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50–355 2009

S. HRG. 110–929 

REFORMING KEY INTERNATIONAL FINANCIAL 

INSTITUTIONS FOR THE 21ST CENTURY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITY AND INTERNATIONAL TRADE AND 

FINANCE 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

REFORMING INTERNATIONAL FINANCIAL INSTITUTIONS 

THURSDAY, AUGUST 2, 2007 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


tjames on DSKG8SOYB1PROD with HEARING
(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

JULIE Y. CHON, International Economic Policy Adviser 

ANDREW OLMEM, Republican Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITY AND INTERNATIONAL TRADE AND FINANCE

EVAN BAYH, Indiana, Chairman 

MEL MARTINEZ, Florida, Ranking Member 

SHERROD BROWN, Ohio 

TIM JOHNSON, South Dakota 

ROBERT P. CASEY, Pennsylvania 

CHRISTOPHER J. DODD, Connecticut 

MICHAEL B. ENZI, Wyoming 

ELIZABETH DOLE, North Carolina 

ROBERT F. BENNETT, Utah 

JAYME ROTH, Staff Director 

JENNIFER C. GALLAGHER, Republican Staff Director 


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(III) 

C O N T E N T S 

THURSDAY, AUGUST 2, 2007 

Page 

Opening statement of Chairman Bayh .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Martinez .............................................................................................. 3 

Senator Casey ................................................................................................... 4 

WITNESSES 

Daniel Tarullo, Professor of Law, Georgetown University Law Center .............. 6 

Prepared statement .......................................................................................... 40 

Adam Lerrick, Ph.D., Professor of Economics, Carnegie Mellon University ...... 8 

Prepared statement .......................................................................................... 55 

Karin Lissakers, Director, Revenue Watch Institute ........................................... 11 

Prepared statement .......................................................................................... 61 

Diane Willkens, President and CEO, Development Finance International ........ 14 

Prepared statement .......................................................................................... 65 


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tjames on DSKG8SOYB1PROD with HEARING
(1) 

REFORMING KEY INTERNATIONAL FINANCIAL 

INSTITUTIONS FOR THE 21ST CENTURY 

THURSDAY, AUGUST 2, 2007 

U.S. SENATE, SUBCOMMITTEE ON SECURITY AND INTERNATIONAL TRADE

AND FINANCE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 2:36 p.m., in room SD–538, Dirksen Senate Office Building, Hon. Evan Bayh, (Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN EVAN BAYH 

Chairman BAYH. I am pleased to call to order the hearing of the 

Subcommittee to focus on reforming key international financial institutions for the 21st-century. 

I want to thank our chairman, the Banking Committee Chairman, Senator Dodd, for his assistance in arranging the hearing and 

for his support in looking into these important matters. 

I also want to recognize the leadership of Senators Biden and 

Menendez on the Foreign Relations Committee. We sort of have, in 

some ways, a hybrid hearing here today. We had this experience 

for the full Banking Committee yesterday, focusing on some aspects 

of global trade where there was joint jurisdiction between the Finance Committee and the Banking Committee. Today we have the 

Banking Committee and the Foreign Relations Committee. 

So I am fully respectful of their leadership, of their jurisdictional 

rights, and look forward to cooperating and working with them on 

these important issues and want to thank them also for their focus 

on the subject of today’s hearing. 

We have Senator Martinez, my colleague and friend, the ranking 

minority member with us today. Mel, I want to thank you for your 

leadership. 

Also Senator Casey, thank you, Bob. Good working with you. And 

I appreciated your forbearance during my testimony the other day 

before the Foreign Relations Committee. You were very kind to 

chair that important hearing. I hope it went well after I left. 

What I would like to do is just make some brief comments of my 

own, then Mel, look to you and Bob to you for your comments. I 

will then introduce our panelists and call on you in order. 

I think our ground rules today, I will be generous with the time. 

If we could, for the oral comments, try to shoot for 5 minutes give 

or take. The full written statements you have been kind enough to 

submit will be submitted in their entirety. If you have to go over 


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a few minutes, that is OK. But please do not be Senatorial in the 

length of your remarks. We will try and be a little briefer than that 

here today. And then we will go to questions and alternate among 

members of the Committee who are here, try to keep our questions 

to 5 minutes. If there is need for a second round, we will do that. 

Let me give my own brief opening remarks, Mel, and then I will 

turn to you. 

Chairman BAYH. Almost exactly 63 years ago, in fact it was July 

1944, some of the worlds most celebrated economists gathered in 

Bretton Woods, New Hampshire to design a system of trade, monetary policy, and development that would prevent the catastrophic 

events that led to the Great Depression and World War II from recurring. 

Then Secretary of State Cordell Hull, British economist John 

Maynard Keynes, and other luminaries articulated policies on 

trade, monetary policy, and poverty alleviation and created an 

international architecture to promote those policies. 

Today we gather with some notable experts of our own to ask 

whether these lofty objectives can be achieved or are being 

achieved and whether the structure established to promote them is 

working well or whether fundamental reform is in order to achieve 

these objectives in the context of the 21st-century. 

Since Rodrigo de Rato will be leaving his post as Director of the 

International Monetary Fund, this is an opportune time to take a 

close look at the institution, its effectiveness, and what reforms 

may be needed. Yesterday the Banking Committee took an initial 

step toward dealing with the problem of exchange rate manipulation domestically. Today we have an opportunity to discuss what 

relevant international financial institutions can be doing to address 

this issue. In fact, I think you can argue that an absence of multinational focus on this issue has left nations such as our own to deal 

with it unilaterally. And that is what we began to do in yesterday’s 

Banking Committee, along with our brothers and sisters in the Finance Committee. 

In recent years, the IMF was able to help reestablish financial 

stability after crises in Asia and elsewhere. Today the IMF is 

struggling to define its purpose. The American public is more concerned about exchange rate manipulation that at any point in our 

history. And yet the IMF seems completely unable to address this 

problem. 

China’s increasing undervalued currency is a glaring reminder 

that the IMF is unable to manage international exchange rates. Or 

if it is able, has so far been unwilling. 

The United States faces a dilemma on another issue of whether 

to grant increased voting rights in the IMF for countries that apparently are violating one of its primary tenets. 

With regard to the World Bank, like the IMF, 2007 marks a shift 

in leadership. In June the Bank welcomed former U.S. Trade representative Robert Zoellick as its 11th president. The motto of the 

Bank is ‘‘Working for a world free of poverty’’ and all nations 

should support that important objective. 

Unfortunately for the IMF, the World Bank suffers from its own 

set of problems. Many believe that the Bank has become too willing 


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to accept corruption as just another cost of doing business in certain countries and has internal staff that resists efforts to change. 

The question before us is whether the Bank, as currently constituted, is an effective instrument for achieving the very noteworthy objective of poverty alleviation. Many believe the Bank has 

become too willing to—the vast majority of the Bank, excuse me. 

The vast majority of the Bank’s IBRD lending is in countries that 

no longer need the Bank for development finance. What should the 

role of the public and private sectors be in such circumstances? 

The Bank’s consideration of using country systems procurement 

directly conflicts with the direct wishes of the U.S. Senate, as expressed in previous votes. What should be done about that? 

Accountability, apparently, has all too often broken down, whether for bad lending decisions or for evaluating performance based on 

results rather than just the volume of loans which have been approved. Success all too often appears to be defined by the volume 

of activity rather than the amount of poverty actually alleviated. 

These are some of the important questions we have gathered to 

explore today. We are fortunate to have a distinguished group of 

panelists, as I mentioned. But before we turn to them, I would first 

like to give my colleagues an opportunity for their perspective. 

Senator Martinez, we will begin with you. 

STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Mr. Chairman, thank you very much and appreciate very much you calling this hearing. It is very timely, particularly doing so right before our August recess. I thank the panel 

for taking time from your busy schedules to be with us on a hot 

August afternoon. 

The International Monetary Fund and the World Bank are very 

important components of our financial system in the world and I 

think it is telling that the last time there was a hearing on these 

institutions was in 2004. So it is more than time that we address 

it and look to you for your guidance and your comments. 

It is a very dynamic world in politics and economics that we live 

in, and so therefore it is important that we take a temperature 

check, that we see where things are relevant to today, and the relevance of these institutions going forward. 

So I welcome each of you here today and thank you for your time 

and look forward to hearing your expertise in this very important 

topic. 

I am very interested in hearing your views about the changing 

role of the IMF and what impact the current and projected economic environment might have on its relevancy. I am also concerned that the IMF and the World Bank continue to decline as relevant institutions to the global financial systems and whether they 

might, if that continues, be replaced by more regionalism. That 

would have, I think, a negative impact as we look to certain regions of the world. One in which I am very interested in is Latin 

America. I know that there are potential there for rogue states or, 

frankly, things that I do not think would be in the best interest not 

only of our country but of the world financial system. 

I am also very interested in your testimony as it relates to corruption within the institutions. Misallocation of resources by offiVerDate Nov 24 2008 04:55 Dec 18, 2009 Jkt 050355 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A355.XXX A355

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cials who do not have the public interest at heart is a big concern 

to me. So I would like to know to what extent you believe corruption is plaguing the developing world, as well as your thoughts on 

how effective these institutions are at dealing with that very specific problem. 

The IMF and World Bank are critically important to the international financial framework and since their inceptions their goals 

have been to increase economic and financial stability and to raise 

economic growth and reduce poverty. While the goals are still relevant, the institutions need to be equal to the challenge to meet 

the changing world in which we live and to address the goals that 

have been set. 

So I look forward to hearing your comments and to our discussion as the afternoon wears on. 

Mr. Chairman, I thank you again for your courtesy and for calling this hearing at a very timely moment. 

Thank you. 

Chairman BAYH. Thank you, Senator Martinez. 

Senator Casey. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Chairman Bayh, thank you very much for calling 

this hearing and Ranking Member Martinez as well. Thank you for 

your leadership on this. 

And to our panelists, I have to say I will be somewhat parochial 

here and mention that Dr. Lerrick has some roots in Pennsylvania 

at Carnegie Mellon and we are grateful that he is here. I hate to 

do that but when you come from a State like Pennsylvania it is important to mention people that are making use of the great institution that Carnegie Mellon is. Thank you very much. 

And all of the panelists, because your testimony today and the 

information you provide through question and answer gives us a 

great insight into these issues, very important issues for the world, 

for our country in terms of governance, in terms of reform. One of 

the problems for me today as I will not be able to stay very long. 

I have to preside over the Senate. There was an emergency change 

when one Senator had to change their time. So one of the responsibilities that these two distinguished senators to my left do not 

have as much of because they have been here longer is to preside 

over the Senate. So I have to show up when I am called. 

Senator MARTINEZ. I also have another affliction, that I happen 

to be in the minority. 

[Laughter.] 

Senator CASEY. We are going to be trading hours, maybe. 

So I may not be able to ask any questions today but I did want 

to thank you for your testimony and appreciate what you are trying 

to do in providing that testimony. 

I think a lot of the issues that will be discussed today and beyond today, either in your presentations or submitted for the 

record, are critically important. Just noting a few of them, the IMF 

enforcement authority and its ability to enforce its authority with 

regard to member responsibilities, a proposal that has been floated 

to change the distribution quotas in order to give developing countries and emerging market countries more influence in the organiVerDate Nov 24 2008 04:55 Dec 18, 2009 Jkt 050355 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HR\OC\A355.XXX A355

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zation. We would like to hear about that, obviously. But a whole 

series of important issues that bring to bear all of the experience 

that you bring to this hearing today in your testimony. So we are 

grateful to that. 

Contrary, I guess, to popular belief these hearings provide us 

with a lot of important information. The expertise and the knowledge and experience you bring here gives us the kind of foundation 

of knowledge that we cannot just get among ourselves. We all have 

great staffs and this, I think, amplifies their understanding of some 

of these issues. So we are grateful to that and we are grateful for 

the service that you are providing today and we look forward to 

your testimony. 

Thank you very much. 

Chairman BAYH. Thank you, Senator Casey. We fully understand 

when you need to leave to preside. 

Senator Martinez, one of the few benefits of being in the minority 

is you do not have the obligation of presiding on the floor. So that 

is finding a silver lining, I understand, but an important one nonetheless. 

I want to thank all of you for your time today. I know you are 

very busy and could be doing other things. At least a couple of you 

have appeared before the Subcommittee before on other topics so 

I am grateful to have you back once again. 

I am going to make very brief introductions, so if I leave out a 

lot of the good things that I have here about each and every one 

of you, I am just doing that in the interest of time and hope you 

will understand. 

First, with regard to Dan Tarullo, thank you for coming back. 

Dan Tarullo is a Professor of Law at Georgetown University where 

he teaches in the areas of international economic regulation, banking, and international law. He spent a year as a Senior Fellow at 

the Council on Foreign Relations and is currently a Nonresident 

Senior Fellow at the Center for American Progress. He served in 

a variety of other important capacities, is widely published. Dan, 

it is good to have you back once again. 

I will just complete the introductions and then we will just start 

with you. 

Adam Lerrick, thank you for coming back once again, you have 

been before us previously. I think Argentina was the subject at 

that time. Some of these things are recurring. Perhaps you will be 

on that subject again one day. 

Adam Lerrick is the Friends of Allan H. Meltzer Professor of Economics and Director of the Gailliot—did I get that correct? Gailliot 

Center for Public Policy at Carnegie Mellon University. He is currently a visiting scholar at the American Enterprise Institute. 

While at AEI, he is studying international capital markets, financial crises, sovereign debt researching, and economic development 

including the impact of aid and the role of multilateral institutions. 

Dr. Lerrick, thank you for being with us once again today. 

Next we are pleased to have Karin Lissakers. With a last name 

like mine, I am always sensitive to try and get the pronunciations 

correct. I have been called a variety of things over the years, but 

rarely Bayh until people have met me and heard my pronunciation 

for the first time. 


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Karin is Director of the Revenue Watch Institute, a nonprofit organization that promotes transparent and accountable management of oil, gas, and mining revenues and helps countries realize 

the full economic benefit of their natural resource wealth. She has 

held senior posts in Government and the academic world. Ms. 

Lissakers was U.S. Executive Director of the Board of the International Monetary Fund from 1993 to 2001, representing the 

Fund’s largest shareholder during a period of turmoil, the international markets, and a U.S.-led campaign to redesign the international financial architecture and reform the IMF, including opening its policies and practices to public scrutiny. 

Karin, thank you. And you should know, I spoke with Larry 

Summers earlier today who had many, many positive things to say 

about both you and Dan and his work with both of you. So thank 

you for your presence here today. 

Next we have Diane Willkens. Ms. Willkens is President and 

CEO of Development Finance International, which she founded in 

1992. DFI is a member of the National Foreign Trade Council and 

Ms. Willkens’ testimony will reflect the Council’s perspective on 

this subject. She leads a 20-person team providing a broad range 

of international development Bank project and export finance consulting services to U.S. and non-U.S. firms. With nearly two decades of experience working within the dynamic international development setting, DFI is recognized for its practical understanding 

and long-term relationships with a full array of stakeholders. 

Diane, thank you for your time today, as well. 

Mr. Tarullo, we are pleased to start with you. 

STATEMENT OF DANIEL TARULLO, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. TARULLO. Thank you, Mr. Chairman, Senator Martinez, Senator Casey. 

As your introductory remarks have suggested, the Bretton Woods 

Institutions are showing their age, this for both external and internal reasons. Externally, the environment in which they operate has 

changed dramatically not just since 1944 when they were founded 

but really in the last 10 years. The emergence of middle income 

countries with large current account surpluses, the related phenomenon of the shift in global economic weight more toward Asia, 

the huge almost unanticipated increases in flows of portfolio capital 

the world, along with the astonishing proliferation of new financial 

instruments have all changed fundamentally the world in which 

these two institutions function. 

Internally, they have been somewhat maladaptive to these external changes. It is true they have both adjusted to new conditions 

before. This time around though they both seem to be having more 

difficulties. 

Perhaps this is because of the tendency of most organizations 

over time to evolve into bureaucracies. Perhaps it has something to 

do with the inability of the U.S. to provide as much leadership as 

it has in the past. It is much easier to change an international institution in a multilateral world with a nation willing and able to 

provide leadership than it is to change an institution in a 

multipolar world. 


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My second point is that despite these difficulties, the successful 

adaptation of both of these institutions is very much in the interest 

of the United States. This again for two separate sets of reasons. 

First, the missions of these institutions are, in and of themselves, 

as important as they have ever been. For the Bank, providing the 

international public good of development through assisting developing countries in providing public goods within their own economies continues to be central to the foreign policy interests of the 

United States. 

For the Fund, promoting international financial stability may be 

a very different kind of task than it was 10, 15 or 20 years ago, 

but it is just as important for providing the backdrop for a well 

functioning real economy here and throughout the world. 

But there is a second set of reasons, alluded to by Senator Martinez, as to why the successful reform of these now troubled institutions is very important to us. The fate of the Bretton Woods Institutions is, in many respects, a bellwether for the future of the multilateral economic system that the United States was so instrumental in founding and has been so instrumental in maintaining 

over the last 63 years. The alternative, as the Senator suggested, 

is in all likelihood not a new set of multilateral institutions, nor a 

vacuum, but instead the turn toward regionalism in much of the 

world but particularly in the fast-growing countries of Asia. 

Now it is true that the predictions of regionalism that have been 

made off and on for the last 20 years have proven at best premature, and at worst just wrong. But I think there is no doubt but 

that the palpable weakening of the multilateral system will lead to 

the growth of regionalism in all its manifestations. 

This is quite probably bad for economic world welfare and it is 

certainly an adverse development for U.S. influence. U.S. influence 

over the rules and norms by which the international economy is 

structured and, I would say more generally, U.S. influence in all 

foreign affairs capacities. 

So my third point: given the difficulties these institutions face 

and given the importance of their success what kind of vigorous but 

constructive criticism can we on this panel, and more importantly 

you in the Senate, offer? Well, the core problems of the institutions 

actually vary, I think, in a fundamental way. The two have been 

joined at the hip since their creation at Bretton Woods. They stare 

across 19th Street at one another even today. But they actually are 

quite differently situated in their missions. And thus, the right reform agenda area varies, as well. 

At the Bank the problems are largely managerial. To be sure, 

there are lots of different views of optimal development strategies. 

But the very fact that the Bank has 500 different lending decisions 

every year means they can pursue simultaneously different strategies. In these circumstances though they have got to change the 

fundamental nature of their operations. They need to assure the 

maximum effectiveness of Bank assistance in promoting development. And that is why my suggestions for change in my written 

testimony focus on things like outcome oriented lending, systematic 

program evaluation, the kinds of mechanisms which would shift 

their mode of operation. 


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The Fund, in my judgment, faces a much more serious problem. 

There is a lack of consensus as to what the role or roles of that 

institution should be in the world today, a lack of consensus among 

the Fund’s members. 

It is true that the Fund’s leadership has not been as strong as 

it should be. It is absolutely true that its performance in things 

like surveillance has been sometimes distressingly weak. But at 

root the absence of agreement among nations as to what the Fund 

should be doing is going to impede even the best management at 

the Fund from adapting that institution to today’s international financial challenges. 

And let me close briefly by suggesting that those are, first and 

foremost, once again becoming the guardian of exchange rate stability in the world. This is a task which the Fund performed for 

its first 25 years under the par value system. It has not been doing 

it consistently in the last 30 years. It needs to do it again. As Senator Bayh suggested, it has to this point failed in doing so. 

Second, it needs to address the new sources of potential international financial disruption. The meltdown—the next financial crisis will probably not be based in a fast-growing emerging market 

because they are sitting on huge reserves. We do not know where 

it will come from but the events of the last couple of weeks suggest 

to us that, for example, a meltdown of international derivatives 

markets is not so far fetched. 

Also, the growth of sovereign wealth funds poses a new kind of 

challenge. 

The management of the Fund has laid out a modest reform agenda. It is moving in the right direction. It is not particularly ambitious. I have some skepticism as to how well even that agenda will 

be moved forward. So I think we all, in and out of Government, in 

and out of the executive branch, need to focus attention on how we 

will produce the conditions that will lead the Fund to a new set of 

missions. 

Thank you so much. 

Chairman BAYH. Thank you, Mr. Tarullo. 

We look forward to following up with some questions on your 

very informative testimony. 

Dr. Lerrick. 

STATEMENT OF ADAM LERRICK, PROFESSOR OF ECONOMICS, 

CARNEGIE MELLON UNIVERSITY 

Mr. LERRICK. Thank you, Mr. Chairman. It is always a pleasure 

to appear before this Subcommittee. The questions posed are always insightful and demanding. 

I will concentrate my oral remarks on the World Bank though I 

will be happy to discuss the Fund, on which I have numerous opinions as well. 

The question of the World Bank which Professor Tarullo talked 

about is what should the World Bank do in a new world? While 

China is buying a $3 billion stake in private equity giant Blackstone with the expectation of a 25 percent annual return, the 

World Bank is busily lending to China at a 5 percent interest rate 

which does not even cover the Bank’s own cost of funds. 


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While India’s multinationals, many of them state-owned, are acquiring industrialized nation assets and invest in the developing 

world to fuel an economy exploding at 10 percent per annum, the 

Bank has just doubled its lending to India to almost $4 billion, 

most at a zero interest rate, which constitute a gift of $1.5 billion 

from industrialized nation taxpayers. The Bank should not be subsidizing projects the Indian government does not think worth financing at market rates. 

While the world reached out at the millennium to forgive the 

debt of 18 of the globe’s most impoverished economies, the Bank 

piled on another $10 billion of net new loans, raising their Bank 

indebtedness by almost 50 percent. The Bank should not continue 

to lend in the same old way with the expectations that its losses 

will always be made good by rich countries. 

As globalization transforms the world economy, the Bank is one 

of the losers. Its historic comparative advantage is gone and its role 

inevitably diminished. There are powerful new competitors in the 

market. Private capital now channels 300 times the funds offered 

by the Bank to the emerging world and will finance any project the 

Bank would consider. Nations moving up the economic ladder— 

China, Brazil, India, and Russia—are funding and building the infrastructure and industry for even the poorest countries in exchange for access to raw materials and export markets. China 

alone will send $25 billion to Africa over the next 3 years, which 

is 50 percent more than the funds the Bank will send to that continent. 

While Bank presidents come and go, a bureaucracy hostile to 

change and clever at manipulating an unwieldy multinational 

board is flouting the Bank’s founding articles, bending the rules, 

distorting the facts, concealing losses, and lowering standards. The 

Bank is desperate to maintain the illusion of relevance to emerging 

countries that no longer need its money and no longer want its advice. 

The Bank was established 60 years ago in what is now financial 

prehistory. Its core mission was to solve two shortcomings in the 

global economy: a shortage of money to finance development and a 

shortage of knowledge in developing nations. The Bank would borrow from the world’s financial centers and couple loans with advice 

to speed the growth of poor countries. In the last 20 years the 

world has changed dramatically but the World Bank has refused 

to change with it. 

Today the private sector dwarfs official funding and emerging nation leaders are just as smart, just as skilled, and know their countries infinitely better than anyone at the Bank. Yet 80 percent of 

Bank loans flow to just 12 middle income governments led by Turkey, Brazil, Mexico, and China. If the Bank stopped lending tomorrow to its major borrowers, no one would notice. It provides only 

0.3 percent of the funds sent by the private sector. 

Loans to middle-income countries are clearly good for the Bank’s 

balance sheet and beef up its image of influence. But Bank reasons 

for continuing to lend to the prosperous are specious and refuted 

by the facts. The Bank does not lend, as it claims, where the poor 

live. More than half of Bank loans since 2000 flow to six upper 

middle-income nations where only 10 percent of the developing 


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world lives. In the creditworthy countries the Bank courts, the 

hardhearted private sector is ready and willing to finance pro-poor 

projects on the same guarantee the Bank demands. If Brazil’s full 

faith and credit is on the line, private capital does not care if the 

proceeds are used to vaccinate Indians in the Amazon or to build 

nuclear warheads. 

Far from generating a surplus for the poorest countries, lending 

to middle income nations is draining resources. To compete with 

the market the Bank has waived fees and interest spreads, reducing its operating margin by 50 percent. All in the Bank does not 

cover its administrative costs and now loses $500 million per 

annum on its emerging economy loans. The Bank’s reported $1.5 

billion net income comes from the $2 billion return on its $37 billion of zero cost capital. 

Every 3 years the industrialized world is required to write a big 

check to the World Bank to fund the International Development 

Association, the arm of the Bank that focuses on 81 of the globe’s 

most underprivileged countries. Zero interest rates make these 

loans a 70 percent gift. The price tag for the 2008 cycle will be $32 

billion, of which $10 billion is the first installment on a $46 billion 

debt relief promise to reimburse the Bank for past bad loans. The 

total U.S. share will be $4 billion to $5 billion. 

A dangerous precedent has been set. Whenever rich nation taxpayers fund the Bank, there is an open-ended obligation to cover 

future Bank mistakes. 

At the Bank the need to know is an insider’s prerogative that 

does not extend to world taxpayers, those in the industrialized 

world that provide the funds and those in the developing world 

that assume the debt. What do we know about Bank lending to the 

poor? And what doesn’t the Bank want us to know? 

We know that after 60 years and $600 billion there is little to 

show for Bank efforts. Bank aid was not behind the impressive economic gains in China, India and Indonesia where all the progress 

in poverty reduction has been concentrated. We know that for two 

decades the Bank continued to pour money into countries clearly 

unable to repay and concealed the truth by rolling over worthless 

loans until the G–7 governments were forced to assume the debts 

and make the Bank whole. We know that the Bank continues to 

tolerate corruption, which in Africa alone has diverted between 

$100 billion and $500 billion into offshore bank accounts. We know 

the lack of effectiveness of Bank projects is startling. By the Bank’s 

own numbers 59 percent of investment programs worldwide and 75 

percent in Africa failed to achieve satisfactory long-term results 

over the 1990–99 decade. 

There is a common thread. The overwhelming priority has been 

to ship off funds even when there is no deserving destination. Before handing over the 15th IDA replenishment, we need to know 

more and should not be deterred by claims of confidentiality or the 

cost and complexity of documentation. The Bank’s internal evaluation group is captive and its findings suspect. Calls for an external 

performance audit have been stonewalled. We want the answers to 

very simple questions that the Bank is afraid to ask. How many 

babies were vaccinated? How many miles of roads are functional? 


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How many cubic meters of wastewater were treated? How many 

children can read? 

Transparency and accountability are close at hand on the Internet. For every one of the 280 projects the Bank approves each year, 

there already exists detailed reports in electronic form ready to be 

delivered to a public website. Disclosure would not be a burden. 

Ghanaian parents will monitor World Bank funding for their children’s schools. Zambian farmers will look for roads ready to carry 

their produce to market. Africa fighting malaria and other NGO’s 

will see if the mosquito nets are hanging in place. Opposition politicians and political watchdogs will know if funds and equipment 

have been spirited away. A whole universe of activist shareholders 

will keep count every step of the way. The world will become the 

independent evaluator of the World Bank and reach collective judgment. 

Thank you. 

Chairman BAYH. Thank you, Dr. Lerrick. 

Ms. Lissakers. 

STATEMENT OF KARIN LISSAKERS, DIRECTOR, REVENUE 

WATCH INSTITUTE 

Ms. LISSAKERS. Thank you very much. 

I think it is very useful for committees of the Congress to pose 

the question periodically are these international financial institutions relevant? And are they effective in executing their mission? 

As I note in my testimony, there were certainly a number of reform measures in the 1990s. But the demands of the world changed 

and the institutions need to change with them. 

I also note that there were some big institutional issues that 

were never resolved in the 1990s and should have been. When you 

talk about effectiveness of an institution one obvious key player is 

the leader of the institution. And I have to say that the process by 

which we choose the heads of the Bank and the Fund are both an 

embarrassing anachronism and undermine both the credibility and 

the effectiveness of the institutions. It is simply no longer acceptable that, to put it crudely, a few rich white guys who should decide in a closed room who heads an institution with more than 180 

shareholder governments and then simply presents the person, 

take it or leave it, which is what has been the case. It may have 

been defensible when they were first founded, but it is no longer 

defensible. 

I was very disappointed that the U.S. missed the chance to 

change the process when the opening arose most recently in the 

World Bank. 

The Europeans now have a chance to change the process by actually opening up the selection. I am afraid they, too, are about to 

miss that opportunity. And I hope that Congress will speak forcefully on the issue and say that the two institutions and their governments should decide now, not wait until the next opening, that 

there will in the future be a merit-based and open and proper selection process so that whoever ends up as the head of the institution has the wide support and confidence of the members. I think 

there has been weak leadership and it has cost both institutions in 

recent years. 


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The second and related reform that is incomplete that has been 

talked about a lot but still not resolved is the necessary redistribution of quotas, voting rights and voice representation in the boards 

of the two institutions. There is now a serious misalignment between not just the influence of emerging market countries in these 

institutions but also their share of the responsibility and their 

share of the financial obligations of these institutions that go with 

voice and influence and vote. 

There is a process under way to redistribute shares. I am just 

concerned that what is being talked about so far that came out last 

year’s annual meeting will not really go far enough. I again think 

that Congress can be very helpful in keeping the pressure on and 

saying if you are going to do this and go through this complex exercise, you should do it right and really solve the problem once and 

for all. And solving it does not mean taking voting shares out of 

the U.S. hide. If anything we are underweight in the current voting 

formula. And I think the members all accept that. 

I would note also, with regard to your concern or Congress’s recent concern on China’s exchange rate posture that one of the factors that is weighed in deciding how big a country’s quota is its 

openness. In the past it has only looked at the trade account. I 

think Congress should suggest that openness should also the capital account, which is directly relevant to the exchange rate, pegging exchange rates and so on. 

The third internal reform is to give the developing countries a 

bigger voice in the institution. The board discussions, sort of like 

Congress, may seem very arcane and tedious at times but it actually is an—the boards are a very important forum, not just because 

they have the ultimate decisionmaking power but because that is 

also the forum where the peer review and the discussion of policies 

really takes place. 

It is so clear that the developing countries are underrepresented 

in terms of just presence in the executive boards. IMF has 24 members. A country like South Africa gets to sit in the executive director’s chair once every couple of decades because it is part of a 19– 

country constituency where each country has to take a turn and sit 

for 2 years. It is actually more than a couple decades. 

In the meantime, Europe has eight chairs in this 24-member 

board and at this stage they do not need eight chairs to repeat the 

common EU policy that they have adopted. But that is what is happening. And it really is up to the Europeans to get off the chairs 

and make room for more developing country executive directors. 

I was sorry to see that the Singapore reform agenda that came 

out of last year’s annual meeting did not include this question. Apparently the European members remain dug in and I think the 

U.S. should be much tougher on that score. It actually has, in its 

power, the ability to force that issue to be resolved, which I would 

be happy to speak to. 

In terms of relevance and larger institutional effectiveness questions, it is true obviously that the IMF is much less important now 

as a source of finance. I think we cannot necessarily count on that 

always being the case because we know that just when we think 

the world economy is cruising along, something is just about to 


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happen and we may be due for one of those periodic decadal eruptions. 

But on a continuing basis it really is a talk shop. It is true that 

members have lost, important members have lost interest in the 

IMF, the Asians most notably. They have created their own defense 

chest in huge currency reserves and their own fora for discussing 

policies. I think that is unfortunate. We need multilateral, truly 

multilateral, institutions to discuss and resolve important global 

issues. And the Fund and the Bank are really what we have that 

are truly universal and we should do everything we can to preserve 

them. That, again, goes to the voice and vote move. 

In terms of have we gotten enough poverty reduction bang for 

the development buck, I think it is pretty obvious the answer is no. 

And I think finally development economists agree that money alone 

does not solve poverty and conflict problems. In the end it is institution building, governance, and accountability that eliminate poverty and conflict. In the end, change in the developing countries, 

as elsewhere, has to come from the inside. 

And that means that the institutions like the World Bank, that 

are trying to address these issues, really have to put their efforts 

not into financing or general lending, development lending, but put 

much more effort and much more targeted effort into institution 

building, encouraging effective laws, proper fiscal financial regimes, 

creating a healthy business environment in these countries and 

fighting corruption, of course. 

We were very pleased to see the effort that Paul Wolfowitz put 

into the anticorruption program in the Bank’s external activities. 

We certainly hope that Bob Zoellick will build on that, not diminished the focus. 

I think both the Bank and the Fund have recognized the need 

for a different approach to development and structural reform. I 

think they have been quite effective in some areas. The IMF has 

really had a huge success in instilling good central banking institutions and policies. You can see the result in lower inflation around 

the world. But on other issues that they have not performed as 

well. 

Governance accountability and anticorruption are the focus of 

much of our work. These are inherently political and therefore it 

is very hard for the Bank and the Fund to do much. But they can 

insist when they invest, for example as the IFC does, in very large 

extractive industries projects, that all the payment flows are fully 

transparent and accounted for. 

Extractive revenues are one of the biggest sources of graft and 

resource looting in the very poorest countries and the Bank and the 

Fund can play—especially the Bank—a direct role in countering 

that by the way they manage. So can the U.S. Congress, the U.S. 

Government, in its policies vis-a-vis OPIC conditions for funding 

and guarantees. And we hope to see a law passed by Congress this 

year that would require extractive companies to publish all of their 

payments country by country to foreign governments as a direct 

counter to the kind of massive corruption that is underway. 

Thank you, Mr. Chairman. 


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Chairman BAYH. Thank you, Ms. Lissakers. I look forward to 

asking some questions and getting some additional perspective 

from you. 

Ms. Willkens. 

STATEMENT OF DIANE WILLKENS, PRESIDENT AND CEO, 

DEVELOPMENT FINANCE INTERNATIONAL 

Ms. WILLKENS. Thank you, sir. 

Mr. Chairman and Senator Martinez, thank you for the opportunity to testify today to share a private sector perspective on the 

World Bank. 

I am testifying on behalf of my company, Development Finance 

International, as well as the National Foreign Trade Council, a 

business organization of 300 American companies whose mission is 

to advance open and rules-based trade. I serve as the Chair of an 

Ad Hoc NFTC working group on the World Bank. 

It has been my privilege over the years to work with some of the 

world’s leading private sector firms—such as Hewlett-Packard, GE, 

BASF, and Philips, to name a few—in their pursuit of sound business policies with the Bank and its sister institutions and have 

been involved in sectors as diverse as health information and communications technology, education, agriculture, environment and 

transportation. 

I would like to begin by emphasizing the important role of the 

World Bank and the regional development banks since their creation after the second world war. As we have heard, as part of the 

Bretton Woods Institutions, the World Bank continues to serve a 

vital multilateral institution and advancing sound and sustainable 

economic development and alleviating poverty in the developing 

world. 

We welcome President Zoellick in his new role and encourage his 

furthering the Bank’s collaboration with the private sector. With 

his depth of international experience, record of accomplishment in 

several prominent high-level trade and foreign policy positions in 

the U.S. and commitment to helping the developing world grow and 

prosper, there is no one better qualified to lead the Bank today. 

My testimony will touch on several areas where the Bank could 

and should improve its policies and interaction with the private 

sector in meeting its overall mission. With the shift in the World 

Bank’s relative importance, given the abundance of capital liquidity 

around the globe, it is in the Bank’s own interest to find flexible 

new ways of working with others, including the private sector. 

Many of my comments have direct relevance, as well, to the regional development banks since they follow closely the lead of the 

World Bank. 

What I would like to do is highlight five overall recommendations 

that are elaborated in the written testimony. Number one, we believe the World Bank should better recognize that the private sector is both a key stakeholder and enabler of sound economic development and should incorporate the private sector into its planning 

and its operations. U.S. companies which operate and invest in developing countries bring numerous best practices through their 

presence and contribute meaningfully to economic growth and development. The private sector should be viewed more as a partner 


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rather than an afterthought in the development of major new policies. 

Number two, the Bank should push forward with critical initiatives on governance and anticorruption. The Bank should strengthen its role in promoting accountable and transparent practices, especially in procurement, an area that is most susceptible to corruption on both the demand and the supply side. 

The private sector from the U.S. as well as several European 

countries have been very concerned about recent proposals by the 

Bank to abandon World Bank international best practices in procurement and effectively lower the Bank’s standards on international competitive bidding. Our concerns relate to fundamental 

issues that define the business environment and investment climate in these developing countries. 

The Bank’s recent proposal involves adopting a more hands-off 

approach in favor of the procurement systems of its country clients. 

However, as the OECD said in its Paris declaration of 2005, where 

corruption exists it inhibits donors from relying on partner country 

systems. 

And again in 2007, in the OECD’s paper on bribery in public procurement it was said a multiplicity of rules will have a negative effect on transparency and lead to uncertainties and high transaction 

costs both for the procurement agencies and potential suppliers. 

As designed, the Bank’s recent proposals go against its own important overall initiatives on anticorruption and improved governance and they should not be implemented. 

Number three, there continues to be a strong case for better coherence between the WTO and the World Bank, particularly in the 

area of trade capacity building and mainstreaming trade. This will 

be even more critical if the Doha Round concludes successfully. For 

example, an agreement on eliminating needless red tape at the border through a WTO agreement on trade facilitation will require 

substantial hands-on capacity building and other assistance which 

the World Bank is well equipped to do. 

Number four, we recommend that the World Bank Group find 

creative new ways to engage other governmental organizations 

such as the export credit agencies. Further, we suggest that the political risk insurance provided by the World Bank Group’s Multilateral Investment Guarantee Agency, known as MIGA, be available 

for transactions beyond investments in order to support sales that 

do not fit the export credit agency model. Namely we encourage 

eliminating the equity requirement for debt transactions and allowing support for subsovereign and/or parastatal transactions. 

MIGA’s continued improvements to process transparency and responsiveness will be essential to its future and sustainable growth 

of its mission. 

And finally Number five, the U.S. Government should enhance 

its efforts to ensure the U.S. companies have an equal and a fair 

opportunity to compete for World Bank funded contracts. Within 

the multilateral development banks we would like to see representation of the U.S. private sector interest that is similar to the representation afforded European and Asian private sector, namely 

long tenured, highly experienced procurement experts within each 


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of the multilateral institutions working on behalf of the U.S. private sector. 

In closing, the challenges facing the World Bank are many as the 

institution defines its changing role. The private sector is committed to working with the Bank in constructive approaches to the 

development challenges and the opportunities before us. 

Thank you for the opportunity to appear today and I welcome 

your questions and, with your permission, I would also like to supplement the written testimony with copies of correspondence between the private sector and the Bank concerning procurement. 

Chairman BAYH. Without objection, we would be happy to entertain that supplementary testimony. 

Thank you. It is always good, Ms. Willkens, to get a perspective 

from the private sector. Pragmatic reality-based observations are 

always helpful, even in Washington. 

We will now turn to questions. Mr. Tarullo, I will begin with you. 

I will try and keep mine to five minutes. Actually, I guess they 

have given me seven, Mel, so then I will turn to you. And if we 

need a second round, we will do that. 

Mr. Tarullo, you mentioned that the challenge facing the Bank 

is primarily managerial. The challenge facing the Fund is one of 

defining its mission in the 21st century. And you suggested that it 

could beef up its role as a guardian of orderly exchange rates 

among the countries of the world. 

Do you have any suggestions about how the Fund can do that besides mere surveillance and commentary? Is there anything practical that can be done? 

Mr. TARULLO. Well, I would not underestimate the importance of 

good surveillance as a first step, Senator. I think we need to distinguish that kind of surveillance that has been done to date and 

what I and others would regard as more rigorous surveillance. 

Chairman BAYH. Define for us what more rigorous surveillance 

would entail. And then the reason I wanted to follow up on this is, 

as you know, several of us have been engaged in our own surveillance of exchange rate policies of other countries. To date mere 

commentary does not seem to have had much of an impact. 

Mr. TARULLO. One of the big problems right now is that when 

we talk about redefining the Fund’s mission, everybody understands that to mean China currency. And when one is talking 

about institutional change but everybody thinks it is really about 

a particular country at a particular moment positions, to put it 

mildly, tend to get dug in because it is about a specific issue rather 

than about the larger issue. That is a reality and we need to face 

that reality. 

Chairman BAYH. How can we back that up and not have the 

Fund appear to have become an instrument of U.S. policy but instead be an objective arbiter of sound global economic policy? 

Mr. TARULLO. That, I think, is exactly the goal. In fact, from my 

perspective as a U.S. citizen I do not think they have been doing 

a particularly good job in the last few years in pursuit of our interests, much less in pursuit of global interests. It comes back to are 

they going to be honest and forthright in their surveillance? 

The IMF’s own—— 


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Chairman BAYH. If they are, do you think that will have an impact? 

Mr. TARULLO. I think it is a first step, and I will say why. The 

IMF’s own internal evaluation operation concluded that their performance in surveillance, including surveillance of China, is just 

not very good. They soft-pedal things. Their economic prognostication is not good. My understanding is—this is not on the record, 

but my understanding is that they declined U.S. request for special 

consultations on China’s practices. 

That suggests that the Fund, rather than trying to push to the 

limit its role under its current mandate—— 

Chairman BAYH. Why the reticence? 

Mr. TARULLO. Why? I cannot explain that, to tell you the truth, 

except that they have become a bit of a political—they have become 

an institution which is caught between the politics of multiple 

strong countries. 

I will say, this gets actually to something that Karin Lissakers 

has mentioned—— 

Chairman BAYH. Their reticence is going to implicate their relevance here if it continues. 

Mr. TARULLO. Exactly. 

Chairman BAYH. Can we segue to her comments? I think you 

were about to touch on this. 

Mr. TARULLO. Yes. Is that what you were getting at? 

Chairman BAYH. I was going to get at that, and then perhaps 

some of the structural changes. We have a moment here where the 

leadership of both the Fund and the Bank will be new, presumably 

will be set for 5 years. Perhaps this is a moment to address the 

mechanisms through which future leaders will be taken and perhaps address voting rights and those sorts of things to elicit more 

interest and participation by some of the countries. But at the 

same time the Fund has to be able to call it the way it sees it, if 

it is going to have any impact. 

Mr. TARULLO. The thing—what we have had at the Fund, we 

have now had two straight heads of the Fund who have left early. 

The first explicitly to go back and reenter German politics. Mr. de 

Rato says he has got to leave because he has got to pay for his kids’ 

education but the rumors were all over that he was—— 

Chairman BAYH. I am tempted to say that he should move to the 

Bank, but I will not. 

Mr. TARULLO. That does not help. And although, as Karin suggested, it would have been better to have a more open-ended process, if Mr. Strauss-Kahn is going to be the next head of the Fund 

one would have thought that one thing the United States could do 

is to ask him A, are you going to stay for 5 years? The rumors are 

that President Sarkozy put you into the Fund to get you out of 

France politics. When they open back up again, are you going to 

go home or are you going to stay here and finish the job? 

B, what do you think about the Fund’s performance on surveillance? What should its role be? Because I think if you are getting 

from the top demands that there be good honest analysis, an analysis which seems to me as invariably going to produce the outcome 

that China’s exchange rate policies are currently destabilizing, then 


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you are at least beginning down the path for a multilateral consensus on what needs to be done. 

And C, I would ask him, as a European, whether he agrees with 

the consensus that seems to exist in the rest of the world that Europe is overrepresented and some of the fast growing emerging 

markets are underrepresented. 

So I do not want to overstate what the Fund can do and the 

Managing Director can do on his own. But it seems to me that they 

have underutilized such influence and potential as they do have. As 

a result, you and your colleagues on the Finance Committee I think 

really feel as though you have no choice but to begin putting pressure from an external source. I think you and Senator Baucus and 

Senator Schumer and Senator Graham would all probably prefer 

the 3 years ago we had had real change. 

Chairman BAYH. Real change accomplished in the context of a 

multilateral effort, as opposed to having to go at it on our own. 

That leads to all sorts of frictions, which are not helpful. 

My question is designed—and I would be interested in the comments by any of the panelists—to really revitalize the Fund, their 

role, increase the weight that is attached to their advice so that 

perhaps we will get some consensus about what needs to be done. 

Perhaps if we can give more buy-in on the parts of these countries, 

they will start to accept some of that so we can reduce the level 

of global economic friction, which is not helpful and in the long run 

not sustainable. 

I am going to turn to Mel here than I have got some other questions. But would anybody else—Ms. Lissaker, would you like to 

comment on that? Or Dr. Lerrick? 

Ms. LISSAKERS. I think that one of the major reasons the IMF 

has been so weaken in recent years is not just the quality of the 

leadership at the top of the institution but the quality of the leadership of its major shareholder. The U.S., as far as I can see, for 

the last 8 years has basically ignored the Fund. It has not asserted 

itself and aggressively asserted—— 

Chairman BAYH. I think the record should reflect she is referring 

to the executive branch, Mel? 

Ms. LISSAKERS. Yes, if there is there any ambiguity. 

I was amused when—— 

Chairman BAYH. Following the financial crises of the 1990s, our 

attention has been focused on other things and it has become sort 

of an afterthought? 

Ms. LISSAKERS. My sense is it is part of a larger lack of interest 

in multilateral approaches, but we will leave that aside. 

I have been amused to have former board members—I mean my 

former colleagues at the IMF Board say you know, we used to complain about the U.S. pushing everybody around and constantly 

pushing an agenda and pushing this reform and that reform in 

Congress. Now we are all looking around and saying where is U.S. 

leadership in this institution? 

The fact is we are the dominant member and without it these institutions will not be strong and they will not be effective, either 

in terms of advancing what we see as our interests but also in 

terms of international resolving important fundamental global 

issues like the very important global currency imbalances. 


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Chairman BAYH. My time has expired and Dr. Lerrick, we want 

to hear from you and then Senator Martinez. Is it your opinion 

then, Ms. Lissakers, that if we can get better leadership at the 

Fund and a greater engagement level from its principal shareholder, our own Government, that its surveillance will be taken seriously and perhaps followed by some of the countries who can benefit from it? Or are we naive in thinking that they will not continue 

to pursue their more narrow self-interest? 

Mr. LERRICK. I think you have to focus on how the world—first 

you have to ask a very simple question. What do you want the 

Fund to do today? And the same for the World Bank. No one has 

asked that question of either institution. 

Someone needs to sit down, the leadership, as Karin would say 

the members possibly. But the leading members need to sit down 

and say we have decided the new role of the IMF is X and the new 

role of the World Bank is Y. Now finance ministers, Secretary of 

the Treasury, central banks, go and implement it. No one has done 

that to date. 

Coming back to I think where you started Mr. Chairman, which 

has to do with China, which is that hot topic now. One of the oldest 

lessons of international economics is there is nothing that can force 

a country running a balance of payments surplus to adjust because 

if they are willing to just keep accumulating reserves there is no 

mechanism to force them to change. 

A deficit country will eventually run out of reserves and they will 

be forced to adjust but a surplus country is not forced to adjust. 

The question of China and the role of the IMF and the role of 

surveillance has, I think, been overemphasized and the potential 

role the Fund can play grossly exaggerated. Because really, first, 

what makes us think that the IMF is better at determining reference exchange rates than the market? It is just an opinion of one 

group of people. 

And second, the IMF has no enforcement capability. This is very 

simple. If the IMF comes to a surplus country and says we need 

your exchange rate is grossly undervalued, it should be 30 percent 

higher, 20 percent higher, whatever the number is. And the country responds that is your opinion. What is the IMF going to do? Is 

the IMF going to impose financial penalties on the country? Is the 

IMF going to have them thrown out of the WTO? Is the IMF going 

to say their banks, their commercial banks cannot participate in 

the international clearing systems? Of course not. 

And so there really is no capability for the IMF to enforce its 

views. And the idea of naming and shaming countries into submission is very innocent, to say the least. 

China is a very powerful country. The Chinese understand these 

issues very well. But it is important to recognize that to the Chinese government the overwhelming, the overarching goal is social 

stability. And they must absorb every year, they must create 30 

million new jobs just in order to keep the economy growing because 

of the massive amounts of numbers of people coming from the 

countryside into the industrialized coast. That is what they are 

going to focus on. 


tjames on DSKG8SOYB1PROD with HEARING
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And so far they have focused on an export-oriented growth 

model, just like all of Asia. It has been very successful. That is 

what they are going to continue to focus on. 

When the IMF says—you saw how adversely the Chinese government reacted when the IMF announced just 2 weeks ago its new 

role of establishing exchange rates. The Chinese immediately reacted sort of like that is none of your business. It is a sovereign 

right and we are not going to listen to you. And so I think you then 

have to figure out why, when you deal with any country, especially 

a powerful country, why it is in that country’s self-interest to make 

the adjustments you want them to do. Not why it is in the U.S.’s 

self-interest or the European’s self-interest. You have to convince 

the Chinese. And it is going to be a very long-term process. And 

in my opinion the adjustment of the Chinese exchange rate—and 

it is clear the exchange rate is undervalued and they are subsidizing their exports through the undervalued exchange rate. 

There is no difference of opinion. How much a change in the exchange rate would actually affect the U.S. economy and the current 

account deficit is a great debate. 

My own view is a 20 percent revaluation of the renmimbi would 

have an infinitesimal effect on the U.S. current account deficit and 

on U.S. manufacturing employment. All of China, first of all most 

of Chinese experts are simply processing where the domestic content, the value added in China is 20 percent or less. So they buy 

the inputs in dollars, they sell the outputs in dollars. A 20 percent 

revaluation is going to change the price by 4 percent. 

And second, even if you could have a major impact on the cost 

of Chinese consumer goods, our imports would not shift to U.S. domestic producers. They would shift to Mexican producers, Brazilian 

producers, Indonesian producers. And so for the rallying cry of 

many of the Senate and the Congress that we just need to force 

China to revalue its exchange rate and that will solve our current 

account deficit is naive to say the least. 

Chairman BAYH. That is a topic worthy for discussion. It is not 

the subject of our hearing here today. We get a variety of opinions 

on that. 

The question here today is whether we should try and have some 

sort of multilateral institution, not to substitute its judgment for 

the judgment of the market but instead encourage the market to 

value currencies as well as other things and to invest that institution with as much legitimacy as we can. 

I would be delighted to have you answer the question about why 

you think the mission should be in the next round but my time is 

way past expired. Senator Martinez, we would love to hear from 

you. 

Senator MARTINEZ. I was picking up right on that actually. I enjoyed your comments because yesterday in this very room we were 

having a discussion on the very issue and some of us expressed a 

strong opinion that it would be foolish for the United States to pretend that we cannot continue to be the great trade nation that we 

have been with protectionist policies. That would be designed to 

create a false sense of security where it would not exist otherwise 

and that we should be competing with the world and in the world. 


tjames on DSKG8SOYB1PROD with HEARING
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But anyway I was going to ask you, based on the fact that you 

were part of the Meltzer Commission, what recommendations of 

that commission you would find were useful? Which ones have been 

adopted? Where should the IMF be going in the future, in your estimation and the estimation of the Commission? What should the 

role be really? 

Mr. LERRICK. I was very disappointed when I saw an interview 

with Mr. Strauss-Kahn in the Financial Times 2 years ago where 

he said that one of the principal functions of the IMF, equally important to global financial stability, was reducing the gap between 

the rich and the poor are. I did not think that was the IMF’s job. 

I thought that was the World Bank’s job. 

The IMF has a very simple function as laid out in its articles, 

which is to increase the stability of the international financial system. That is its job. 

If we want it to continue that job, we have to think of it in a 

new world. The IMF has created a world where there were no 

international capital markets. There were exchange controls. It was 

a gold standard. That world is gone. 

You have to think what does it mean to improve the stability of 

the financial system today? 

Clearly, the IMF cannot pay the role—and many of us believe it 

should not have played the role it did in the 1990s in intervening 

in all of the financial crises with bailout packages. We consider 

that that increased the frequency and severity of such crises and 

was counterproductive and the IMF failed in that mission. But that is no longer an option for the Fund. $30 billion, which 

at that time was thought to suffice to stem a financial crisis in a 

large emerging market country, would now be gone in a matter of 

minutes with the size of the financial flows. The IMF does not have 

the financial capability to intervene in a financial crisis even in a 

middle income emerging nation today. 

It certainly does not mean the IMF should be out there lending 

to the poorest countries. That is the job of the World Bank. And 

it certainly does not mean the IMF should be out there giving its 

opinions on exchange rates or imbalances between different countries. 

The IMF has one asset though that is extraordinarily value for 

the stability of markets, which is its information gathering and its 

data collection and dissemination process which is grossly undervalued. It is a very small part of the Fund in terms of its visibility. 

But remember what creates crises are surprises. Markets hate 

surprises. If you improve the quality and timeliness of information 

you will do much work to reduce the frequency of crises and reduce 

their severity when they occur. And that is what the IMF, in my 

opinion, should focus on, which is it has done an extraordinary job 

at creating the requisite data and information the country should 

supply to the markets. It should improve that even more for countries government sectors and for their financial systems. 

And by providing that to the market the Fund is going to do far 

more to increase the stability of the system than any other of these 

more grandiose rolls it is now seeking. 

Senator MARTINEZ. Mr. Tarullo, we were talking earlier about 

the regionalism and the potential for that. I wonder if you might 


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elaborate on this and discuss what already you have seen in terms 

of the building of regional institutions and whether the rise of regional and economic institutions could have a serious adverse effect 

on the United States economy? 

Mr. TARULLO. Thank you, Senator. 

The rise of regionalism obviously is most advanced in Europe in 

the form of the European Union and the European Monetary 

Union. We tend to think of it, as indeed I do, most acutely in the 

case of Asia because these are the fastest growing economies in the 

world. And it is, I believe, in our interest to integrate those economies successfully into the global economic system as importers as 

well as exporters. And in order to do that they are going to have 

to turn more toward domestic demand led growth. 

All of those things are, I think, accomplished more easily through 

the multilateral mechanisms of the WTO and the International 

Monetary Fund than they would be trying to do it bilaterally. 

The Asian countries, in the aftermath of the Asian financial crisis in 1997 and 1998, have skepticism bordering on rejection of the 

multilateral financial system, certainly the IMF. They feel that 

they were left in the lurch, that they were stuck with the aftermath of the crisis. They feel that the Fund’s response was insufficient instead of excessive. 

And so the one area in which regionalism has actually moved forward concretely in Asia is on finance and in the monetary area. 

That is to say discussions among the central banks and agreements 

to have resources pooled in the event of a financial crisis. 

Now countries that are running massive current account sur- pluses and sitting on $1 trillion of reserves are not going to face 

a current account crisis anytime soon. So it is not as though these 

mechanisms are going to be activated. But it seems to me that they 

portend ill for what our role should be, which is anchoring a multilateral system that is moving—in that part of the world—is moving 

toward a set of economies that consume domestically, that import 

as well as export. And I think to the degree that regionalism takes 

hold in the monetary area it is more likely to take hold in the trade 

area as well. 

My last comment on this is it is not inevitable. People talk as 

though it is inevitable. I do think it is inevitable, for two reasons. 

One, if you reenergized the multilateral institutions there is an alternative. And two, many countries, including countries in Asia, 

will be more comfortable with a multilateral system than one in 

which there is a dominant regional power. That is the United 

States, for much of the world, serves as a counterweight to regional 

powers as well as sitting up there as the big global power. And I 

think we ought to take advantage of that desire on the part of a 

lot of other countries to provide stronger multilateral leadership. 

Senator MARTINEZ. Mr. Chairman, my time is up but I would 

like to just maybe follow up with one quick question because perhaps this might do it. I think we are going to have votes coming 

up shortly. 

Ms. Lissakers, you mentioned about the elections of the leadership of the organizations and the preeminent role, I guess, of the 

United States perhaps advocating for a more open process. And 

while that sounds on its face to be a good thing, I also wonder 


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whether or not the current system has not served the institutions 

well. In other words, whatever other problems there may be going 

forward, is the election of leadership and the way it has been done 

in the past at the root of whatever the problems may be? And 

would a different process yield a better outcome necessarily? 

Ms. LISSAKERS. I do not think there is a guarantee that it would 

yield a better outcome. One certainly would not want to emulate 

the U.N. model where the position just gets handed from one continent to the next to the next. That is definitely not a model to 

emulate. 

There was actually a joint World Bank/IMF Board committee on 

reforming the selection process while I was on the board and we 

came up with a process where the initial—where any country could 

nominate. But there would be a screening committee that would 

not be governmental but would be eminent persons who were widely and internationally respected. 

Some could include former managing directors our heads of the 

World Bank but other respected individuals, from a mix of backgrounds, from business, from academia, and so on. And they would 

then short list of candidates to get away from this political horsetrading that goes on in most multilateral institutions and then 

present the short list for the votes and straw votes to the two 

boards, to the members. 

I still think that is actually a pretty good model and I think it 

would be a significant improvement to the current one. You just 

cannot have—I mentioned earlier how important it is for these institutions to be effective promoters of sound governance and public 

accountability. How can they really do that credibly when their 

leaders are selected in this totally non-open or accountable manner? 

Senator MARTINEZ. But I am encouraged by what you suggest, 

which is perhaps a semi-open process which would have a short list 

drawn together by an elite group of people. I think that may yield 

a better outcome than just throwing wide open. 

Yes, sir, you wanted to comment? 

Mr. LERRICK. Very quickly, Senator Martinez. Again, before you 

discuss how the leadership should be chosen you should decide 

what you want the institution to do. Let me give you an example. 

If you want these institutions to continue as lending institutions, 

with that as a major function that they play, the leadership should 

be chosen from the creditor members. There is no example in the 

private sector where borrowers get to determine how the bank is 

run because borrowers only want three things: more money, lower 

interest rates, and longer maturities. 

Senator MARTINEZ. Or loan forgiveness. 

Mr. LERRICK. Or loan forgiveness. That is the extreme of longer 

maturities, lower interest rates, and more money. And so therefore, 

if you have a system where you want these institutions to be lending large amounts of money, it has to be the creditors that determine policy. 

Senator MARTINEZ. Thank you, Mr. Chairman. 

Chairman BAYH. Thank you, Senator Martinez. 

I would be interested, Mr. Tarullo and Ms. Lissakers, if you 

would comment on something that Mr. Lerrick mentioned and at 


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least alluded to. I think in Article I of the IMF part of its mission 

is to ‘‘maintain orderly exchange arrangements amongst its members.’’ 

Dr. Lerrick, I interpreted your remarks as being that that should 

not be a part of its mission. Further—and I do not want to get into 

the wisdom of the policy about the Chinese management of their 

currency or what our reaction should be, but I interpreted your remarks as being that we essentially should not have a global entity 

that comments upon the wisdom or lack thereof, of that, that it 

should be sort of a free-for-all. And if our country, in spite of your 

opinion, if a majority of American policymakers disagree with your 

point of view, we should take unilateral action vis-a-vis the Chinese, as opposed to trying to establish some sort of international 

consensus. 

Mr. LERRICK. No, Senator, I believe the Fund can certainly provide its opinion, but that is all it is is an opinion. The Fund says 

well, what we believe this is what the appropriate exchange rate 

should be—— 

Chairman BAYH. No, but—— 

Mr. LERRICK. Remember, that article was written under a system 

where, first of all, the entire world economy was dominated by industrialist economies. 

Chairman BAYH. Might they not say that it is nobody’s business 

to determine what the Chinese currency’s value should be, but it 

is a job for the market to do? 

Mr. LERRICK. Certainly one can say that. In fact, in today’s financial markets, that is what is going to occur. 

Chairman BAYH. But not with regard to China’s currency. 

Mr. LERRICK. There you have a question of whether the Chinese 

government has the sovereign right to try to influence the value of 

its currency. And that is a debatable point. That is one of the 

things—— 

Chairman BAYH. I do not want to get too far down on that path 

but there are different questions about whether they are, in fact, 

managing their currency. And if so whether, even if they have the 

right to do that, then presumably other countries should also have 

the right to do something in reaction to that if they so choose. 

Mr. LERRICK. Absolutely. 

Chairman BAYH. It is sort of an every country for themselves and 

you get the bilateral action and reaction as opposed to some sort 

of multinational entity. 

But I was curious, Mr. Tarullo and Ms. Lissakers, if I 

mischaracterized your position, Mr. Lerrick—— 

Mr. LERRICK. I think you have not totally mischaracterized it. I 

think the fact of the matter is the Fund does not have the ability 

to play the role that that article you are quoting assumed it did. 

And it had that role—even if it had that role in 1945, which it really did not, that capability, it certainly does not have it today. 

And then the question is do you want to try to have an institution—when you asked why has the Fund been too reticent to assert 

itself aggressively in certain cases? Maybe because the fund understands that all that will happen if it asserts itself aggressively is 

that it will lose the remaining credibility it has. 


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Chairman BAYH. Is moral suasion, Mr. Tarullo and Ms. 

Lissakers, something that it would be beneficial? 

Mr. TARULLO. Look, none of us should be and I do not think anybody here has overstated the potential for the Fund in managing 

exchange rates. But I would disagree with Dr. Lerrick on the potential that the Fund, or indeed any multilateral process has, for 

the following reasons. 

First, I do not—if you have got a process, an analytic process, 

that is regarded as credible and as not having a particular vested 

interest in anyone’s outcome and that process acquires credibility 

over time, as it must, then it can serve as—the staff report can 

serve as the starting point for a discussion. 

Second, of course you cannot force any country to change whatever its exchange rate policy may be. And of course, in a highly legalistic sense, it is a sovereign prerogative of the country. 

But the whole nature of international economic interaction, and 

indeed international interaction, is that countries talk, they come 

together, they negotiate, they play one another’s interests, desires 

and outcomes in order to try to maximize their position. And when 

a country concludes that it is not particularly useful for its standing in the rest of the world, that it is eliciting negative reactions 

that are getting in the way of achieving their ends in other areas, 

and importantly where they can see how their own self-interest, in 

this case, actually does lie in eventually revaluing their currency, 

then I think you have got the potential for a helpful process. 

You know one thing, the first G–7 summit that President Clinton 

ever went to, in 1993 in Tokyo, as you recall we were still running—still. Then we were running significant budget deficits. That 

changed and now we are back to the budget deficits. 

But at that time, when the president got back he was just shaking his head, both literally and metaphorically, saying all he was 

hearing from the other leaders the drag, the dangers the U.S. 

budget deficit was posing to the global economy. 

We are talking about the leader of the free world who is affected 

by the fact that other leaders say here is a problem you are posing 

for us. 

I, in my capacity as his sherpa, felt the same thing, although by 

the time I was sherpa we had made progress on the budget deficit. 

It does not seem as though anybody can force the most powerful 

country in the world to do something in particular. And they cannot. But what they can do is to cooperate more or cooperate less 

on your own initiatives. 

And I think that, just as the G–7 process at the proper moment 

in history, which we are long past, actually was valuable for the 

G–7 countries, sharing views yes but also creating some not-so-subtle pressures on one another, I think that can be true here as well. 

But like Dr. Lerrick, I would not overstate the—the IMF is not 

going to become an adjudicator of exact precise exchange rates. It 

neither can do it and I agree with him it should not do it either. 

Chairman BAYH. Dr. Lerrick I will get back to because you did 

ask a very good question, which is defining what its mission should 

be going forward, and we have not really gotten back to that, which 

I would really like to. Ms. Lissakers, I would like to hear from you. 


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But it does seem as if there is some overlap here. Dr. Lerrick you 

said, of course, they can comment and offer their opinion and so 

forth. Not with an expectation they can force anybody to do anything. 

Mr. Tarullo, what you are saying is that the more that is viewed 

as being an objective, informed opinion about why it is in someone’s best interest to take a course of action that has some utility. 

It is not a panacea but it has some utility. 

Mr. TARULLO. If it begins a process. If the report is just sitting 

out there it does not get you too far. there will be a story on it in 

the Financial Times and that will be about the end of it. 

But if it is the beginning of a process and the de Rato idea on 

multilateral surveillance seems to me to have some merit, even 

though it was not particularly an impressive first set of results because it says OK we are going to have reports first to try to get 

some objective analysis. And then we are going to try to replicate 

the old G–7 model in a new forum with the right players, which 

the G–7 clearly does not have. 

Chairman BAYH. Ms. Lissakers. 

Ms. LISSAKERS. Mr. Chairman, you said a few moments ago look, 

if these multilateral institutions are not effective and they are not 

working then why shouldn’t countries just go their own way, adopt 

unilateral policies, respond as they need to to make things happen? 

Chairman BAYH. That is not my desire. It is just my observation 

in a vacuum that is what is likely to happen. 

Ms. LISSAKERS. And that is exactly the scenario that the founders of the Fund especially had in their heads and the Bank when 

they created them. The original mission of these institutions was 

precisely to prevent that from happening and to give countries an 

alternative and effective channel to address issues that affected 

them directly but also required the participation and cooperation of 

other countries to resolve. And that is exactly where we are. 

So I think the original mission is still valid. The question is 

whether the techniques and the approach of the institutions are 

still effective. And clearly they have to change. The fact is the 

Fund does not try to set exchange rates anymore. It does an analysis which says if you, China or another country, allow your exchange rate to float and let the market set the rate, this is roughly 

where we think you will end up right now. This is what we think 

is probably an equilibrium exchange rate. 

That is an analytic point against which the U.S. can and does 

use to go to the Chinese and say the Fund analysis and our own 

analysis shows clearly that your exchange rate comment, by any 

market measure, is undervalued. You need to adjust. The real impact is exactly what—effectiveness or not—is through the mechanisms Dan described, which is the governments, the member governments of these institutions collectively bearing down on a member that is acting in a way that is contrary to the best analysis and 

policy guidance and saying you are out of line. You need to adjust 

your policies. 

Sometimes that works and sometimes it does not. But it is this 

peer review mechanism that is the real value and that we should 

not discard, as Adam, I think would—— 

Chairman BAYH. Yes, Dr. Lerrick. 


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Mr. LERRICK. Very simply, Mr. Chairman, Professor Tarullo 

raised what I consider an extraordinary good example of the problems the Fund faces in this role. A year and a half ago the Fund 

announced the major initiative of the multilateral surveillance 

mechanism where—as opposed to the Fund speaking one-on-one to 

individual countries of what they thought the problem was they 

would bring together groups of countries who were part of a global 

problem and we will work out a solution together. 

It was extraordinary—and after the first year there was a big announcement in April, this spring, of how successful the Fund had 

been at this. I was asked to come in after the announcement was 

made to meet with the senior management of the Fund where they 

told me look at the extraordinary success of the multilateral surveillance program. And they pulled out the announcement. And on 

the announcement it said the United States is going to reduce its 

fiscal deficit and its current account deficit; the Germans and the 

other Europeans are going to make their labor markets more flexible, work to make their labor markets more flexible; the Chinese 

are going to work to make their exchange rate more flexible. 

I asked, I said well what on this piece of paper is any different 

than what these same governments have announced many times 

before officially in writing? And their response came back but we 

got them to put it all on one piece of paper instead of five pieces 

of paper. 

And I said well, what is that great achievement? And they said 

well, if you do think getting it all on one piece of paper instead of 

five different pieces of paper is a success, well then you will not be 

impressed by the multilateral surveillance mechanism. I think that 

is an example you should think about. 

I think there is an immediate stage between the multilateral system—— 

Chairman BAYH. They are working hard to save the rain forest, 

Dr. Lerrick. Less paper, fewer trees. 

Mr. LERRICK. But I think there is an intermediate stage between 

the totally multilateral approach that, of course, people would love 

and this every country goes its own way. I think that is based on 

countries’ self-interest. 

I think what will happen is, as you will see, is that companies 

will pair off into regional groups or into select groups where if it 

is a problem you will see the United States speaking directly to 

China. The United States is not just going to go off by itself and 

impose certain sections without at least attempting to discuss the 

problems with China. I think that is Secretary Paulson’s strategy, 

has been his strategy. I think you will continue to see that. And 

what you will see is I think the choice is not—— 

Chairman BAYH. It has borne about as much fruit as the document you just described. 

Mr. LERRICK. Of course, but I do not think the multilateral IMF 

system will bear much more fruit. But I think that it is what you 

are going to see, this intermediate stage where there will be regional or bilateral discussions. 

Chairman BAYH. Let’s move to something, if we might, that Mr. 

Tarullo mentioned as what he felt was part of a mission going forVerDate Nov 24 2008 04:55 Dec 18, 2009 Jkt 050355 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HR\OC\A355.XXX A355

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ward for the IMF. That was sovereign growth funds, I think you 

mentioned, trying to analyze what the effect of that is going to be. 

Dr. Lerrick if you are correct, and you probably will be for the 

foreseeable future, China will be running large surpluses. They 

have questions about what to do with those surpluses. They are in 

the process of making equity investments, the Blackstone investment just got a lot of attention and so forth and so on. 

Is a legitimate function for the Fund going forward to at least 

begin to explore the consequence of nation-states making equity investments of this type? 

Mr. TARULLO. Senator, I would say not just equity investments 

but investments of all sorts. 

Chairman BAYH. It is kind of ironic, we advise most countries to 

reduce the role of government in their own economies and now 

their governments will be taking ownership interests in the economies of other countries. 

Mr. TARULLO. This is, in part, an example I think of be careful 

what you wish for. I recall not very long ago a number of prominent economists advising countries to diversify the destinations of 

their reserves not simply in terms of currency but also higher yielding instruments. 

In direct response to your question, it seems to me that there are 

two sets of concerns one of which is a concerned that this Committee addressed last year and that you just wrapped up not so 

long ago, which is the CIFIUS kinds of concerns. That is, the potential acquisition of an industry, a company, in a country which 

raises national security type issues if it is held directly or indirectly 

by the government of another country. 

As you may have noted, Chancellor Merkel of Germany has recently evinced her anxiety at the prospect for sovereign wealth 

funds doing that. 

I think that that kind of issue is best handled directly through 

a CIFIUS-like process, as you all have amended it. 

The second set of issues, though, gets to the aggregate effects of 

these financial flows on global financial stability. And it seems to 

me that the Fund not only has a role going forward, it ought to 

have had a role over the last several years. Because the data dissemination standards which Dr. Lerrick mentioned a few minutes 

ago would appear to me to be a logical place for the addition of 

some standards on disclosure of the practices of countries in investing there foreign exchange reserves. And that that would help tell 

us where the money is going. It would help everyone, markets, governments, the Fund itself, know whether there are asset flows into 

some areas and some kinds of instruments which could be potentially destabilizing. 

So I think at the very least the Fund should be doing that and 

has not to date. 

Chairman BAYH. Dr. Lerrick, Ms. Lissakers—and Ms. Willkens, 

I have not forgotten about you. I have some questions for you, too. 

We just sort have gotten off in an area of their expertise for the 

time being. 

Mr. LERRICK. Mr. Chairman, Professor Tarullo is absolutely 

right. The Fund should focus, in my opinion, on its mandate which 


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is how do you improve the stability of the system? The way you improve the stability is identifying sources of instability. 

Whatever the source could be, it could be sovereign investment 

funds, it could hedge fund leverage, it could be derivatives. That 

is what the Fund should be focusing on, gathering the information, 

setting the disclosure standards, getting that information out to the 

markets and to policymakers so they know where the risks are. 

Because if they know where the potential risks to the system are 

market participants will take preventive action so that they will 

not be caught, to protect themselves against that risk. And policymakers like the Fed or the European Central Bank will know 

where the potential source of instability is. And that, in my opinion, is the most valuable role for the Fund. The advent of sovereign 

growth funds or investor funds is certainly a new phenomenon. The 

Fund should be studying, gathering information and disseminating 

it to the market. 

Chairman BAYH. What do we do in a case where perceived national interest may differ from systemic risk to the global economy? 

Mr. LERRICK. That is not the Fund’s job. National interests are 

the job of national governments. Again, if you define the Fund’s job 

as maintaining global financial stability. 

Chairman BAYH. What if the policies of a nation-state run the 

risk of destabilizing the global economy? 

Mr. LERRICK. Then you get back to the system of what is the enforcement mechanism? 

Chairman BAYH. And the answer to that is none. 

Mr. LERRICK. The answer to that is at this stage we do not have 

one on the international level. We were just possibly—in theory 

you could try to have some ad hoc coordinated action by different 

member governments. 

Chairman BAYH. Coalitions of the willing. 

Mr. LERRICK. Coalition of the willing or the frightened. 

Mr. TARULLO. Senator, it is not a binary world here. We are not 

limited to institutions that either have rules that are subject to a 

quasi-adjudicative process that are then enforced in some respects, 

or a kind of everything goes, it is all up to you. 

The world is mostly composed of intermediate levels of cooperation, discussion, and pressure. And I would say that although Dr. 

Lerrick and I agree, I think, substantially on the sovereign wealth 

fund issue and what the Fund should be doing about it, I would 

go a step further and say it seems to me that when the kind of 

trend that you mentioned becomes evident, it ought to be a function of the Fund to have a discussion of that in an appropriate 

forum with the appropriate people there. 

And to say well, it is just talk, it is just a discussion, I think is 

to overlook how much difference talking and discussion has made 

among central bank Governors of major countries in the last 30 or 

40 years. You do not read about that in the FT but it makes an 

enormous difference in people understanding about the consequences of what they are doing and communicating with one another. 

Chairman BAYH. Ms. Lissakers, and again what had occurred to 

me is I think what Dr. Lerrick said is exactly right. The Chinese 

care about domestic stability. They are undergoing great change. 


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They need to promote rapid rates of growth to accommodate that 

change. And it is quite possible that what will promote stability 

within China may have a different impact, if it goes on for some 

period of time, for the rest of the world. Or perhaps not. But at 

least there needs to be someone that renders an objective opinion 

about that. 

Ms. LISSAKERS. I think we should not underestimate the government of China’s level of sophistication about the policy choices, the 

complex policy choices they face. Any policymaker who observed or 

participated in the financial crisis in the 1990s came away, I think, 

convinced that fixed exchange rates are very dangerous in a fundamental way because they lead financial players to take excessive 

risks. It creates a very distorted incentive system. 

The Chinese, I think, have seen that in their own domestic financial systems. They have had a terrible banking problem. I believe— 

I have not followed this closely—that they have used some of their 

large foreign exchange reserves to shore up and reform their banks 

and recapitalize those banks. 

That is a very important step for them to have the choice of loosening their exchange rates. Because if you look at the Korean example, which Korea had huge foreign exchange reserves when it 

blew up, which is one of the reasons they took everyone by surprise, their crisis. But their banks had all these hidden exposures 

that the Fund, among others, had not carefully monitored. And it 

led to a massive economic crisis for Korea. That is certainly an experience the Chinese do not want to repeat. And that, I would assume, is one of their concerns about not moving rapidly on exchange rates. But they also have the growth. They are very export 

dependent. 

I think, like every government, they face conflicting push and 

pull and pressures and they are treading very carefully. In the end, 

they are going to have to make their decision of what is in China’s 

interest. I think where the Bank and the Fund can be useful and 

the dialog with members can be useful is in showing them why 

they need to make a change for themselves, they need to make the 

exchange rate move. And there are ways to do it that would avoid 

any major financial crisis. 

But in the end not the IMF, not the U.S. has—can alone make 

them do something that they think is fundamentally against their 

economic and political interest. 

Chairman BAYH. If I could shift for just a moment, we have been 

focusing here on the Fund. I thought Dr. Lerrick made an interesting point, and he has written about this. That is the Bank’s 

practice of continuing to lend to middle income countries, some of 

which enjoy these very large reserves and are now engaged in investing in ownership stakes abroad and so forth. I would be interested in other panelists’ view about what is the continued legitimacy of the Bank being involved in countries with those sorts of 

reserves? Shouldn’t they be required to spend some of their own reserves internally before the Bank basically—and they can borrow 

on equal terms with, in some ways, fewer strings attached in a private credit markets. What is the legitimate role of the Bank in this 

sort of situation? 

Ms. Willkens, we have neglected you, and then Ms. Lissakers. 


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Ms. WILLKENS. It has been a privilege to get the education I 

have, so thank you. 

There are many projects that the Bank is doing in the middle income countries that private credit markets would not touch. They 

would not touch a primary education project. They would not touch 

a malaria or HIV/AIDS project. There is no profitable return on 

those. So the question then becomes whether the government is 

going to use its only resources. 

Chairman BAYH. Are those IDA projects? 

Ms. WILLKENS. No, I mean IBRD. I am speaking of IBRD, as 

well. 

Chairman BAYH. Let’s let her finish, Dr. Lerrick. 

Ms. WILLKENS. So you have a range of projects and in the public 

sector lending that the Bank does on the IBRD side my observation 

over the last 10 years has been by and large these projects are 

projects that are not going to have a large profitable return that 

the credit markets would expect. 

And as we heard, some of the challenges facing us going forward 

in these middle income countries are going to be trade, trade capacity, normalization—— 

Chairman BAYH. I guess my question to you would be I am sure 

they are worthy projects. If we are looking at a country that has 

hundreds of billions of dollars of their own reserves, why shouldn’t 

they undertake those worthy projects in their own country first before calling upon the rest of the world? 

Ms. WILLKENS. That is a good question. Today, I think the Bank 

offers the expertise. I have always said that the World Bank has 

two things it sells. It sells expertise and it sells money. And to the 

extent the Bank maintains an international best practice expertise 

in some of the new areas that it is pressing forward on, then I 

think the Bank is a legitimate offerer of finance. 

Chairman BAYH. I will have a few questions about some internal 

management issues. Dr. Lissakers and then Dr. Lerrick. 

Ms. LISSAKERS. Unless you change the incentive structure for the 

Bank, that pattern of behavior is not going to change. There are 

three, I think, major incentives. One, loans to middle-income countries are the major source of income, operating income for the 

Bank, as I understand it. And if they stop lending to middle-income 

countries the Bank is going to have a serious budget problem. 

Chairman BAYH. That is interesting, they are a major source of 

revenue for the Bank and yet they are not profitable and so the private sector would not make them? 

Ms. LISSAKERS. They generate interest income for the Bank. You 

can argue with how the Bank keeps its books. But certainly that 

is what people at the Bank—you can understand I am less familiar 

with the internal interstices of the Bank’s funding. But that is certainly what I have been told. 

Second of all, I know in the past at least—I do not know if it is 

still true—career paths were really determined by your ability to 

push loans out the door. That was the most concrete measure 

of—— 

Chairman BAYH. Success is measured by the volume of loans undertaken? 

Ms. LISSAKERS. Right. 


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But the third one is that the members like these loans because 

they are very often tied to procurement of goods from the richest 

manufacturing countries. Not always but very often. And the members want to see these institutions generate a lot of procurement 

from their own manufacturers. 

Chairman BAYH. Dr. Lerrick. 

Mr. LERRICK. Senator Bayh, I think there is a misunderstanding 

about the type of project the World Bank funds. The first premise 

is every IBRD loan carries the government guarantee. It does not 

matter whether the loan is for an AIDS project, to build a power 

plant, to build a road, for primary rural education. The central government is the entity on the hook. 

Once that entity is on the hook, the private sector does not care 

what you do with the money. It does not care whether you are financing on AIDS Project or building a power plant. In fact, if you 

look at a prospectus for a public bond offering for Brazil or for Mexico or for Korea or Indonesia, the use of proceeds section simply 

says general government purposes. The government has total discretion as to how it uses the funds. 

So to say that the markets are not willing to finance pro-poor 

programs is just incorrect. Any pro-poor program the Bank will 

fund, the private markets will fund. 

Second, the question of the income on loans to middle-income 

countries, the Bank does not make its income off of lending to middle income countries. They do not even cover their administrative 

budget from it, from the spread. The way they really make their 

money is the Bank has on its balance sheet almost $40 billion of 

zero cost capital, which is the initial cash contributions of the members when they join the Bank; and second the accumulated past retained earnings the Bank made when lending was profitable. It is the income on that $40 billion that is paying all of the ex- penses at the Bank. Because very simply $40 billion invested in 

U.S. Treasury notes at 5 percent generates $2 billion a year of income. The World Bank’s net income reported last year was $1.7 billion. So that proves that there was a net loss on its lending activities of at least $300 million. 

Mr. TARULLO. Senator, can I just make one point on this issue, 

because there is a certain irony here since I sat on a group considering what the World Bank should be doing in which I was the one 

saying they should not be lending to middle income countries so 

much. And in this forum I just want to offer a couple of reasons 

why although that should be the direction in which things move 

there may be reasons to have some lending to middle income countries for some time. 

First, as somebody as already referred to, part of what the country buys is expertise. If you look at the—there have been cases in 

which a middle income country is paying higher interest on a Bank 

loan than it could have gotten in private capital markets and that 

is because they are buying something different. 

Now we could say that should be a market transaction, too. But 

there is, I think, a global interest in some of the interaction that 

takes place because the things like environmental standards, 

things like treatment of minorities are dealt with differently when 

there are Bank standards attached to the lending. And we are talkVerDate Nov 24 2008 04:55 Dec 18, 2009 Jkt 050355 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\A355.XXX A355

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ing about some countries in which those values have not been internalized. That does not justify—— 

Chairman BAYH. So there are non-economic values, perhaps 

that—— 

Mr. TARULLO. That are sort of global goods, in some ways. 

The second thing is, to return to a theme that you and I actually 

were talking about in the Fund context, it may be that there is 

more of a global package here that is eventually going to re-energize both institutions and pull China and other countries more into 

them. 

That package is probably going to consist of, it is going to consist 

of, a reallocation of quotas and more voting influence. It is going 

to consist of a greater sense of expectation upon China’s own practices in a sort of reciprocal fashion. 

But I wonder whether some sense of continued access to some 

Bank resources for some limited period of time might not end up 

being de facto a piece of that. 

I guess my point is all the things we are talking about in both 

institutions are separate in one sense, in an analytic sense. They 

could be tied together in the larger task of trying to move the institution forward. 

Chairman BAYH. Dr. Lerrick, you mentioned, and I cannot recall the amount precisely, $3 billion or $4 billion will be the U.S.’s part 

of the additional capital being put into the World Bank over the 

next 3 years? Is that about right? 

Mr. LERRICK. It will be approximately—it has not been deter- mined yet. It will determined next year, but it will be between $4 

billion and $5 billion. 

Chairman BAYH. Mr. Tarullo, then help me explain to the average American taxpayer why—I would have to assume they will believe that this money is going for the very worthy purpose of helping to alleviate global policy and that kind of thing—why some of 

that should be invested in China—— 

Mr. TARULLO. Dr. Lerrick, you are talking about IDA; right? 

Mr. LERRICK. Those funds will go to IDA. 

Chairman BAYH. Those are not lent to middle income countries? 

Mr. TARULLO. That is for the 80 poorest. 

Chairman BAYH. Great. That helps to clarify that then. 

Ms. Willkens, yes. 

Ms. WILLKENS. There is IDA going into China and there is some 

IDA money going into India, as well. By the most part they have 

graduated to IBRD. But for far western provinces, you still find 

IDA money mixed in. 

Chairman BAYH. Out in the weaker area? 

Ms. WILLKENS. Yes. 

Mr. LERRICK. Not for China. China graduated 3 years ago out of 

IDA. India—Ms. Wilkins is absolutely right. India is going to receive more than $2 billion this year of IDA funds. And you certainly can ask the question why India which is, as a government 

policy, limiting foreign private investment in order to maintain control over its economy, is borrowing at zero interest from the World 

Bank to finance projects that the private sector would be happy to 

fund. And that is in India. India is a continued IDA borrower. In 

fact, I think it will be the largest IDA borrower this year. 


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Chairman BAYH. Any of you want to address—and our time is 

about running out. We have got five votes coming up here. And you 

have been very patient so far. 

Anything that can be done to perhaps address some of the internal incentives in the Bank, this culture of lending I think it is referred to? Is there really any accountability for loans that go bad? 

And is success—how do we deal with success being evaluated on 

the volume of activity as opposed to the effectiveness of the activity? 

Mr. TARULLO. Let me just mention two things quickly, Senator. 

One is changing the design of the lending itself to get away from 

what we call conditionality, conditions about what the government 

is supposed to be doing generally when it receives the money, and 

moving much more directly to outcomes as the goal of the loan and 

quite explicitly meeting those outcomes as a condition for renewal 

or supplementing of the lending. 

I think that kind of approach has manifold benefits. One is that 

it creates a kind of internal disincentive for there to be funds siphoned off for corruption or things to operate inefficiently because 

if they do that there is not going to be renewal. 

Secondly, it gives a different kind of criterion on the basis of 

which one can evaluate the loan officer’s performance. Did the 

lending that she moved out the door end up having good outcomes 

as opposed to just looking at the net amount of money. 

Chairman BAYH. Doesn’t this get to some of your concerns, Ms. 

Willkens, where the Bank has quite a cadre of excellent economists 

and people who can give a macro view of things but perhaps not 

enough people who are expert at actually making the resources 

translate into the on the ground results that we are looking for? 

Has that been part of your observation? 

Ms. WILLKENS. I was relieved, I think the direction you were 

heading, these internal measurements would be very useful. What 

the private sector has had a lot of concern with over the last several years, especially under President Wolfensohn, was the increased push out the door for what they called sectoral adjustment 

lending, $300 million to the health for Mexico for what? 

And then the issue came up how are you going to measure what 

was supposed to be achieved? And no one knew. And by the way, 

there were no procurement rules that applied to that $300 million. 

So for internal measurements of effectiveness and satisfactorily 

addressing the objectives of the project, that has never been a 

strong suit of the Bank and that could be improved. 

On the ground yes, the companies we work with, all of them 

would say that the need for sector expertise and project management expertise on the ground is extra important. The banks have 

all declared they are going to increase their infrastructure lending 

over the next two to 3 years. Engineers are passe in the Bank in 

the last 10 years. So the Bank really needs to beef up in the infrastructure sectors, we think, to be able to support effective measurements and effective and actually timely implementation of the 

projects. 

Chairman BAYH. How vigorous do you think we should be in insisting on some of these internal reforms as going hand-in-hand 

with the new tranche of funding? 


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Mr. LERRICK. Senator Bayh, I think economists believe that bad 

incentives are the root of all evil. Clearly the Bank and, in fact, the 

entire aid business—the failure of aid are due to the bad incentives. 

Aid has clearly been a failure, development aid has clearly failed. 

The problem is that you need to reform the incentives throughout 

the entire system. Within the Bank the incentive is just the volume 

of lending. It has never been what results, what performance has 

been achieved by that loan or that grant. 

In fact, when it was mentioned what recommendations the 

Meltzer Commission came up with were implemented or not implemented, the key recommendation to do with the World Bank was 

to shift to a system of performance-based aid, that in essence you 

only delivered aid based on measured, verified performance. And it 

is not very difficult. We are not talking about complicated projects. 

How many children were vaccinated? How many cubic meters of 

water were treated? But the incentives are not there. 

In fact, the concept of performance-based grants which became 

the platform of President Bush—— 

Chairman BAYH. Why is there a resistance to that sort of thing 

internally within the organization? 

Mr. LERRICK. It makes life hard. It is a lot easier to fly into Rio, Sao Paulo or Brasilia and sign a $500 million loan to the Brazilian 

government than to go off into the bush and try to measure 50 $1 

million vaccination programs. It is a tougher job and the Bank does 

not really want to do that and it makes their life difficult. 

But I think when you go back, there is a fundamental flaw in 

the entire aid concept which is that the donors are more desperate 

to give than the recipients are to receive the money. Once you understand that problem it makes it almost impossible to make aid 

to work. Because if the World Bank comes to a country and says 

we want you to enforce these anticorruption standards and the 

country says we do not want to, and the Bank says OK, we will 

still give you the loan. What is going to happen? That is one of the 

great problems. 

The problem—and you saw it at the G–8 summit in 2005 in the 

world’s leaders stood up and said we are going to give all the debt 

relief, we are going to double aid, and then we are going to double 

it again. And it is going to be focused on the very poor countries 

such as Africa. The problem is that if you actually enforce these 

anticorruption standards there would be no destination in Africa to 

ship the money to. 

And since the overwhelming goal of the aid community is to ship 

the money, they are going to keep sending it with or without the 

corruption. That is the main problem. 

Chairman BAYH. Ms. Willkens. 

Ms. WILLKENS. I agree with many of the remarks that were 

made. I think the World Bank, though, has an opportunity here. 

And one of it, as its core deliverables and its expertise. 

One of the reasons they have not been able to measure how 

many vaccines are being delivered out there in the remote areas is 

there have not been the tools, there have not been the technology, 

there have not been reporting systems, there have not been statistical collections able to then roll up and report out. But if you look 


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at the World Bank’s pipeline now you will see a handful of five to 

eight statistical projects under review in the pipeline for approval. 

And over time I think the Bank has an opportunity to take a leadership position to create those statistical gatherings that will empower analytical review of the projects. 

Chairman BAYH. Is it your impression in your dealings and the 

companies you deal with, their dealings with the Bank, that there 

is an openness to requiring more accountability in terms of insisting upon not just inputs but results? Or are they culturally resistant to that sort of thing? 

Ms. WILLKENS. Private sector, absolutely receptive to it—— 

Chairman BAYH. No, no, the private sector. I am asking about 

the Bank. 

Ms. WILLKENS. The Bank themselves. In large part where the 

tools are available to measure we find receptivity to the measurements. Now understand I deal in the health and the information 

technology sectors and the like where these measurements are very 

core to the companies that are doing the business as well. So the 

two come together and there is a lot of alignment and partnership 

in proposing solutions. 

The other point I wanted to make on corruption though, as private sector we are quite concerned that we see the Bank lowering 

the floor on international standards. Again, I see this as an opportunity for the Bank to come in and use its bully pulpit and use its 

position to start creating a gold standard for positive efforts made, 

anticorruption efforts made, and in international best practice and 

to put them in place. 

And we are seeing a few African countries where leadership has 

changed fairly dramatically where we think, especially in Africa, 

there is a chance for several countries to take a—become the gold 

standard—probably should use a different word than gold in Africa—but become the guiding Good Housekeeping seal of approval 

there for transparency and good governance. 

Chairman BAYH. Just two final questions, one Ms. Willkens for 

you and then one generally. There is a move afoot, as I understand 

it, at the Bank to give more discretion to the recipient countries in 

terms of managing these projects. Has it been your experience that 

when that has been the case too often the specifications for procurement have been so finely tailored as to make only one provider 

eligible for receiving the funds? Would that only run a greater risk 

perhaps of corruption? Or to play off on something Ms. Lissakers 

said, the countries providing the credit want their companies to 

provide it. Perhaps there is management on the part of the recipient countries, too. 

Ms. WILLKENS. The proposal you are speaking of is something 

known as country systems in procurement and it was a proposal— 

you mentioned this in your opening—a proposal that the Congress, 

in the Foreign Ops bill of 2006 specifically conditioned 20 percent 

of the IDA funding on the basis that the World Bank withdraw 

their country systems proposal. That was done, the IDA money was 

released, but the new country systems proposal hit the table in 

May of this year. It looks worse than the proposal that was withdrawn at Congress’s request. 


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So what we are concerned about is yes—and I have a host of examples where the specifications look like a vested interest that has 

gotten to the government. 

What happens today for a company as we have, through a series 

of protections under the World Bank guidelines and the standard 

bidding documents, the ability to basically move into the World 

Bank procurement officers and get remedy before that procurement 

is completed and contracts are awarded. 

Under the proposal of the Bank that is on the table today, those 

contracts would be let and 2 years from now the World Bank would 

be able to come in and look at the project and see what went 

wrong. But we are very concerned about the lack of a methodology, 

a lack of a statement of international best practice in procurement 

by the Bank and really the kinds of safeguards that will keep U.S. 

companies—and I should say, Senator, as well, European countries 

involved in these projects. There is quite an alliance that has been 

built over the last 2 years to urge that the World Bank keep in 

place its procurement policies for international competitive bidding 

to protect against this kind of shenanigans and many, many more. 

Chairman BAYH. Mr. Tarullo, you mentioned that some of the 

loans perhaps are given to promote values that it is difficult for the 

marketplace to capture. Would one area perhaps be in the area of 

biodiversity, for example, projects related to that? Or projects that 

span national borders that perhaps it is difficult for a single country to capture the entire value? 

Mr. TARULLO. I would think again, Senator, in line with the notion that the Bank should be providing public goods, I do not know 

enough to make a judgment as to the conditions under which such 

lending or technical assistance would be useful. But you have defined a situation of a public good issue. That is where the Bank 

should be concentrating its efforts, not in areas where private investment, even without government guarantees, would be forthcoming. 

Chairman BAYH. A final observation, I gathered from all of your 

testimony that you all would embrace a robust focus upon eliminating corruption. I gather that there are some people who think 

that that is just sort of the cost of doing business in some of these 

countries and if that is what it takes to grease the wheels in the 

short run to get some of these things done well, that is OK. 

But I gathered from your testimony that in the long run that 

does more to undermine the cause of helping the poor than any 

sort of expediency in the short run might justify. Is that a fair observation? Anybody here today want to stand up for corruption? 

Ms. LISSAKERS. I would just like to say, in defense of the Bank, 

that I think that is an area where there is a genuine effort to move 

away from simply accountability in projects to the outside world to 

the Bank or to its members but to reach out to local civil society. 

In the countries where we work on the extractive industry transparency, the Bank has been quite supportive and is trying to do 

more to build up the capacity of local citizens to demand information and accountability from their own governments. That in the 

end is the only solution or cure to the widespread corruption problem. 


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I do not think it is systematic enough in the Bank and I do not 

think it is embedded across the board in its activities. There is a 

long way to go. But I agree absolutely, the Bank should be a promulgator of best practice and it should be absolutely rigorous on 

that score, as should the member governments, which is why I 

mentioned the importance of OPIC, for example, saying if we are 

going in and guaranteeing a project in extractive industries that 

are highly prone to corruption, we are going to safeguard that by 

insisting that the companies that benefit from our guarantee publish what they pay to the government where this project is taking 

place. That is good for business. It is good for development. 

Mr. LERRICK. Senator, I would like to come back to a point you 

raised earlier which is the Congress next year is going to have an 

opportunity when the Treasury comes for an appropriation for the 

IDA funding, IDA 15, to focus on just the issues you raised. Should 

there be performance evaluation of IDA projects? Should we have 

transparency? Should we know what the project was supposed to 

do? Know what the project did do? Not just us, the public. 

And I think that is where the Congress has its ability to actually 

influence the outcome and help the poor in the developing world, 

which is to attach conditions to this funding which I do not think 

any reasonable person could object to, which is we want minimum 

standards of performance evaluation. We want minimum standards 

of disclosure and transparency to know that two things: one, the 

money of the industrialized world taxpayers are being well used. 

And when you go back to your constituency and say we just gave 

$4.5 billion to help the poor, I think you would want to know something more than well, it went to the central bank and who knows 

where it went after that. And say well this is the people—because 

the American people I think are very generous and would be happy 

to provide the funding if they know it is doing good. But they are 

suspicious that it is not, and rightly so. This is the Congress’s opportunity to put in some standards of disclosure and performance 

monitoring. 

Mr. TARULLO. Senator, if you are going to take that opportunity, 

I would urge you to do it sooner rather than later. That is, do not 

wait until the Treasury Department is coming up looking for the 

IDA funding because then everybody is going to get in a crunch. 

Just let me hypothesize for a moment. A Dodd-Shelby-Bayh-Martinez letter to Bob Zoellick saying we have conducted some hearings, we have listened to a lot of people. This is the way we are 

looking at the Bank and we know you are going to be or Treasury 

on your behalf is going to be up here next year looking for IDA 

funding. These are the kinds of things we are going to be looking 

at and we just want to let you know now. 

And then that last key little paragraph, we look forward to our 

staffs discussing this issue in the coming year. 

Chairman BAYH. I think that is an excellent suggestion, Mr. 

Tarullo. I have asked my own staff to follow up on that. 

I want to express my gratitude to all of you for your advice 

today, for your patience. 

Just one editorial comment of my own, with regard to the Bank, 

and then I will wrap it up. 


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It seems to me that an entity devoted to alleviating global poverty has a special responsibility to operate efficiently and to not 

squander resources and perhaps to bend over backwards to ensure 

that the way it treats its own employees is generous but not lavish. 

That sends the wrong signal as well. 

Having said all of that, thank you very much. I think these are 

very important questions you have helped shed some light on here 

today. I look forward to following up with you. 

And I am going to follow up on your suggestion, Mr. Tarullo, to 

reach out to some of my colleagues and begin this dialogue with 

our policymakers sooner rather than later. 

Thank you all very, very much. 

[Whereupon, at 4:43 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 


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