationships that are fair and reciprocal. 

It is very clear that the U.S. benefits from freer, more prosperous neighbors, trading partners, and 

like-minded societies around the world. To promote that, the U.S. needs to be actively engaged 

in global affairs including global growth efforts and global security. We do this both in our selfinterest and as a world leader that champions and embodies personal freedom, property rights, 

the rule of law, and human progress. 

We recognize that successful international relationships include multilateral institutions, but the 

challenge for them is to have clear, focused missions and deliver results effectively, and with 

accountability to participants. 

To give you a sense of the magnitude of the challenge, Treasury's Office ofinternational Affairs, 

which I head, is currently participating in nearly I 00 international working groups and 

organizations. Each has the goal of benefiting the world, but each requires staff time, energy, 

and often travel. I joined Treasury in early August, and I will work to review these various 

processes to determine which of them can be wound down, scaled back, or converted to financial 

plans based on restraint rather than expansion. I have had the opportunity to make these points at 

the IMF, World Bank, G-20, Financial Stability Board, and the Asia-Pacific Economic 

Cooperation (APEC) Finance Ministerial Meeting, and it will need to be a continuous process in 

our international affairs work program. 

As an example, our U.S. representative gave a statement earlier this week at the Steering 

Committee meeting of the Global Agriculture and Food Security Program (GAFSP) in Rome 

that the U.S. is not expecting to make any future contributions to GAFSP and that GAFSP should 

be wound down, with donors exploring options to return future reflows to donors. The U.S. 

government and other donors provide funding to support similar agricultural investments in poor 

countries through other institutions and funding sources. Furthermore, MDBs are capable of 

institutionalizing the lessons learned and of continuing GAFSP projects without separate donor 

support. For reference, the United States is the largest historical contributor to GAFSP, having 

contributed $653 million. 

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New Sources of Capital 

It used to be the case that a large part of the flow of external capital to developing countries came 

from banks using syndicated loans, often under encouragement or pressure from governments. 

This culminated in the Latin American debt crisis of the 1980s. The Brady Plan in 1989 began 

the process of securitizing large portions of this debt, creating major new sources of capital for 

development. 

For many countries, this securitization of sovereign debt has enabled the availability of local 

currency debt in longer maturities, providing a cushion against shocks. In the early years of this 

decade, Chile faced a catastrophic drop in the price of copper, one of its major industries and 

exports, yet survived without a recession in part due to these innovations in international finance. 

Separately, the structure of world interest rates has moved much lower as history moves further 

away from the devaluations and high inflation of the 1970s. Huge amounts of capital available 

at lower interest rates than in the past are now available as investors reach for yield globally. 

These three transformations the securitization of sovereigns, the lengthening of maturities for 

local currency debt, and the decline in the structure of interest rates- are truly stunning in the 

history of international finance, fostering greater accountability and market-based capital flows 

that should add materially to global growth and prosperity. 

While welcome, these developments also create at least three challenges for multilateml 

development finance. First, governments increasingly have access to more capital and low-rate 

credit than their capacity to manage the inflows responsibly. Tajikistan, Mozambique, and 

Ghana have taken advantage of capital markets access and obtained financing in bond markets, 

but their experiences are a cautionary lesson to others that the availability of increased financing 

must be coupled with appropriate transparency, the capacity to prudently manage liabilities, and 

the capability to deploy resources efficiently. 

Second, a growing number of countries have taken advantage of low interest rates and the 

proliferation of global capital markets to tap investors beyond their ability to repay. Creditors, 

including the MDBs, should be cautious about exacerbating unsustainable situations in 

borrowing countries- particularly those with capacity constraints that hinder their ability to 

properly manage their debt. 

And third, the role of the MDBs has to change dramatically, so that they focus less on the 

volume of finance they provide and more on the goal of providing high-quality services that are 

not available elsewhere. MDBs must improve the tools and methods they use to analyze 

additionality, guard against crowding-out, and maximize development impact. We should set as 

a goal that every project and intervention an MDB undertakes moves a borrower along a 

continuum toward the ability to finance their own development without donor support. In 

seeking this transformation, we need to challenge the multilateral organizations to rethink their 

methods and operations. 

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The MDBs can use their knowledge and analytical capabilities to not only contribute to this 

dialogue, but also to continue to work with capacity-constrained countries to create the enabling 

environment for responsible private sector borrowing. 

Private capital has been behind many of the innovations that have produced the greatest 

measurable results in fostering growth and lifting people out of poverty. Some examples of these 

innovations include financial technology, mobile telecommunications, microloans, digital 

currencies, and social entrepreneurship. 

In sum, we should take full advantage of this period of relative stability in global finance to 

transform development finance. To this end, the Administration is moving on a constructive and 

transforrnative agenda that seeks to reconcile large multi laterals aimed at meeting the challenges 

of earlier decades with a world of relatively plentiful private sector capital. 

World Bank Reforms 

The World Bank is the largest of the development finance institutions. Working with the 

previous Administration, it secured a 50 percent increase in the financial capacity of the 

International Development Association (IDA). It has asked the current Administration to work 

toward large capital increases for the International Bank for Reconstruction and Development 

(IBRD) and the International Finance Corporation (IFC). 

The business model of the MDBs' non-concessional windows, including the IBRD, is to 

leverage the capital that shareholders provide (paid-in capital) by borrowing from markets using 

loan guarantees from shareholders (callable capital). MDB capital increases are generally 

intended to permit sustainable lending levels to address increased development needs or crises. 

IBRD loans Outstanding and Paid~ln Capital (USD Billions) 

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We welcome a dialogue on World Bank reforms. As discussed, there is a historic transformation 

underway in the availability and sophistication of private sector funding for development 

finance. President Trump has made clear the importance of other donors doing their fair share, 

and of U.S. and other donor funding not displacing the private sector. Further, we should 

observe how countries absorb the new capital flows expected from the 18th replenishment of 

IDA, to which the U.S. has committed to contributing $3 billion and allowing substantial 

leveraging of!DA's equity capital, the expected reflows of previous concessionallending. 

Additionally, the World Bank is facing major problems in its graduation process implementing 

a system in which the allocation of its resources moves dynamically from countries where the 

necessity for external multilateral finance has declined to countries that are capable of effectively 

absorbing multilateral resources and have substantial needs. 

IBRD Engagement with Graduation-Eligible Countries 

A key policy concern at the World Bank is its track record of continuing to lend large amounts to 

countries that have higher per capita incomes and ready market access. When the World Bank 

does not graduate these countries, less funding is available to reach countries with greater 

development needs, and there is an excess burden placed on shareholder capital. The World 

Bank's relationship with countries should change as they move up the income ladder and gain 

access to wider sources of financing - shifting from lending to a greater focus on knowledge 

transfer and the buildup of domestic capital markets. 

Between 1985 and 2008, on average, 10 percent of IBRD annual lending went to graduationeligible countries. Since 2009, countries eligible for graduation have received, on average, 40 

percent of!BD lending. Pre-crisis, World Bank management and graduation-eligible countries 

generally adhered to the graduation policy. Countries that were wealthier, more creditworthy, 

more institutionally developed, and less vulnerable to shocks were more likely to have 

graduated, and between 1990 and 2016, there was an average three year lag between crossing the 

income threshold and graduation. 

During the 2008-2009 financial crisis, access to private capital became more difficult for many 

developing countries, and IBRD lending to graduation-eligible countries increased significantly, 

particularly in the form of large, quick-disbursing policy loans. 

Many graduation-eligible countries, even those with strong market access, have continued to 

demand IBRD financing. Graduation-eligible countries tend to see the IBRD as a stable source 

of financing and development expertise, and also may be reluctant to formally graduate to 

preserve access to the IBRD in the event of another crisis. 

Adherence to the graduation policy has progressively weakened. Currently, 25 countries have 

incomes above the threshold, though not all borrow from the IBRD every year. 19 of these 

countries have been above the threshold for longer than five years. Nearly half are rated 

investment grade or better, and six of these countries are defined by the World Bank as highincome, with per capita income exceeding $12,475. 

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This leaves a lot of room for improvement. The Articles of Agreement set forth two broad 

criteria for IBRD lending: (1) that given prevailing market conditions, a borrower would 

otherwise be unable to obtain the loan under reasonable conditions, and (2) that private capital is 

not available on reasonable terms. In 1973, the IBRD established an income threshold (currently 

$6,895 per capita) that would signal a country's eligibility for graduation (making it "graduationeligible") and trigger the start of discussions between World Bank management and country 

authorities on graduation. A subsequent 1982 policy further called for the consideration of "a 

country's level of development and overall economic situation" and "a country's capacity to 

sustain long-term development without further recourse to the bank's financial resources." The 

policy stipulates that graduation from new IBRD lending should normally occur within five 

years after a country reaches the income threshold, with the length of the phase-out depending 

upon a country's ability to access external capital markets on reasonable terms and its progress in 

establishing key institutions for economic and social development. These subjective factors 

allow World Bank management and the graduation-eligible country considerable leeway. 

According to World Bank management, graduation discussions take place in the context of 

negotiating new Country Partnership Frameworks (CPFs), which are strategy documents that 

Bank staff and the borrowing country develop to guide World Bank engagement over a set 

period (usually three to six years). Treasury has not found these graduation discussions to be 

serious or meaningful, and based on our observations, the decision on whether to even formulate 

a graduation plan is left to the borrowing country. We have strenuously argued for a more 

rigorous, transparent, and rules-based process. 

During discussions in 2016 on the Forward Look, a medium-term strategy for the World Bank 

intended to inform subsequent discussions on a potential capital increase, the previous 

Administration secured two significant policy commitments. First, there was a commitment in 

the Forward Look that the IBRD would build up its portfolio for countries below the graduation 

threshold. Second, the Forward Look indicated that it would more narrowly focus its 

engagement with graduation-eligible countries on advisory services and the use of more tailored 

financing instruments for purposes of crisis preparedness, improving domestic resource and 

private sector mobilization, debt management, and capital markets access. 

World Bank management, meanwhile, has neglected these commitments in the Forward Look 

and instead seeks to maintain or increase its strong engagement with graduation-eligible 

countries on the view that it wants to work against poverty in middle-income countries; wants 

the portfolio diversification available from lending to more creditworthy countries; and covers 

some of its overhead by lending to easier, less risky countries. Even in 2017, the biggest 

borrower from the IBRD was China, which received $2.4 billion in new financing and has 

outstanding exposure of$13.3 billion. 

We think the World Bank can do a better job meeting its commitments to poorer countries while 

still pursuing a financially-sound business model. An overriding objective for the 

Administration is to ensure the World Bank is directing its resources to the people who need 

them most in the countries with the least access to private capital. Not only does this help ensure 

that each marginal dollar is as impactful as it can be, but it also guards against public money 

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displacing private investors. Ultimately, the World Barile's success should be marked by the 

number of countries that eventually graduate from borrowing altogether. This calls for an 

efficient graduation process based on an enforceable graduation policy with tangible measures of 

success. 

Given this divide in viewpoints, the Administration is seeking a framework in which we can 

execute a strong growth agenda while working cooperatively with other governments. To that 

end, the President has nominated, or will soon be nominating, eminently qualified individuals to 

serve as representatives on the boards of the World Bank and other international financial 

institutions. 

Treasury believes that the World Bank currently has the resources it needs to fulfill its mission 

and that the Bank should develop proposals in which the Bank's organic capital accumulation 

alone could be sufficient to support future lending targets. The state of the world, that of capital 

markets, and that of countries is vastly different today than when the World Bank's capital 

structure was developed, and we think now is an opportune time to rethink the structure and 

mission, so that the World Bank can maintain its leadership role in multilateral development 

finance. 

Impact of China in International Finance 

A key driver of global poverty reduction has been the progress major emerging markets have 

made in moving away from planned economies to market-oriented economies. It is in this 

context that I have expressed concerns about China's direction. As its portion of world GDP 

increases, China's market liberalization is a critical factor in whether global growth will be 

sustained well into the future. 

China's gradual liberalization was welcome. Price liberalization was powerful. There was some 

progress in rebalancing the economy away from excess investment toward consumption and 

services. China also sought to reduce corporate and financial leverage, and to address growing 

risks in the financial sector. We welcomed those, but are concerned that the liberalization seems 

to have slowed or reversed. 

Recently, the role of the state in China's economy has been increasing. State-owned enterprises 

have not faced hard budget constraints, and China's industrial policy has become more and more 

problematic for foreign firms. Export credits have grown large. 

This is not the kind of market-based reform that China has undertaken in the past, or the kind of 

reform that China needs. It is critical that capital be allocated more effectively and that China 

stop engaging in massive subsidies that distort global markets and harm U.S. competitiveness. 

China's unfair trading practices are unsustainable and harmful to the growth and prosperity of 

the U.S. and many other nations. The Administration is committed to achieving a fair and 

reciprocal trading and investment relationship with China, including through market-based 

reforms. 

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Role of the International Monetary Fund 

The IMF operates in the same global context- an improving world growth outlook with an 

unusually high availability of private sector capital. It faces the challenge of redefining its role at 

a time when it currently has ample resources, but faces unknown future challenges. 

The shift in recent years toward local capital markets large enough to fund a portion of internal 

development not only reduces reliance on donor resources like those from the World Bank, but 

also acts as a buffer against volatile capital flows, one of the problems addressed by the IMF. 

The pattern of!MF financing ha~ historically tended to respond to global financial cycles rather 

than the size of available IMF resources. Since 1980, the IMF has, on average, committed only 

about 20 percent of its available resources. Country requests for assistance surged in the midI 980s, in part due to the Latin American debt crisis, and in the 1 990s as a result of emerging 

market crises in Russia, Korea, Indonesia, Turkey, and Mexico. Quota increases in the 1990s 

and in 2016 helped IMF resources catch up to large spikes in crisis lending. 

At its peak, the IMF in 20 II had committed about 70 percent of its available quota resources, 

due to the Global Financial Crisis and its aftermath in Greece and the euro area. By design, IMF 

lending is generally far below available resources, as the perception of the IMF "running out of 

resources" during a crisis period could inadvertently cause the market to flee vulnerable 

countries and worsen global spillover effects. 

Current IMF Anangements and Resources as Percentages 

-Lending Arrangements/Total Resources 

-Lending Arrangements/Quota 

30% 

0% 

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Evolution of !MF Resources (USD Billion) 

1400 

1200 

1000 

~ 

~ 800 

~ 

0 600 

"' ::> 400 

200 

0 

ill Quota ill GAB/NAB Bilateral Borrowing Agreements 

I. TotalJMF resources. Data through 2017 provided by the IMF Data for future years are 

based on current quotas and the current schedule for when borrowing arrangements will 

expire, and thus are subject to change. 

2. Most of the Bilateral Borrowing Agreements were absorbed into the New Arrangements to 

Borrow (NAB) from 2011 onward. The 2016 agreements have an initial term to end-2019, 

extendable through end-2020 with creditors' consent. 

3. The current NAB period end~ in November 2022. 

The IMF needs to advance reform programs that have, as a goal, higher median incomes and that 

help incentivize the market-based allocation of capital, underpinned by dependable money at the 

core. 

The IMF has a key role to play in pressing for timely, accurate, and comprehensive debt 

information from borrowers and creditors. It must promote stronger debt management processes 

in low income countries. We welcome the IMF's work to strengthen the low-income debt 

sustainability framework and look forward to its implementation next year. Similarly, we are 

encouraged by IMF efforts to incorporate a heavier focus on public corruption, which not only 

wastes limited public resources, but also acts as a deterrent to private sector investment and 

growth. 

Because sustained global excess imbalances pose substantial risks to future economic growth, a 

key priority tor the Administration is overseeing progress in eftorts to correct such imbalances. 

The IMF does, and should, play a critical role in advising, informing, and helping member 

countries achieve global economic stability and stronger economic growth. The !MF must be a 

more forceful advocate in making clear policy recommendations that surplus and deficit 

countries can implement in order to address global imbalances. As a first step, we have urged 

the IMF to elevate the External Sector Report to flagship status and will engage with the IMF as 

it seeks to strengthen the External Balance Assessment model next year. 

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Additionally, the uptick in global growth and the relative calm in international markets has 

presented us with an opportunity to advance policies to further stimulate both domestic and 

global growth. Notably, we included the following, new language in the International Monetary 

and Financial Committee (IMFC) communique and the APEC Finance Ministerial Statement: 

Strong fundamentals, sound policies, and a resilient international monetary 

system are essential to the stability of exchange rates, contributing to strong and 

sustainable growth and investment. Flexible exchange rates, where feasible, can 

serve as a shock absorber. 

Exchange rate instability has been a major cause of investment uncertainty and the cost of crossborder investments, and the current stability, supported by strong fundamentals, should 

encourage investment and growth worldwide. 

The IMF will begin the 15th General Review of Quotas in 2018 with a goal, as decided by the 

IMF's Board of Governors, to complete it no later than the Annual Meetings in October 2019, 

with any changes taking effect in 2020 and beyond. The review will assess the adequacy of the 

IMF's resources and determine whether to adjust members' quotas and quota shares. There is no 

assumption of larger quotas, and the Administration has not yet made any decisions regarding 

the 15th review. It is Treasury's view that the IMF currently has ample resources to fulfill its 

mission, following the implementation of the 14th quota review last year. In the upcoming 

review, we will support IMF reforms in line with the U.S. goal of promoting global growth, 

while ensuring that the U.S. maintains its veto on key issues within the IMF. 

Conclusion 

The Administration wants economic growth not only for the U.S., but for the whole world. It is 

not a zero-sum game where our achievements must come at another country's expense. 

Sustainable and inclusive prosperity builds on itself and is critical not only for climbing out of 

poverty and creating wealth, but also for global security. 

U.S. leadership and strong relationships with our allies and partners will be critical to advancing 

a policy agenda that contributes to rising median income, a level playing field for American 

firms, and prosperity that contributes to national security. Just as my colleagues are working 

with Congress to embark on reforms intended to spur domestic economic growth, I look forward 

to working with you to improve the growth trajectory for the global economy for the benefit of 

all Americans. 

Thank you for your time, and I am pleased to take any questions. 

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QUESTIONS FOR THE RECORD FOR 

UNDER SECRETARY FOR INTERNATIONALAFFAffiS DAVID MALPASS 

SUBMITTED BY REP. DENNYHECK(WA-10) 

CFIUS MISSION 

1. My understanding is that CFIUS performs three fundamental missions: reviewing 

transactions, monitoring mitigation agreements, and monitoring for non-notified 

transactions. For each of these three missions, could you offer your views on the 

following questions? 

a. Is this mission important? 

Response: Yes. CFIUS plays a critical role in protecting the national security of the 

United States, which it does through each of its three core missions: reviewing 

transactions that have been submitted to CFIUS and taking action as necessary to 

address any national security concerns; monitoring and enforcing compliance with 

mitigation measures; and identifYing transactions of concern that have not been 

notified to CFIUS for review. 

b. Is it being achieved? 

Response: CFIUS is accomplishing these three missions; however, recent increases in 

transaction volume and complexity have strained CFIUS and its member agencies. 

For example, from 2009 through 2013, 96 covered transaction notices were filed with 

CFIUS per year on average. 1 In 2016, 172 covered transaction notices were filed 

with CFIUS. And in 2017, a record 238 notices were filed. This total represents 

more than a 100% increase as compared to the 2009 to 2013 average. As CFIUS has 

seen a significant increase in volume, the national security issues it is confronting 

have also become significantly more complex, due to the way foreign governments 

are using investments to meet strategic objectives, increasingly complex transaction 

structures, and increasingly globalized supply chains, among other things. 

c. Wbat is the biggest constraint or difficulty in achieving this mission, statutory 

authority or budget constraints? 

Response: As mentioned in my response to the previous question, the increase in 

transaction volume and complexity has strained CFIUS and its member agencies. 

In addition, CFIUS has observed the increased use of new transaction structures by 

foreign investors that CFIUS does not have the statutory authority to review, such as 

certain joint ventures and non-passive, but non-controlling, investments. These 

transactions often pose similar national security considerations as those currently 

1 In 2009,65 covered transaction notices were filed; in 2010, 93 covered transaction notices were filed; in 2011, lll 

covered transaction notices were filed; in 2012, 114 covered transaction notices were filed; and in 2013, 97 covered 

transaction notices were filed. CF!US Annual Report to Congress for CY 2015 (September 2017). 
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covered by CFIUS. We support the Foreign Investment Risk Review Modernization 

Act (FIRRMA), which would expand CFIUS's authorities to cover such transactions, 

and urge Congress to advance the bill on a bipartisan, bicameral basis. 

2. Does CFIUS's mission need to be expanded beyond the three missions outlined in 

question 1? 

Response: CFIUS should remain focused on its three core missions. However, as 

mentioned in my previous response, it is the view of the Department of the Treasury that 

CFIUS's statutory authority should be expanded to allow it to review additional 

transactions beyond those that could result in foreign control of a U.S. business. 

FIRRMA would accomplish this. 

CFIUS ANNUAL REPORT 

3. CFIUS just released its annual report for the 2015 Calendar Year in September of this 

year. Section 7(b)(m)(1) of the Foreign Investment and National Security Act of2007 

(FINS A) requires the Chairperson of CFIUS to submit an annual report before July 31 of 

each year describing reviews and investigations of covered transactions during the prior 

calendar year. 

BUDGET 

a. What are the causes of the significant delays in submitting the CFIUS annual 

report to Congress? How can Congress help ensure the annual report is submitted 

in a timely manner? 

Response: The increase in transaction volume and complexity throughout 2016 and 

2017 has strained the resources of CFIUS and its member agencies. As a result, 

CFIUS's resources are fully dedicated to achieving its core missions, which has 

ultimately led to delays in the publication of CFIUS's annual report. Treasury 

believes that timely publication of the annual report is important and is committed to 

reducing delays in the publication of future reports. 

4. Did Treasury include a request for additional funds for CFIUS-related activities in Fiscal 

Year 2018? 

Response: Treasury reallocated internal resources to make additional resources available 

to increase Treasury CFIUS personnel in FY20 18, but it did not request additional funds 

in its FY 2018 budget request. Additional CFIUS-related resources ($564K) were 

requested in the FY 2017 budget request and provided for in the Consolidated 

Appropriations Act 2017 (P.L. 115-31, dated May 5, 2017). 

S· Assuming, for this question, that the CFIUS statute remains unchanged, do you intend to 

request additional resources for CFIUS-related activities in Fiscal Year 20 19? 
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Response: Treasury's FY 2019 budget request maintains the baseline funding to support 

its CFIUS related requirements. The President's Budget for FY 2019 is reflective of the 

administration's goals of focusing on rebuilding the country's national defense and 

investing in our most pressing security needs .. 

6. To the extent that CFIUS will draw additional resources to carry out responsibilities it 

may be charged with by CFIUS modernization proposals, and given the constrained 

budget environment, what is your strategy to keep greater demands from CFIUS from 

crowding out other areas of the Treasury budget? 

Response: Expansion of CFIUS authority will require additional resources. Should 

proposed CFIUS reform legislation be enacted, without a prioritization of key areas of 

concern for national security or a commensurate increase in resources, the Department 

would need to review all assigned programs and associated funding within its portfolio to 

determine what resource allocation adjustments were necessary. 

THE FOREIGN INVESTMENT RISK REVIEW MODERNIZATION ACT (FIRRMA) 

7· Section 3(a)(5)(C) ofFIRRMA requires CFIUS to develop definitions of covered 

transactions included·in the bill through regulation. 

a. Section 3(a)(5)(C)(iii) ofFIRRMA allows CFIUS to exclude certain joint 

ventures otherwise included in the defmition of"covered transaction" contained 

in the bill on the basis that other provisions of law are sufficient to address 

national security risks associated with the joint venture. 

i. IfFIRRMA is enacted, does Treasury intend to use this discretionary 

authority to deem other provisions oflaw sufficient? 

Response: Yes. CFIUS would use this discretionary authority to exclude 

certain "covered transactions" in the event that it determines that other 

provisions of law-such as export controls-are adequate to address any 

national security concerns. In this way, Treasury would seek to focus 

CFIUS resources on only those transactions for which the national security 

risk is not otherwise adequately addressed under other authorities. Treasury 

expects that other provisions of law would be adjusted to better enable 

review of certain transactions for national security risks under those 

authorities, as necessary. 

ii. If other provisions of law provide an equivalent level of protection to 

national security exist, does Treasury have a preference as to whether they 

be reviewed through CFIUS or other provisions? 

Response: Treasury believes that CFIUS is most effective as a last line of 

defense when no other provisions of law are adequate and appropriate to 

address a national security risk. As such, other provisions of law that are 

more efficient and tailored to address particular national security risks 
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should be used before CFIUS is employed. This is because CFIUS, as an 

interagency committee, is a time- and resource-intensive process that draws 

upon expertise across the Executive Branch to complete its national security 

reviews of covered transactions. This is consistent with CFIUS's mandate 

to only take action when no other provision of law is adequate and 

appropriate to address the national security risk. 

m. Are there reforms needed to other provisions of law to achieve a 

comprehensive solution to the risks the CFIUS process is intended to 

mitigate? 

Response: While CFIUS modernization is critical to ensuring our national 

security, it is not a silver bullet for addressing all national security concerns 

posed by an evolving foreign investment landscape. In order to achieve a 

comprehensive solution, it is important to consider whether the 

implementation or scope of other authorities can be enhanced or modified to 

ensure that national security is protected while maintaining an environment 

that also promotes investment and innovation in the United States. 

0