[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



                THE STATE OF THE INTERNATIONAL FINANCIAL
                         SYSTEM AND IMF REFORM

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 22, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-19


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 22, 2001.................................................     1
Appendix:
    May 22, 2001.................................................    37

                                WITNESS
                         Tuesday, May 22, 2001

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

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    38
    Bereuter, Hon. Doug..........................................    41
    Carson, Hon. Julia...........................................    44
    Ford, Hon. Harold Jr.........................................    48
    Lee, Hon. Barbara............................................    50
    Waters, Hon. Maxine..........................................    54
    O'Neill, Hon. Paul H.........................................    56

              Additional Material Submitted for the Record

O'Neill, Hon. Paul H.:
    Analysis of Proposals for 100 Percent Debt Reduction from the 

      International Financial Institutions for the HIPCs.........    62
    Exchange Stabilization Fund Report...........................    65
    International AIDS Trust Fund Report.........................    93
    OECD Tax Havens statement....................................    60
    Written response to questions from Hon. Ken Bentsen..........    64

 
     THE STATE OF THE INTERNATIONAL FINANCIAL SYSTEM AND IMF REFORM

                              ----------                              


                         TUESDAY, MAY 22, 2001

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                    Washington, DC.
    The committee met, pursuant to call, in room 2128, Rayburn 
House Office Building, Hon. Michael G. Oxley, [chairman of the 
committee], presiding.
    Present: Chairman Oxley; Representatives Leach, Roukema, 
Bereuter, Bachus, F. Lucas of Oklahoma, Kelly, Paul, Weldon, 
Ose, Biggert, Shays, Miller, Capito, Ferguson, Tiberi, LaFalce, 
Waters, Sanders, C. Maloney of New York, Bentsen, J. Maloney of 
Connecticut, Hooley, Carson, Sherman, Meeks, Lee, Inslee, 
Schakowsky, Moore, Jones, Capuano, Hinojosa, K. Lucas of 
Kentucky, Shows, Crowley, Israel, and Ross.
    Chairman Oxley. This hearing of the Committee on Financial 
Services will come to order. Pursuant to the Chair's prior 
announcement, I will recognize myself for 5 minutes for an 
opening statement, as well as the Ranking Minority Member, and 
the Chair and the Ranking Minority Member of the Subcommittee 
on International Monetary Policy and Trade for 3 minutes each. 
All Members' opening statements will be made a part of the 
record, and it is so ordered.
    Today, the committee is meeting to hear from the Secretary 
of the Treasury, Mr. Paul H. O'Neill, on the state of the 
international economy. This hearing is mandated by the fiscal 
year 1999 Foreign Operations appropriations bill. That law 
provided for an $18 billion increase in U.S. funding to the 
International Monetary Fund. To ensure that the IMF would 
effectively use these funds, Congress included as a 
requirement, authored by Representative Mike Castle and a 
Member of our committee, that the Treasury Department report 
annually on IMF reforms and testify to this committee on the 
state of the international financial system.
    Earlier this year the committee heard from Federal Reserve 
Board Chairman Alan Greenspan, about the conduct of monetary 
policy and the state of the domestic economy. Given the 
interdependence of the U.S. with the rest of the world, 
economic growth in the United States is greatly affected by 
disturbances or crises in the international economy. For 
instance, the recent 30 percent drop in the Turkish lira caused 
Ohio-based Procter & Gamble to blame the Turkish economic 
crisis for a decline in earnings projections for the second 
half of 2001.
    Accordingly, the committee welcomes this opportunity to 
oversee U.S. international economic policy. An important way 
the U.S. has influenced the direction of the international 
economy is through its participation in international financial 
institutions, principally the IMF and the World Bank. These two 
institutions, as well as the General Agreement on Tariffs and 
Trade, were the result of the Bretton Woods Conference in 1944 
and comprised the Western world's response to the Great 
Depression and World War II.
    The IMF's traditional focus has been on exchange rates and 
balance of payments and how they effect trade and the stability 
and growth of global economy. The World Bank has traditionally 
focused on providing loans to assist countries in developing 
their basic infrastructures. As the international economy has 
evolved, so too have the institution's programs, with the IMF 
now also providing longer term loans for ``development'' 
purposes and the World Bank providing short-term structural 
adjustment loans.
    Most commentators agree that the Bretton Woods institutions 
were successful in reconstructing post-World War II Europe and 
Japan, assisting in the economic development of a number of 
less developed economies and avoiding international economic 
depressions. What there is not agreement on is their success in 
providing development in poorer countries and combating 
economic crises in a more interdependent world.
    The last half of the 1990s was marked by recurrent 
financial crises and a recognition that the economic situation 
in some of the world's poorest countries has gotten worse, not 
better, despite billions of dollars in development loans. As a 
consequence, both the international financial system and the 
multilateral lending institutions have been the subject of 
widespread calls for reform.
    In that regard the IMF legislation also had a provision, 
authored by International Monetary Policy and Trade 
Subcommittee Chairman Doug Bereuter, calling for the 
establishment of an advisory commission to review the need to 
reform the World Bank, IMF and other multilateral 
organizations. This so-called Meltzer Commission issued its 
report last year and will no doubt be the subject of review by 
this committee today and in the future as it conducts its 
oversight of the international financial institutions under its 
jurisdiction.
    In addition to U.S. participation in international 
financial institutions, I am sure the committee will want to 
hear the Secretary's thoughts on how the U.S. should respond to 
some of the economic problems in other countries and in other 
regions of the world. Japan's economic stagnation, Turkey's and 
Argentina's currency woes, EU's interest rate policy and 
foreign exchange policy may all be subjects on which the 
committee will seek guidance from the Secretary today.
    In closing, this hearing gives this new committee with its 
enhanced jurisdiction over the financial services sector a 
chance to hear from a new Administration on how best to use 
these international organizations to encourage trade and 
economic growth. From my own perspective, I am supportive of 
international efforts to improve trade and economic cooperation 
among countries. While some would prefer to take a more 
isolationist stance and withdraw U.S. participation and 
leadership from these institutions, such a stance is neither 
desirable nor conceivable in the 21st Century. A much more 
constructive route is to focus on how to best reform and use 
these institutions to increase economic prosperity for the 
United States and our trading partners.
    With that, I welcome you to your first appearance before 
the committee, Mr. Secretary, and I look forward to your 
testimony.
    I am now pleased to yield to the Ranking Member, the 
gentleman from New York, Mr. LaFalce.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 38 in the appendix.]
    Mr. LaFalce. Thank you very much, Mr. Chairman.
    Secretary O'Neill, I want to welcome you to your inaugural 
appearance before our committee. Oversight of the United States 
interests in the international financial architecture is 
without doubt one of the important functions of our committee. 
So I think it is appropriate that this topic is the occasion 
for your first appearance.
    Reform of the international financial institutions is a 
continual and complex task. For our part this committee and 
Congress have provided specific guidelines of reform over the 
past 3 years, and it is critical that we achieve good 
communication between our committee and the Treasury Department 
in order to ensure that these guidelines lead to good policy 
reforms. I hope today's hearing is only an initial step in what 
will be a continuous and cooperative effort.
    I would like to raise a conceptual issue that I believe is 
nonetheless critical to the reform effort, and that is 
identifying the proper mission of the IMF, the development 
banks, and especially the World Bank, and I am troubled by the 
impression that may be left by some of your remarks, correctly 
or incorrectly, regarding the nature of World Bank activities. 
There has already been some confusion and some reading of the 
tea leaves regarding your recent statement on this topic, and I 
look forward to clarifying your views here today.
    As some have interpreted your comments, distributional 
concerns should not be a part of the Bank's mission and the 
exclusive guiding principle for bank activities should be the 
promotion or productivity in per capita income growth. If that 
impression is accurate, I would be troubled. All should 
recognize that productivity is central to the long-term success 
of all economies, rich or poor. And I note that you rightly 
point to education as a critical productivity enhancing 
investment which the bank should be supporting.
    Indeed, in the Reagan era I authored the bill creating the 
White House Conference on Productivity, chaired by one of your 
predecessors, William Simon. The working chairman was Bill 
Seidman, the chief White House liaison was Roger Porter. So my 
concern is not with emphasizing productivity, but my concern is 
with any attempted exclusivity of this focus.
    Those of us who follow the history of the World Bank 
recognize a pattern of policy shifts over the years between so-
called growth policies and policies that emphasize poverty 
reduction. I think the McNamara era firmly established the 
moral imperative of poverty reduction at the bank. This was 
followed by a period coinciding with the Reagan years which 
ushered in a much more focused, some say exclusive focus on 
growth policies, however badly designed. But starting with the 
tenure of President Bush, the senior, and continuing through 
the end of the Clinton Administration, I believe the Bank has 
sought a path toward what could ultimately be an appropriate 
combination of growth and poverty reduction policies.
    We are not there yet, but I do believe that reform efforts 
already under way at the Bank may well succeed in stimulating 
long-term growth in developing countries while also providing 
desperately needed immediate relief from poverty. Both are 
necessary, but the latter is critical, in my view. Growth 
policies constitute a good long-term anti-poverty strategy, but 
they are insufficient for meeting the needs of those trapped at 
the bottom of the income ladder in the interim, and the interim 
could last for generations. The so-called long term can often 
amount to decades or even lifetimes, and the bottom of the 
income ladder often means less than a dollar a day.
    So it is unacceptable to suggest that the World Bank should 
ignore conditions of desperate poverty while exclusively 
pursuing growth policies, the benefits of which may trickle 
down to the poor, but only after many, many years.
    There are a number of other issues that I am extremely 
concerned about that I can't discuss in great length, but in 
1988 I included a provision in the omnibus trade bill which 
called for Treasury to make 6-month reports on the exchange 
rates and have a policy with respect to exchange rates, which 
is enshrined in law, and I worked this out with David Mulford. 
And we are entering trade agreements all the time with little 
regard to the effect of exchange rates and it is difficult to 
enter into a trade agreement with a country for free trade when 
it might be 1-to-1 and all of the sudden within a month it is 
not 1-to-1, it is 1-to-3 or 1-to-100.
    So we need much more attention on exchange rates, and note 
the Treasury has to give us a report every 6 months. The report 
preceding the Mexican debacle of 1994 did not even mention 
potential problems with the peso. So it has got to be a good 
report though, too. And so much is going on today around the 
world, Argentina and Turkey. I would like a glimpse of your 
views as to what is going on there and what we might be able to 
do.
    Thank you very much.
    Chairman Oxley. The gentleman's time has expired.
    The Chair is now pleased to recognize the Chairman of the 
Subcommittee on International Monetary Policy and Trade, the 
gentleman from Nebraska, Mr. Bereuter.
    Mr. Bereuter. Thank you, Mr. Chairman. Since my remarks are 
lengthy, I would ask unanimous consent to summarize and just 
make a point or two.
    Chairman Oxley. Without objection.
    Mr. Bereuter. Thank you, Mr. Chairman, and, Secretary 
O'Neill, welcome to the committee. As my colleagues know, we 
look forward to a productive working relationship with you and 
your key assistants, Assistant Secretaries or Under 
Secretaries, when you get them in line that is. And I would 
tell you that our subcommittee's agenda includes some work on 
authorization for the Export-Import Bank, the Asian Development 
Fund, something called the IFED, and then we will move into 
trying to knock down some of the trade barriers to the export 
of our financial services from the various types of 
institutions. But after that I think the most challenging, 
politically and intellectually challenging task before us is a 
fundamental reexamination of the international institutions 
architecture.
    The IMF in particular is controversial, especially charged 
now, in light of the fact that it is an element in the anti-
globalization demonstrations and effort around the world. I 
would like to offer just a couple of comments about the IMF 
specifically.
    I believe that the IMF and the Treasury Department under 
the Clinton Administration was unwilling to admit some of its 
errors and misjudgments. During the Asian financial crisis the 
IMF, with strong encouragement from key members of the Clinton 
Administration, employed what I think were counterproductive 
policies in both Thailand and South Korea, inappropriately 
treating them as the usual fiscal basket cases at the beginning 
even though their fiscal situation was sound. Perhaps any 
Administration would have made that judgment, but it was a very 
different case, and I think we need to learn from these errors.
    In addition, there were also loans to Russia, which might 
be better labeled as Yeltsin loans, and which will be shown 
over time, I think, to be one of the biggest blunders of the 
late 20th Century.
    However, at the same time we in Congress, I think, need to 
candidly admit that if we didn't have an IMF or an institution 
somewhat like it we would have to create one.
    The second area, as the Chairman already mentioned, I have 
a particular interest in the recommendations, majority and 
dissenting views of the Meltzer Commission, which resulted from 
language I first offered. That commission--and I would like to 
have your comments, your views on it today and later from the 
department.
    Looking at the majority and the dissenting views, they 
recommended that the IMF withdraw from questionable long-term 
concessional loans and focus instead on the extension of more 
manageable short-term, 4- to 8-month, credit areas. Moreover, 
the Commission recommended that the IMF should lend only to 
countries that meet certain prequalification criteria.
    I appreciate the independent judgment of the dissenting 
members of the Commission who contend that limiting the IMF to 
a set of prequalification criteria would preclude certain 
countries which are central to macroeconomic global financial 
stability from receiving assistance. For example, if this 
prequalification criteria would have been applied to the 1997 
Asian financial crisis, global contagion may have been far 
worse.
    They have devoted most of their attention to the IMF and 
secondarily to the World Bank and not too much to the regional 
banks. But with respect to the World Bank, they propose that 
the World Bank shift from highly concessional loans to a system 
of performance-based grants to the poorest countries in the 
world that lack reasonable access to funds in the capital 
market. Furthermore, the Commission recommended that the World 
Bank defer to the regional multilateral institutions for 
lending activity in Asia and in Latin America.
    I think the Congress should do a fundamental reexamination 
of their recommendations and the dissenting views, and I intend 
to in our subcommittee, with the assistance of both sides of 
the aisle, engage in that kind of activity as a major part of 
the subcommittee's activities for this Congress, and I look 
forward to your input, your recommendations in all respects.
    [The prepared statement of Hon. Doug Bereuter can be found 
on page 41 in the appendix.]
    Chairman Oxley. The gentleman's time has expired.
    The Chair is pleased to recognize the Ranking Member, the 
gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman.
    Welcome, Secretary O'Neill, thanks for being with us. Since 
its beginning 55 years ago, the IMF has grown to become the 
most powerful financial institution in the world, with 
effective control over the economies of some 50 developing 
nations. But there is a growing sense among many people, 
including myself, that the IMF is not doing the job it was 
established to do and that it has taken on new jobs that it is 
not able to do.
    In Asia, for example, the IMF not only failed to warn of 
the financial crisis, it was largely responsible for creating 
the crisis in the first place. It did so by forcing countries 
to remove restrictions on capital flows and then made matters 
worse by requiring governments to raise interest rates and 
slash budgets, turning a financial crisis to a full-blown 
economic depression in Asia, with reverberations throughout the 
world.
    At the same time, the new roles that the IMF has taken on 
for itself have led to dismal failures. The IMF's debt 
reduction program for the world's most heavily indebted poor 
countries, for example, has led to deeper poverty and continual 
debt for the poorest people of this world. In many of these 
countries, where HIV/AIDS, hunger and unemployment are rampant, 
it is common for governments to spend far more on debt service 
than on urgent human needs, such as health and education.
    In addition, by requiring poor countries to export their 
way out of financial and economic trouble, the IMF has forced 
American workers to compete against rising imports of low wage 
products. The IMF's misguided policies in recent decades are 
largely responsible for the lack of per capita economic growth 
in Latin America, plummeting per capita income in Africa, 
skyrocketing trade deficits in the United States, and a decline 
in real wages for American workers.
    Mr. Secretary, I hope you will agree with me that the IMF 
is an institution in desperate need of some structural 
adjustment of its own. For example, number one, the IMF and 
other international financial institutions should open 
themselves to public scrutiny and oversight. Where is C-SPAN 
when we need it? Major decisions, often impacting the lives of 
hundreds of millions of people, the most vulnerable people in 
this planet, are taken behind closed doors. In fact, the 
Congress, to be honest with you, doesn't even know the role 
that our representative in the IMF is playing.
    Number two, the IMF should make lenders pick up the tab for 
their losses in financial crises. If you want to invest in 
Asia, that is fine, but if you lose money there, don't ask the 
taxpayers of this country to bail you out. Our conservative 
friends call this moral hazard. I call it corporate welfare.
    Three, the IMF should stop prescribing ``one size fits 
all'' austerity conditions that often lead to economic 
stagnation and poverty. Instead, the IMF should allow countries 
to pursue alternative policies to create stability without 
austerity; in other words, sustainable economic development.
    Fourth, the IMF should stop pretending to be a development 
institution. Its misguided development attempts have resulted 
in rising debt and deepening poverty for the poorest countries 
in the world. Developing countries need real transfers of 
resources and technology, direct investment and development 
aid, not austerity policies and more debt.
    And last, but not least, the IMF and the World Bank should 
cancel--and I hope that you will think about this and perhaps 
agree with us--should cancel and not just reduce the debt that 
they have created among the impoverished countries of the 
world. The IMF's current debt reduction program, according to 
the recent report by the U.S. General Accounting Office, is 
keeping poor countries hopelessly in debt and the IMF forever 
in charge.
    Mr. Secretary, I hope you will join me in calling for these 
reforms, and I hope that you will join Members of Congress from 
various political philosophies in working to make these reforms 
a reality. I thank you for joining us today.
    Chairman Oxley. The gentleman's time has expired, and we 
will now turn to the Secretary for his statement.
    Mr. Secretary, welcome to the Financial Services Committee 
for your first appearance before our committee and hopefully, 
not the last. Thank you.

 STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY, U.S. DEPARTMENT 
                        OF THE TREASURY

    Mr. O'Neill. Well, thank you, Mr. Chairman, Mr. LaFalce, 
the distinguished Members of this committee. It is a great 
pleasure to have this opportunity to be with you today to talk 
on these important subjects. Since there are so many of us and 
the time is already moving on, with your permission, Mr. 
Chairman, I will simply put my prepared statement into the 
record.
    Chairman Oxley. Without objection.
    Mr. O'Neill. Thank you, sir. And maybe just make a few 
observations and then engage you in the things that you are 
most interested in talking about.
    I believe the institutions we are here to discuss today 
have been, and are, and need to be important to the world. 
Having said that, I also believe that reform is both desirable 
and necessary, in the sense that I think we should expect a 
great deal from these institutions and from what they 
accomplish, and I think it is not too difficult to find, both 
in the experience and the analysis that has been done of these 
institutions, shortfalls in what one would describe as an ideal 
performance. So it is clear to me that changes are desirable 
and need to be made.
    It would be nice if we could stop the world so that we 
could do it all at once. I frankly don't think that is 
possible. As evidence, I would suggest to you that from January 
20 we have been necessarily engaged with these institutions on 
matters of the moment, if you will, with Argentina and Turkey. 
It is simply not possible to say we are going to have a 
complete transformation of the way these organizations work and 
implement changes on the fly. This is not to say that we can't 
begin to reform and begin to have an opinion about directional 
changes, but perhaps that will come out in our dialogue in the 
next couple of hours.
    I think these institutions developed over a considerable 
period of time and there is an expectation of practice and 
procedure in the world. I think, if we simply drew a line and 
said from this day forward these things will not rule, the 
relationships any more, that we would find we would not like 
the consequence of, in effect, shutting off the lights on 
policy the way it has been and insisting it change tomorrow in 
a sharp and distinct way. So I think for sure we need reform, 
and we need change, and we need to do it in a way that gives 
people around the world a clear indication that we are intent 
on changing the rules of engagement, if you will. But we need 
to be deliberate and certain in the changes that we do want to 
make. Of course, what we suggest to these institutions, I think 
we need to understand, is a voice among several. In most of 
these institutions we hold a significant position, but not an 
absolute controlling position. At the same time, I think those 
of us in the Administration do understand that what we say to 
these institutions we say on behalf of the American people. So 
it is very important that this not be an independent view; that 
is to say, not a view independent of the view of the Congress 
and the will that you work through legislation.
    But I do think working together we can help the rest of the 
world to attain a living standard at least directionally 
consistent with what we have been able to achieve in this 
country and in a fairly near term. Mr. Chairman, with that, I 
would be delighted to begin responding to questions.
    [The prepared statement of Hon. Paul O'Neill can be found 
on page 56 in the appendix.]
    Chairman Oxley. Thank you, Mr. Secretary. And let me begin. 
First of all, thank you for your remarks and for the prepared 
statement that I reviewed in regard to the proposal of reforms 
on the international front.
    Mr. Secretary, I was interested to read this past Sunday an 
op-ed piece in The Washington Post in which you were criticized 
for remarks made regarding the World Bank anti-poverty programs 
and the OECD initiatives concerning international tax and 
banking safe havens. I thought it was a rather, shall we say, 
in your face kind of an op-ed piece and I thought perhaps since 
you were testifying today, it would be an appropriate time for 
you to perhaps reflect on that op-ed piece, assuming you have 
seen it or certainly your staff has seen it. I will give you an 
opportunity to respond.
    Mr. O'Neill. Well, thank you very much. Indeed I did see 
it. I suppose from graduate school days I have been a consumer 
of four or five newspapers every day. Now that I am here I find 
I don't enjoy them quite as much as I used to. I did see this 
column, and frankly, I was surprised that if Mr. Hoagland was 
going to write what he did, he didn't bother to call me to find 
out if what he was criticizing me for was fair game or not. 
With regard to the issue that he raised about the statement 
that I have issued about the so-called tax haven process with 
the OECD, in fact, in a nutshell--I would be happy to supply 
this for the record as well--what I have said is this, and I 
believe it is a correct policy for the United States: we are 
intent and, in fact, we have a legislative mandate at the 
Treasury to ensure that all people who fall under the tax laws 
of the United States fully and faithfully pay their obligations 
under the tax laws of the United States. In that regard, we 
have before my time been associated with the OECD in working to 
develop an arrangement so that our country and reciprocal 
countries can provide information to each other to assure that 
information on individuals that fall subject to the tax laws of 
any of the reciprocal countries can be made available with 
probable cause. I reaffirmed and reasserted as strongly as I 
know how to in the English language that we were committed to 
that principle and we were committed to working with the OECD 
to accomplish that purpose with the countries of the world, not 
just the members of the OECD.
    [The information referred to can be found on page 60 in the 
appendix.]
    At the same time, I was getting lots of letters from 
respected Members of Congress from both the House and Senate, 
suggesting to me that the OECD was not only helping with this 
initiative to help us fully enforce our tax laws, but that the 
OECD project was wandering off the path and getting involved in 
so-called tax harmonization and trying to interfere in the tax 
structure judgment of sovereign nations. I went out of my way 
again to say as clearly as I know how to do in the English 
language that we did not wish to be associated with any such 
process.
    Those are the two principal issues in the debate in which I 
tried try to clarify the U.S. position in writing my opinion 
and making it available to the public. Mr. Hoagland, I think, 
perhaps without having read what I wrote, chose to characterize 
my intervention as somehow creating a difficulty for U.S. 
foreign policy because I was now advocating dirty money.
    Perhaps all of you who have lived in the public eye, most 
of you for a very long time, are accustomed to this. I am not 
so much accustomed to it. Perhaps I will become accustomed to 
it.
    On the issue of what it is I have said about the World 
Bank, and again I think Mr. Hoagland suggested that I was 
personally attacking Jim Wolfensohn, I must tell you this 
column appeared on Sunday and I really found it quite humorous 
to be at dinner at Jim Wolfensohn's house on Sunday night so we 
could have a laugh about it together. It is true that I have 
said that I think the IMF and the MDBs and the World Bank need 
to reform. These are not things that I say in the closet or to 
a selective audience. I have said it on the public record over 
and over again, as recently as at Jim's house on Sunday night 
when there was a distinguished group gathered to talk about the 
reasons why these institutions exist, which is the existence of 
4.8 billion people who live in the world with living standards 
that I think we are all horrified by. And I said as directly as 
I know how in that company that I do believe we need to raise 
our standards and expectations of what these institutions 
deliver. That was not said in a way to be personally critical 
of Jim Wolfensohn and the things he has been trying to 
accomplish. Quite to the contrary, I think all of the good 
things that have been accomplished should be credited. On all 
of the shortfalls, we should work together, not in a mean-
spirited way to find fault with the institutions, because I 
begin with the presumption that we all want to do good and it 
is useful to learn from our mistakes.
    I must say there is an awful lot of room to learn, because 
if you look at what we have accomplished in terms of raising 
the standards of living around the world in the last 50 years, 
we have a very long way to go. Despite the fact that we have 
spent hundreds of billions of dollars or provided hundreds of 
billions of dollars, there is woefully little to show for it, 
at least as I would measure the productivity that one could 
expect to see from well-deployed money.
    So again, I guess I am not too surprised to find people 
writing things without what one would consider to be the 
necessary information, but I take it as part of the badge of 
having the honor to do public service again.
    Chairman Oxley. The gentleman from New York, Mr. LaFalce.
    Mr. LaFalce. Thank you very much, Mr. Chairman.
    Mr. Secretary, I want to emphasize something that I just 
didn't emphasize enough before at that point. I do want to work 
with you in a very cooperative manner, in a very bipartisan 
manner. I look forward to that and I think I can speak for, if 
not all, virtually all of the Democrats on this committee, too, 
and we look forward to getting together with you in the near 
future to start that process.
    Let me just focus in on two areas: First, exchange rates 
and then; second, the roles of IMF and the World Bank with 
respect to two issues in particular, debt relief and AIDS. But 
first exchange rates.
    You were the President of Alcoa Aluminum, and if you 
entered into a long-term contract with Mexico, would you have 
taken payment for a 30- or 40- or 50-year period in pesos 
without regard to the possible devaluation of the Mexican peso? 
How would you have accounted for that, and how would you, 
please, account for a free trade agreement, whether it is with 
Canada or with Mexico or Israel or Jordan or free trade 
agreement with the Americas? How would you account for the 
potential volatility of exchange rates, because our trade 
agreements historically have not done that?
    Mr. O'Neill. Well, you are right. This is a subject that 
first as President of International Paper and then as CEO of 
Alcoa for 13 years.
    Mr. LaFalce. I didn't mention International Paper, because 
they closed the plant in my congressional district, Mr. 
O'Neill.
    Mr. O'Neill. I noticed that.
    Mr. LaFalce. That is J. Stanford Smith.
    Mr. O'Neill. That is right. I noticed that Tonawanda was 
part of your district, and I was happy to say that Tonawanda 
was closed before I got there. It was not on my watch. But as 
you know, there are other great International Paper facilities 
in the State of New York.
    In any event, how does one deal with this in the private 
sector? First of all, you do not make what I would call 
unbalanced contracts, actual relationships across country 
boundaries, because you are aware of the uncertainties and 
complexities that can develop over time. But you are quite 
right to put the time dimension on the question you did. 
Because in the kinds of businesses that I have been in, when 
you go into a country and either buy operating plants or build 
operating plants, those are decisions for 50, maybe even 100, 
years. So first of all, you do not go in unless you have a 
fairly high level of confidence that something like the rule of 
law that we know here and enforceable contracts and an ability 
to keep corruption out of your immediate activities exist. So 
there are some preconditions that intelligent people make 
before they put assets on the ground.
    Mr. LaFalce. If that was the case, we never would have gone 
to Mexico, because Vincente Fox campaigned on the imperative of 
cleaning up the endemic corruption.
    Mr. O'Neill. I was careful to say within the framework of 
the work that you do as an individual company. I am one who 
believes you can pretty well secure for yourself an ability to 
work in a corridor of Western values if you insist on it. And I 
think I can demonstrate to you I was able to do that in Brazil 
and in Mexico and in Korea and a lot of other----
    Mr. LaFalce. How would you deal with the exchange rate 
problems and how do we deal with that in our trade agreements?
    Mr. O'Neill. I guess I think it is not possible to protect, 
nor probably is it desirable to protect, all of our individual 
companies and factors of production against shifts in the way 
the world is configured and the risk associated with changing 
government structures and rulers and presidents and parliament 
and Congress and all the rest of that.
    Mr. LaFalce. Should your trade agreements have some escape 
hatches?
    Mr. O'Neill. I do not think it is possible to create a safe 
corridor for capital that says no matter what you do we are 
going to ensure you that sovereign governments, in general, 
follow fair exchange rate practices. So no, I don't think that 
you can be protected by your government against exchange rate 
risk. But there are market devices that exist out there that 
those of us in the private sector use every day, in effect to 
make sure that for production purposes we work in the currency 
of the country so that whatever happens our production cost, in 
effect, remains protected against the rest of the world. Then 
the other thing you look at if you are good at making money in 
the worldwide operations, you look at the basic physical 
competitiveness of what you do, so that no matter what happens 
in the world you have an anchor that gives you a better 
position than anyone else in the world, and then you would use 
derivative contracts to protect your foreign exchange risk.
    Mr. LaFalce. With all due respect, Mr. Secretary, I find 
that unfortunately quite deficient, because I have too much 
experience with trade flows being dependent primarily upon 
currency fluctuations. You look at the trade we have with 
Canada and if we are dealing at 88 cents to the dollar, that is 
one thing. If we are dealing at 65 cents to the dollar, it is 
something else. Businesses close and people lose jobs and if 
you enter into an agreement on a certain set of assumptions, 
and that is a certain relationship between the two currencies, 
and then there is a 50 percent change or a 5000 percent change, 
the most basic fundamental element of the bargain has changed 
so drastically that you never would have entered into that 
bargain. And I just don't think we can enter into trade 
agreements without considering that question. And nobody, 
Democrat or Republican, has come to grips with that issue. And 
I don't find your response thus far adequate.
    Chairman Oxley. The gentleman's time has expired. The 
Secretary may respond.
    Mr. O'Neill. As I said to you, I was the Chairman of Alcoa 
for 13 years and at International Paper for 10. During this 
time I ran a company that lived in a world where the yen varied 
between 270 and 80 and mine was always the most profitable 
company in the world, without regard to exchange rate 
fluctuations between the yen. If you would like to talk about 
European countries, yes, it creates pain on a short-term basis 
if your financial management is not good at providing 
derivatives to cover exchange rate risks, but it is a fairly 
short phenomenon. If you know what you are doing, you can make 
money in a very substantial way in a world that is fraught with 
uncertainty and the uncertainty of sovereigns changing and 
currency rates changing, because sovereigns make big mistakes 
about the financial structure of their own country.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Iowa, Mr. Leach.
    Mr. Leach. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. Your written testimony very 
thoughtfully focuses on IMF reform and I think quite properly 
it underscores the effort to promote in three words, 
productivity, transparency and prevention. In that context, 
particularly of the first and the third, productivity and 
prevention, it is arguable that the greatest issue in the world 
today, particularly the developing world, is disease 
prevention. Here it is relevant to note that the so-called 
Meltzer Report called for greater attention to the AIDS 
problem. It also called for a greater grant, as contrasted with 
lending, component of the international financial institutions.
    Consistent with this reform approach, this Congress, led by 
this committee in the last Congress, passed authorizing 
legislation for the establishment of an AIDS trust fund and in 
the last 6 months there has been an awful lot of international 
discussions on the subject. In any regard, the legislation that 
emanated from this committee, which is the law of the land, 
directed the Secretary of the Treasury to negotiate the 
establishment of such funds to be housed at the World Bank. 
Could you update this committee on the status of those 
negotiations?
    Mr. O'Neill. Well, as I am sure you know, a week or so ago 
the President announced the intention to provide $200 million 
as a beginning for a trust fund arrangement. We are still 
working out the details of exactly how this should be housed 
and administered, and the details are not quite finished.
    Mr. Leach. I appreciate that. I would only stress that the 
World Bank has more experience than many understand, and it has 
a mechanism of a 5-to-1 leveraging circumstance, of which the 
one is the United States. It seems to hold an awful lot of 
potential for an early timeframe addressing the trust funds 
issue. And I would only urge, as we have privately discussed, 
the Treasury put its oar in as strongly as it can. And I am 
pleased with the President's announcement. We all hope for 
more, but I hope this is a first step in that direction.
    Thank you.
    Chairman Oxley. Does the gentleman yield back?
    Mr. Leach. Yes, I do.
    Chairman Oxley. The gentleman yields back.
    The gentleman from Vermont--he is temporarily gone.
    Mrs. Maloney.
    Mrs. Maloney. Welcome, Mr. Secretary. In 1998, the world 
faced an Asian contagion so potentially massive that our 
leaders in this country feared that our domestic markets could 
be destabilized if it spread. Before this committee Secretary 
Summers said the contagion would put American savings at risk, 
because of what it would have meant for the broad pattern of 
financial markets if it had not been contained. Obviously, with 
the explosive growth of investing in this country through 
mutual funds and retirement plans, such a situation could 
impact tens of million of small U.S. investors.
    Given the possibility that we could face another situation 
like that in the future, I have a question about how the 
Administration--the policy that you would put forth. Would your 
Administration actively work with our international partners to 
fend off such a crisis or would you stand on the sidelines and 
leave countries to fend for themselves? In such a situation do 
you support only IMF lending to countries that prequalify for 
loans under the conditions developed by the Meltzer Commission?
    Mr. O'Neill. Thank you very much.
    Let me begin by saying I think in the world that we lived 
in then, and even the one that we live in today, that contagion 
is an issue that should concern us. At the time that Secretary 
Summers spoke to you I suppose I would have said to you what he 
did, but I frankly do not believe that we should accept the 
notion of contagion as something that God intended for us to 
have. In fact, I think the idea of contagion is one that we 
should work very hard to develop mechanisms to defeat.
    In this sense, if you look today at, let's say, some 
locations or nation-states that have had financial problems 
that have been in the news--everyone knows something about 
Turkey and Argentina and Indonesia. If you look at those three 
places, and you look at their geographic relationship to each 
other, and you look at their international trade with each 
other, I submit that you would be very hard-pressed to make a 
case that they were in any way related to each other. Yet we 
have this fashionable notion that if something happens to the 
financial condition of one, that it could be difficult for 
other countries, like the three that I mention and a host of 
others. It seems to me we should not accept this proposition 
that somehow a weakening financial condition in one difficult 
place is accepted as a basis for money to race around the world 
and be withdrawn from other markets on the basis of an 
experience in one country.
    Now, I don't think it is so easy to solve the problem of 
potential contagion. But associated with recognition of the 
possibility of contagion has come what I would say is too 
frequent intervention, because, in fact, we have convinced 
ourselves we did not have a choice; that is to say, if we did 
not act, that the consequences would be multiplied like 
dominoes falling over. That may have been correct, but by 
making money available on that theory, I think we do promote 
the idea that the Meltzer Commission report found not a good 
one, that somehow we have got to intervene everywhere on the 
spur of the moment in order to protect ourselves against the 
consequences of someone falling. I think, as we work, that we 
can limit country problems to individual countries, and that we 
will, with that, have a much stronger ability to do 
preidentification of places that are getting into financial 
difficulty and, therefore, be able to intervene on a 
precautionary basis rather than standing back and waiting for 
things to come apart.
    So, yes, I think we need to be worried about contagion. I 
think in the most desirable of worlds we need to be 
identifying, unraveling financial conditions and working 
through the international financial institutions before there 
is a real problem. And in that regard I think we need to become 
increasingly insistent about the fundamental conditions for 
association with these institutions which are, as I said 
earlier, insisting on at least directional activity toward the 
rule of law and enforceable contracts and an accelerated effort 
to reduce corruption.
    Chairman Oxley. The gentlelady's time has expired.
    The Chair now recognizes the gentleman from Nebraska, Mr. 
Bereuter.
    Mr. Bereuter. Thank you, Mr. Chairman. I wonder if you 
would comments on two things, Mr. Secretary. First of all, it 
seems to me we have an international problem of one or a few 
people having huge amounts of money which they can move around 
the world immediately or in very, very short order and that 
they can manipulate the currency market and the stock markets 
with devastating effect, that then the IMF is then asked to 
come in and pick up the pieces and it has a contagion effect 
beyond that.
    I remember leading a small delegation in the office of 
Donald Tsong, who has a very powerful position of Finance 
Officer for Hong Kong. He was badly shaken. He had just in his 
view taken on this group of pirates what were attempting to 
break the peg between the Hong Kong dollar and the U.S. dollar 
and he was successful because he intervened in the stock 
market, which was contrary to every ideological bone in his 
body, but he was sitting on $80 to $100 billion reserves at the 
time. A country with small reserves couldn't handle that 
situation.
    I wonder what you think we need to do to adjust to this 
reality that exists today. Does, for example, the Bank for 
International Settlements have a role? What do we do?
    The second question relates to the Asian financial crisis 
and how the IMF responded to Thailand, but particularly also 
the Republic of Korea. There it seems to me a major 
contributing factor was simply bad banking practices, a whole 
array of things, lack of transparency, crony capitalism, and I 
am wondering if you think the IMF did an adequate job of 
warning about those problems and those warnings were simply 
ignored and not given much attention or if, in fact, the IMF is 
up to this task, if it should be allocated in some sort of 
different fashion, because I think the consequences were severe 
and they eventually gave those countries fiscal problems that 
they didn't otherwise have.
    I welcome any kind of comments, or perhaps you need more 
time to reflect on this. But any initial comments or proposals 
to follow up on will be appreciated.
    Mr. O'Neill. I think we will give you something for the 
record in addition to what I will say. I think the IMF is up to 
doing the role that it should be doing, which in a way would 
scale back some of the breadth of what it is doing now and what 
it has in the recent past been trying to do, by becoming much 
more focused. So I think the resources can be there to do a job 
that is doable.
    With regard to renegade money, what I would call renegade 
money, I would say something else. I think we need to be 
especially vigilant of what I would call the presence of 
substantial amounts of hot money in places that have financial 
weakness. What I mean by that is money that is not invested in 
the hard, economy on the ground, because if it is invested in 
physical assets, it is not so easy to pull up a smelter or 
paper mill by its roots and run off with it whenever you wish.
    So I think there are some indicators of danger that one can 
see. I think the other thing we need to do is partly related to 
what I said about the dangers of contagion. If we can create a 
satisfactory way for dealing with the issues of contagion, then 
we can do a good job of preidentification of places that have 
difficulties. Let's say that the IMF would recommend to a 
country these are things that you need to do in order not to 
become a crisis country and a country chose to ignore that 
advice, to solve the contagion problems we could teach them 
very valuable lessons by letting so-called hot money take a 
bath. I think in places where capital rates of return are, 
let's say, 25 or 30 percent a year, you know that there is a 
reason for rates to be so much higher than the cost of capital 
and that reason is risk. I think the nasty part of what we have 
done in bailing out some of these countries is that we have, in 
effect, let people get away without paying the risk premium 
that was implied in the rate of return that they were able to 
get. We need to figure out a way that when somebody, in effect, 
bets the farm on a 25 percent interest rate environment, if the 
circumstances suggest they should lose it all, they should lose 
it all.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chair.
    As you know, Mr. Secretary, we don't have a lot of time and 
I apologize for that. I would like to ask you three questions 
if I could.
    Number one, I and many Members of Congress and the public 
are concerned about the issue of transparency. And while I can 
appreciate that in rare circumstances every organization in 
this world needs secrecy, the fact of the matter is that the 
IMF is cloaked in secrecy. Can you assure the committee that 
you will do what you can to open up the IMF so that the 
citizens of this country and the world, in fact, can get a 
better understanding of what that institution does? That is 
question number one.
    Question number two deals with what some call moral hazard, 
some call corporate welfare. You are aware that the IMF 
essentially bailed out many large banks who made unwise 
investments in Asia. People all over this country are outraged. 
When they make bad investments, the United States Government 
and the IMF do not bail them out. Will you be prepared to stand 
up in a very strong way to say to the banks and financial 
institutions if you want to invest poorly, go ahead, but we are 
not going to bail you out?
    My third question is will you urge the IMF to not just 
reduce the debts of the most impoverished countries of the 
world, but, in fact, to cancel them? As you know, our country 
and other industrial countries have said that the IMF has not. 
According to a recent report by the GAO, the IMF policies are 
keeping poor countries hopelessly in debt. The question is will 
you urge the IMF to cancel, not just reduce debts?
    Those are my three questions, Mr. O'Neill.
    Mr. O'Neill. Thank you.
    On the first issue of transparency of the IMF, what I would 
like to do is meet with you, or have my staff meet with your 
staff, and understand exactly what it is you would like to have 
for the benefit of the public that you do not now find 
available. To the degree that we can agree that such 
information ought to be available to the public so they can 
understand what these institutions are doing with our money.
    Mr. Sanders. Thank you. We will take you up on that, and we 
will give you a ring. Thank you.
    Mr. O'Neill. To the issue of corporate welfare, what I was 
saying earlier to the previous question, was that I want to 
develop a way so that people who take a risk of earning 25 
percent actually have an opportunity both to realize that 25 
percent and to lose everything if that is what the 
circumstances of country suggest. I am certainly not for 
bailing out investors when they made a free will decision and 
it turned out to be wrong. I don't think that should be the 
business of government.
    Mr. Sanders. Good, glad to hear that.
    Mr. O'Neill. On the third issue of debt forgiveness I would 
say two things. First of all, I don't know of a single case, 
and I don't pretend to be 100 percent sure of the history of 
these institutions, but I doubt if there is a single case where 
a country was forced to take money from these institutions. 
That means that these loans that are now being the subject of 
forgiveness are something that was agreed between the granting 
institutions and the countries. So I think the idea that 
somehow the IMF and the World Bank and the MDBs somehow 
intentionally put countries into a financial tailspin, I don't 
know the evidence of that.
    Mr. Sanders. Mr. O'Neill, you are aware that in some cases 
the IMF lent money to dictators and really unscrupulous people 
who made debts in a very undemocratic way without input from 
their people, and now the poor people of these countries are 
stuck with these debts that the IMF should not have negotiated 
with dictators and corrupt people. I would just mention that.
    Mr. O'Neill. Let me say again what I said about rooting out 
corruption. If you are a real investor, you don't knowingly go 
where corruption is because it raises the risk premium for your 
capital. So I am not one who wants to make a case that we 
should be--or that our intermediaries, which I consider these 
institutions to be--should be knowingly making money in the 
face of corruption.
    Mr. Sanders. You are aware that that has happened, right?
    Mr. O'Neill. It is certainly true in retrospect, as one 
looks at the fact that there have been people that absconded 
with the money. There is no doubt about that. I have said on 
public record, I may as well say it again here, sending the 
money that was sent to Russia was beyond belief, but it was 
sent by the previous Administration and actually at the 
insistance of the previous Administration through the IMF to 
Russia. I am not in favor of doing that kind of thing.
    Now, should we forgive money at a faster rate? I think we 
should see how this debt forgiveness program is doing. But 
given the opportunity, I would say this to you as well, as I 
begin to examine these programs and activities in more detail, 
I ask myself the question, what does all this look like from 
the point of view of the president of a recipient country? Then 
I look at what we have been doing with the so-called HIPC 
relief and we are saying to the sovereigns who receive 
principal and interest relief you must do this with the 
proceeds, it makes me wonder very much if we have really given 
careful consideration to what it is like to have a 
responsibility for running the country rather than being at the 
end of a direction line where there is no coordination among 
the different trusts that are being put on people. So, while in 
some sense one might say as we give relief through the HIPC 
activity and we reduce or eliminate principal payments or 
interest payments, there is something very attractive about 
more investment in education. But from the financial point of 
view, it may be the worst thing in the world to insist that a 
sovereign now take on new debt obligation as though it were 
suddenly financially secure, when maybe the best use of relief 
from principal and interest is simply to put the country on a 
sound enough financial basis so that it may some day have hopes 
of being financially solvent.
    Chairman Oxley. The gentleman's time has expired.
    The Chair will announce that there are two votes on the 
floor of the House, Mr. Secretary. There are about 3\1/2\ 
minutes left on the first vote. The hearing will stand in 
recess.
    [Recess.]
    Chairman Oxley. The hearing will come to order.
    I now recognize the gentleman from Alabama, Mr. Bachus.
    Mr. Bachus. Thank you.
    Secretary O'Neill, last week you testified before the IMF/
World Bank about the banking crisis in Japan, and you pointed 
to what we did here during the 1980s, that we wrote off the 
debt, we punished the wrongdoers, and we made a fresh start.
    Mr. O'Neill. Right.
    Mr. Bachus. I agree with you that is an appropriate thing 
to do on many occasions.
    I would ask you to look at that analogy with the highly 
indebted poor countries. I think you have correctly said that 
in many cases going forward, we ought to use grants as opposed 
to loans. In fact, in the past I would submit to you that we 
should have used grants instead of loans. Because we didn't, we 
have created a horrendous situation in these countries.
    I am not going to cross-examine you about this, because I 
am sure you are aware that millions of people are dying in 
these countries because funds are being used to repay debt that 
could be used for health care, education, sanitation and 
infrastructure.
    I would ask you this: I am aware that President Bush in his 
second debate said and acknowledged that debt forgiveness is 
appropriate at times. Are you aware, number one, that the rich 
countries of the world have agreed to forgive the bilateral 
debt, but that we still have the IMF and the World Bank, and 
they say they are not in a position to forgive much of the 
multilateral debt?
    First of all, I would say are you aware of that, that we 
have a contrast between the rich countries forgiving debt, yet 
the multilaterals not taking that same step?
    Mr. O'Neill. Well, I think it is true that we have some 
inconsistency even among what rich countries have decided to 
do. But for sure there is a difference, say, between the 
beginning initiative with the HIPC--and I would characterize it 
as that, a beginning initiative--and what some countries have 
done in a bilateral way, yes.
    Mr. Bachus. Are you also aware of some of the successes 
that we are hearing from Zambia and other countries? There are 
countries we are hearing of success, the number of children 
enrolled in schools and beginning to turn some of these 
epidemic conditions around as a result of the debt relief that 
has been granted?
    Mr. O'Neill. Indeed, I have looked at individual country 
reports and examined what has happened to life expectancy 
figures and attendance of children at school and the presence 
or absence of safe water and sanitation conditions and the 
other things we associate with economic progress or well-being 
of human beings. But as I said in my testimony, I think where 
you find there is real progress, the standard of living is 
going up as measured by the average earning power in the 
economy. I guess one of the things that I am interested in 
seeing if we can develop as we go along is, in fact, a very 
direct measure of what is happening to the average income of 
individuals and families in all of these developing places 
around the world, so that maybe we begin with that statistic at 
the top of everything we look at, because it is probably the 
best summary figure that tells us whether or not life is really 
improving in these places.
    I suspect you probably have traveled as much or more than I 
have around the world. It is really difficult to believe the 
conditions that exist in some countries, and, in fact, to see 
places that lived under colonialism for a period of time that 
have actually receded far behind where they were when the rule 
of colonialism was lifted, and to wonder how we cannot only 
resolve to change these outcomes, but to accomplish a 
substantial change in direction and level of standard of living 
everywhere in the world.
    Mr. Bachus. I would also submit to you in regard to income 
levels that we are having children go to school for the first 
time, and I think there is a lag time, but I think once you 
start educating children, there may be a few years before the 
income rises, but I think we would all agree in this room that 
education is essential to improving living standards, and in 
many of these countries they simply lack those schools.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Bachus. Let me simply say this: I would hope that the 
Treasury would analyze the pros and cons of the proposals to go 
further with debt relief and provide 100 percent debt 
forgiveness for these countries. I would ask you, if you have 
already done so, to supply some of the information to us. If 
not, I would hope you would consider such an analysis.
    [The information requested can be found on page 62 in the 
appendix.]
    Chairman Oxley. The gentleman from Texas, Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Secretary, let me say, reading through your testimony, 
I don't have any particular problems with what you say on its 
face, but I think when you dig a little deeper, I think it 
becomes much more complicated. I used to think I was sort of 
becoming somewhat of a rational expectationist, but now I think 
now irrational behavior is a more realistic economic model, 
particularly when it comes to international markets.
    Even in your testimony, I think you have some conflicts in 
how things have really played out, but I want to give you the 
benefit of the doubt, because you are new to the job, and you 
are going to have to ride through these things as it is. But I 
do want to get your viewpoints on a couple of these things. 
Your core objectives I agree with, but then you talk about 
later on page 3 that conditionality is sometimes a problem, and 
you reference Indonesia.
    We have had debates on this panel, left-right, right-right, 
left-left and in the center, on questions of conditionality and 
whether or not the Fund and the Bank and Treasury and the G-7 
were too harsh on countries. But I think there come times when 
you want to promote sound monetary, fiscal exchange policy that 
it requires some pretty tough conditions that have to be 
imposed. I would concur that Indonesia has not worked, whereas 
South Korea has worked fairly well, and Thailand has worked 
fairly well.
    I would also agree with your comments regarding issues of 
moral hazard, and I am all for letting investors lose their 
money. What they do with their own money is their own business, 
as long as it is legal. But we also have to recognize, I think, 
that you have questions of capital flows in emerging economies 
and the impact that that has. I doubt you would agree with, and 
I hope you don't agree with the idea, of having some sort of 
capital flows regulation or capital flows tax. Malaysia, as you 
know, tried that, and it ended up being a failed experiment.
    The I would like you to comment on those, but the three 
questions I have for you are this: Your Administration has said 
that you don't want to pursue the same policies that were 
pursued in the past in dealing with bailouts. I am curious of 
how you view Turkey different, and perhaps Argentina--maybe you 
don't want to comment on that--but, how you view Turkey 
different from what South Korea and Thailand were.
    Second of all, we had a hearing last week regarding the 
HIPC countries, and the GAO reported that it would take 15 
years of 6 percent annual real growth for the HIPC countries, 
the majority of the HIPC countries, to grow out of the 
concessional lending program. You talk about the idea of 
lending to pay debt payments, which I think is a disastrous 
policy. What is the Administration's long-term view on trying 
to address that, or are we going to just continue to paper 
over? This goes back many Administrations.
    Finally, what are your views or the Administration's views 
on the issues of dollarization and monetary control boards?
    Mr. O'Neill. OK, good. I don't think you asked me a 
question about conditionality. You were just commenting on what 
I said in my testimony. But I do want to make a point about 
conditionality, if you don't mind.
    You know, I believe it is fundamental and it is a question 
of management principle, if you will. If you have 
conditionality in any arrangement that you might have, in a 
private contract or understanding or in relationships between 
these international financial institutions and a country, if 
you have three conditions, and you have people to oversee three 
conditions, and you have measures that you can use to know 
whether or not the conditions are being met, I would suggest to 
you you are much more likely to actually accomplish what you 
want than if you have 300 conditions and they are very murky 
and immeasurable. It is in that sense--and I understand I am 
drawing polar extremes to make the case--that I see a need for 
these institutions to be very careful in the number of 
conditions that they put under the umbrella of conditionality, 
and include as a general rule only those that are measurable 
and, therefore, enforceable and necessary to the broader goal 
of improving the living condition of a people in the affected 
country.
    Now, on the question of do we handle Turkey differently 
than Secretary Rubin or Secretary Summers might have done, I 
honestly don't know. What I can tell you is that what we did in 
this particular case was to be very clear that we thought the 
intervention institutions of choice should be the IMF and the 
World Bank, and that these are the institutions that at least 
in theory we have held out as the right way for the world to 
deal with financial crises, problems, and we ought not to 
become engaged in bilateral assistance on top of or in lieu of 
appropriate intervention by the IMF and the World Bank.
    The other thing I think maybe one can say is different from 
some of what has gone before is to be very strong in our 
suggestions to the institutions that they should expect the 
political leadership of Turkey to take a forthright, on the 
record, very clear position of ownership of the changes that 
were going to be made as a condition for the receipt of 
assistance, which they agreed to do.
    It has been, I think, too frequently the case that the 
institutions have dealt with supposedly empowered finance 
ministers and maybe with the appearance of the political 
leadership of the country owning the agreement, but without the 
reality of that ownership. We were really quite strong in 
suggesting to the IMF and the World Bank that they should 
ensure and insist on the ownership by the political leadership 
of changes that needed to be made, and then--in the case of 
Turkey for the 15 issues that they decided they were going to 
tackle--that they, in fact, take legislative action where it 
was needed before money began to flow.
    If you read the newspapers of record in the last few weeks, 
you will see they have begun to do things that most would have 
said were not possible. So, I suppose you were here and you can 
decide for yourself better than I whether these are, in fact, 
different in kind from what Secretaries Rubin and Summers might 
have done. They are certainly different from my impression of 
what has been done in the past as a general rule.
    Chairman Oxley. The gentleman's time has expired. Let me 
indicate the gentleman is almost 3 minutes over. We will have 
to move on.
    Mr. Bentsen. If the Secretary could answer the others for 
the record, I would appreciate that.
    Mr. O'Neill. I would be happy to do that. Thank you.
    [The information requested can be found on page 64 in the 
appendix.]
    Chairman Oxley. Without objection.
    The gentleman from Texas, Dr. Paul.
    Dr. Paul. Thank you, Mr. Chairman, and welcome, Mr. 
Secretary.
    Mr. O'Neill. Thank you.
    Dr. Paul. I appreciated most of all your comments in your 
statement about transparency and accountability, considering 
that to be very important, because you say it is essential. Of 
course, I would like also to have transparency and 
accountability in another arm of the U.S. Government in dealing 
with international financial systems, and that happens to be 
with the Exchange Stabilization Fund. The IMF was set up with 
funds from the Exchange Stabilization Fund in 1934, and in 
recent years it has seen to it that Mexico got $20 billion from 
the Exchange Stabilization Fund and $22.6 billion went to 
Russia.
    This is all off budget, it is not appropriated, and there 
is a question of constitutionality here on whether or not the 
Treasury Department should be involved in this type of 
financing at all.
    But as far as the taxpayers' exposure goes, it is greater, 
I believe, with the Exchange Stabilization Fund than it is with 
the funding that we give to the IMF.
    Recently there were some minutes released from a discussion 
with the Federal Reserve that occurred in 1995 dealing with the 
Mexico City bailout, and in this discussion they recognized 
that the Exchange Stabilization Fund could be involved in gold 
swaps, and this was recognized as being legal.
    The question also came up whether or not there were any 
other agreements made, other than the one that was currently 
pending with Mexico, and the answer to that was yes, indeed, we 
had a swap arrangement with the Bundesbank.
    My question to start with is: did that swap arrangement 
deal with a gold swap, and does it continue to exist? I would 
like that answered in light of the fact that up until August of 
the year 2000, the status report on the U.S. Treasury gold 
always reported that gold at the West Point Reserves, the 
amount was 1,710 tons, was called gold bullion reserves. In 
September that label changed, and it changed to custodial gold. 
During that same period of time, the Bundesbank also had a 
reduction of gold that they held by 1,700 tons.
    I would like to know what is the connection between these 
two events, and what does this all mean? Do we have gold swaps 
with Germany, and could we have a little bit of transparency so 
I can better understand this process?
    Mr. O'Neill. Well, I will tell you, I would not probably be 
in a position to answer any of these questions except for the 
fact that on Sunday night when I was working through my 
briefcase, I found a report that it is my duty to transmit to 
the Congress providing the information on the most recent 
examination of the Exchange Stabilization Fund. Indeed, this 
was a fund set up in the Roosevelt Administration in 1934 for 
the express purpose of protecting the American financial system 
from the vagaries of the rest of the world's finance systems. 
Just as you say, it is empowered to operate in gold and in 
currencies, and there is a substantial latitude as to how this 
arrangement can work.
    My memory is that last year there was one transaction. It 
was a fairly small transaction involving an agreed intervention 
vis-a-vis the yen. It was the only transaction last year. I can 
assure you, and we will make sure you get a copy of this 
report, that I found the report really quite complete in its 
documentation of what was done in the past year.
    I don't know the 1995 circumstance. In fact, the funds in 
the Exchange Stabilization Fund are marks and yen, and, if I 
can say it this way, attributed dollars. But the U.S. 
Government does still have gold reserves, and just by 
coincidence, Chairman Greenspan and I were talking about those 
reserves this morning. It turns out, by his best recollection--
I didn't check, because I assumed that his recollection is 
always right--but, he was noting this morning that the U.S. 
holdings of gold are some $80 billion, which I observed is just 
about the same as Bill Gates' net worth, for whatever that is 
worth.
    In any event, we will get you a copy of the Exchange 
Stabilization Fund report, and if there are additional details 
you would like to have, I would work with you to see if we 
can't get them for you.
    [The information requested can be found on page 65 in the 
appendix.]
    Dr. Paul. If I could follow up on this, thank you very 
much.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from California, Ms. Lee.
    Ms. Lee. Thank you, Mr. Chairman.
    Hello, Mr. Secretary. Let me follow up on a question 
Congressman Leach asked you with regard to the World Bank AIDS 
Trust Fund and my conversation to you about this.
    Last year, of course, we passed the World Bank AIDS Trust 
Fund. It was signed into law, and it was the responsibility of 
the Treasury to coordinate the efforts and to negotiate this 
Trust Fund. To date this Trust Fund has not been negotiated. 
One of the reasons we are very anxious about this is, of 
course, AIDS is killing many, many people around the world. 
Since the passage of the World Bank AIDS Trust Fund, we have 
estimated over 1 million people have died in Africa alone.
    What I want to ask you is what is going on in terms of the 
negotiations? You indicated that the details were not quite 
finished. Last week, or the week before last, the President 
announced his commitment, $200 million to an international 
trust fund, but we don't know which trust fund he is talking 
about. This Congress worked very hard, very diligently to 
negotiate the principles and authorities and all of the details 
for the World Bank AIDS Trust Fund, and to date nothing has 
happened.
    So I would like to hear more from you with regard to the 
Trust Fund, which is the law, and what are you doing in terms 
of enacting that law, or are you trying to get around it by 
doing something new?
    Mr. O'Neill. I honestly can't speak to the question of why 
the previous Administration didn't do anything about this.
    Ms. Lee. The previous Administration transferred $20 
million only. It should have been $150 million. We were very 
disappointed at that dismal amount of money that was 
transferred.
    Mr. O'Neill. Actually, it is my impression they didn't move 
anything. But in the budget we put together in January and into 
February, we did decide we were going to move $20 million to 
get started with this Fund and to make good on the legislation, 
just as you say. It has been subsequent to that that the 
President indicated we are going to now put $200 million into a 
fund. There is still work going on at the OMB as to exactly 
what vehicle should be used.
    Ms. Lee. Why is there a question about which vehicle?
    Mr. O'Neill. Well, there are substantive discussions. Kofi 
Annan has suggested that the U.N. has a special capability for 
running this kind of activity. So there is a look to see what 
are the merits of the different devices one could use to make 
sure that this money does the highest value job that is 
possible in putting money where it accomplishes the most.
    Ms. Lee. Mr. Secretary, these funds should not be mutually 
exclusive. We passed one fund last year which should be enacted 
immediately. The Secretary General of the United Nations is 
also talking about a fund which hopefully will be enacted 
immediately. But the nature of the pandemic is so enormous that 
we need both funds. My concern is, once again, Treasury being 
in the lead to negotiate the fund that was enacted into law, 
what is the problem with complying with the law at this point?
    Mr. O'Neill. We are getting it done. I think it is not true 
that the Congress appropriated the amount of money authorized.
    Ms. Lee. No, we didn't appropriate it. We authorized it.
    Mr. O'Neill. Right. So we are working on the structure that 
is required to respond to this legislation, and we should have 
it done fairly soon.
    Ms. Lee. It was my understanding also that in the 
legislation we wrote a provision that you would report back by 
April 30th on actually the status of those negotiations.
    Mr. O'Neill. Do we have a report?
    The staff says the report is completed. We should get you a 
copy today.
    [The report requested can be found on page 93 in the 
appendix.]
    Ms. Lee. Today. Thank you.
    Let me just ask one more question with regard to this $200 
million. Do you know what accounts the President is intending 
to take its $200 million from in terms of the Trust Fund which 
he announced his support for?
    Mr. O'Neill. We talked about this at the National Security 
Council. The Department of Health and Human Services is going 
to be the source of $100 million, and the State Department will 
be the source of another $100 million.
    Ms. Lee. Mr. Secretary, I would encourage you and urge you, 
in fact, to not take money from funds that are needed in terms 
of infectious disease control, in terms of U.S. peacekeeping, 
in terms of any kind of initiatives that don't need to be 
robbed. I mean, we have a surplus in this country, and $200 
million is nothing in terms of new money. So I would just 
encourage you, whatever fund that is going in, make a pitch for 
new money, and also enact the World Bank AIDS Trust Fund 
immediately. The pandemic is such that we need as much money 
and as many resources as possible through as many vehicles as 
possible.
    Thank you very much.
    Chairman Oxley. The gentleman from Connecticut, Mr. Shays.
    Mr. Shays. Mr. Secretary, it is wonderful to have you here. 
I want to thank you for your openness. I hope that over time 
you don't become so jaded that you aren't as open as you have 
been. I think in the long run it pays off.
    Mr. O'Neill. Thank you.
    Mr. Shays. I know you have so many different 
responsibilities and so many different areas, but I do want to 
just focus on debt to the IMF and Africa. I realize it is a 
small part of all the things you focus on, but I have a 
tremendous amount of regret as a Member of Congress that 
Congress didn't get more involved in Africa years ago, and I 
didn't get more involved.
    When Secretary of State George Shultz testified before 
Jesse Helms' committee last year, he said, ``People need to 
live in reality. There have been a lot of loans made to 
desperately poor countries that are never going to get repaid, 
and a lot of them have been extended by the IMF and the World 
Bank, and it seems to me these organizations should realize 
that reality and write them off just as if you were running a 
private bank.''
    So my question to you, Mr. Secretary, is shouldn't we stop 
the IMF and World Bank from making new loans just so they can 
pay off their old loans?
    Mr. O'Neill. Well, as I said in my testimony, I believe 
this: I do not believe that we should confuse the recipients or 
ourselves or our people by calling something a loan when we 
really intend for it to be a grant, which is to say we have no 
hope that the principal and the interest are ever going to be 
paid. That is a grant. Frankly, to me, it is not an acceptable 
way to do business, to confuse those terms. That is not to say 
that from time to time you won't be disappointed about 
performance on a loan, but when you look at the amount of money 
that we are talking about forgiving, it is a huge amount of 
money. If I remember the numbers right, if we went to 80 
countries----
    Mr. Shays. We are talking primarily about 35 countries.
    Mr. O'Neill. Let's talk about 35. As I understand, my 
recollection is that full forgiveness is $43 billion. My staff 
tells me my memory is good.
    Mr. Shays. We are not talking about Sudan and Somalia.
    Mr. O'Neill. I am talking about the 35 countries that I am 
sure you are, the ones that are subject to debt forgiveness, 
$43 billion. It is very hard to make a case that anyone could 
make $43 billion worth of mistakes. So for sure we need to work 
on letting this money go. The process that has been put in 
place is working away.
    One thing, I think this is right, is that as we become more 
direct in what we are doing with loans and grants, that we not 
make new loans when it is fairly certain they won't ever be 
paid back either, so that we put our policy where our heart is 
and our programs where our heart is and face the reality when 
we are giving the money away that we are really giving it away.
    Mr. Shays. What tells you, though, that many of these 
African nations are going to be continuing to grow their 
economy? We are seeing the AIDS epidemic savage certain areas 
of various countries, where the kids have no teachers, they are 
all dead, their middle class is just dying off in large 
numbers, five million orphans. I just don't see what the IMF 
sees as the ability of these countries to pay back debt. So I 
would love to know what you see. What hope do you see in Africa 
for their ability to pay these debts?
    Mr. O'Neill. Well, I think you have to do this one country 
at a time. There are different degrees of capability to pay 
back new loans if all the old ones are forgiven and the 
interest is forgiven on the old ones. I was saying earlier I 
think we should not look at these countries through the lens of 
the IMF as though the IMF existed alone in the world. 
Intelligent risk-takers would look at these questions from the 
point of view of the leadership of the receiving country, and 
then they would look at the financial condition of the 
receiving country and understand what degree of risk or 
security there was with regard to the fiscal situation in the 
country. Then they would not just look at the IMF, they would 
look at the IMF and look at the U.N. and all of the sources, 
both public and private, of funds flowing into a country, and 
they would not necessarily follow what we have decided to 
dictate apparently to the IMF that they must say to countries: 
when you get principal and interest relief, you must spend the 
money on these new purposes, which we know better than you what 
you need to do.
    I think no one could argue that some of the things we are 
suggesting aren't desirable, but they certainly don't have 
anything to do with fiscal responsibility or the prospect of 
ever helping a country get on a good footing so that it can be 
responsible for itself.
    Mr. Shays. Fifteen seconds just to respond and say my 
concern is the IMF doesn't want to acknowledge that they made 
bad loans, that they then reinforced those bad loans by giving 
more loans to pay off the bad loans, and we have been doing it 
for years and years and years. That is my concern.
    Chairman Oxley. The gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
the hearing, and I thank the Secretary for being present here 
today.
    Mr. Secretary, I sent you a letter February 16th that 
basically urged you to support complete debt cancellation for 
the world's poorest countries during the February meeting of 
the G-7 finance ministers in Palermo. That letter was signed by 
73 Members of Congress, both Republican and Democratic Members. 
Unfortunately, until yesterday I had not heard from anybody. I 
did get a brief response yesterday, but I am sure that both you 
and I should have the opportunity to understand a little bit 
better where you stand on debt cancellation.
    I would like to just ask, I guess there has been a lot of 
conversation here today about debt relief. I don't know if you 
know what happened last Congress. The Appropriations Committee 
reported out $69 million in debt relief. We went to the floor 
cold with an amendment. We ended up with $225 million for debt 
relief from the U.S. When that ended up in the conference 
committee, the conference reported out $435 million for 
complete bilateral debt relief.
    Now, this was a result of a lot of hard work by a lot of 
good people, religious organizations, non-Government 
organizations, all under the banner of Jubilee 2000. We worked 
very hard to get us to live up to what was a commitment to deal 
with this issue of debt relief.
    We don't want to stop here. We want to continue to make a 
push for full debt cancellation, but, of course, we know that 
the United States would play a most important role. I mean, we 
are the 800-pound gorilla at the IMF and the World Bank.
    Where do you stand on complete debt cancellation for these 
poor countries? Your letter back to me and the other 17 members 
really does not discuss that. Could you help me to understand?
    Mr. O'Neill. You know, I have said on the public record, 
and I am sorry if you didn't think my letter really reaches 
your question, that I think we should proceed with the program 
we have in place, I think we ought to proceed with the process 
that has been put in place.
    I think if we are really going to entertain the possibility 
of writing off everything, we need to face up to how many 
billions of dollars that is. Before we adopt the policy, we 
need to put it to ourselves whether we are ready to appropriate 
the money that is required for, let's say, our 25 percent of 
all of the IMF debt forgiveness, whether we are prepared to ask 
the American people to appropriate it at this time. As long as 
we are at it, we should go beyond the IMF and the World Bank 
and the MDBs and look at all the bilateral loans that exist out 
there and see how we differentiate all the loan arrangements 
that we have, either directly or indirectly, through the 
Federal Government, and see what our taste is for doing this 
and on what basis we would do it.
    Ms. Waters. Well, let me just share with you some 
information that I have. I am told that to provide complete 
debt cancellation to these 22 impoverished countries would cost 
only $287 million per year for the IMF and $215 million per 
year for the World Bank. To extend complete cancellation to all 
heavily indebted poor countries would cost an additional $81 
million for the IMF and $138 million for the World Bank.
    Considering this is a modest amount, considering the fact 
that Congress appropriated $435 million for debt relief last 
year alone, where are you getting your billions information 
from? Would you give me your figures again?
    Mr. O'Neill. $43 billion for the 35 countries. I think the 
difference is that your numbers suggest that we are going to 
write off the principal and interest over the life of the loan 
instead of--if you are really interested in writing loans off, 
you write it off. You don't continue to carry it on the books 
as though somehow it only failed to be repaid 1 year at a time. 
Perhaps that is the difference. From a financial point of view, 
if you have got a bad loan, it is all bad. It is not bad 10 
percent. If it is a 10-year loan, it is not bad 10 percent this 
year and 10 percent next year, and 10 percent, and so forth, 
every year until you get through 10 years. It is no good today, 
and it is not ever going to be any good. That is what we are 
talking about.
    I think the difference is a difference between an idea, 
which I frankly never heard of before, of amortizing a bad debt 
rather then recognizing it as all bad at once. It is a new 
concept to me, I must say.
    Chairman Oxley. The gentlelady's time has expired.
    The gentleman from Florida, Dr. Weldon.
    Dr. Weldon. Thank you, Mr. Chairman.
    Just to follow up on the lady's question, were you implying 
that you think it would be appropriate if the IMF and World 
Bank are going to write off these loans, that the Congress 
appropriate the money to make the loans good, that that is 
necessary?
    Mr. O'Neill. Well, in this world where we are probably in 
all stages of loan maturation, what I was basically saying is 
that while we don't often think of ourselves as having a 
balance sheet, we have, in effect, said to the American people, 
we participated in a process where we used your taxpayers' 
money to create a loan fund or to guarantee a loan fund, and 
the money was then given to these countries, and by all 
accounts many of these loans are not serviceable, they are not 
ever going to be paid back, the principal is not going to be 
paid back, the interest is not going to be paid back.
    So probably I should grant you the point that we wouldn't 
in most of these cases have to actually appropriate the money, 
but it is an appropriation of the American people's money. But 
if we basically say we have an asset we don't have, and we 
write it off to the tune of $43 billion, at least as a private 
citizen, I would be pretty interested if my Government held out 
to me they have an asset that they have decided they really 
don't have. I would like to know what the balance sheet looks 
like, as well as the income statement.
    Dr. Weldon. Sure, and I certainly support you on that. I 
have read your statement, and I support particularly focusing 
these organizations more appropriately in areas where I think 
they have really been more effective in terms of promoting 
international financial stability and stable currencies. But I 
just wanted you to clarify that for me. You are not necessarily 
suggesting that for the IMF and World Bank to properly write 
these off, we would have to make an appropriation. They can do 
that, but we would have to be notified that the balance sheet 
has contracted substantially.
    Mr. O'Neill. There is a secondary consequence. If you 
believe, as I do, that these institutions should stay in 
business, and we suddenly decide to write off all of these 
loans and the prospective interest payments, it very much 
changes the loan position of these institutions.
    Dr. Weldon. Absolutely. I understand that.
    Mr. O'Neill. In fact, one would have to begin appropriating 
very substantial amounts of money over time in order for these 
institutions to even maintain their current level of activity. 
So I think even the way we keep, frankly, kind of funny books 
in this country, we would eventually be in a position where we 
would have to tell the American people we are going to have to 
appropriate substantial amounts of new money in order for the 
institutions to maintain their level of activity.
    Dr. Weldon. Thank you for clarifying that for me.
    I wanted to just quickly get back to an issue that you 
alluded to in your response to Mr. Oxley's question. You were 
referring to tax policy, international tax policy, OECD.
    Mr. O'Neill. Right.
    Dr. Weldon. I assumed you were alluding to in parts of your 
response to the Clinton Administration rule regarding U.S. 
institutions reporting the names and other identifying 
information on non-resident aliens.
    I was curious, has the Treasury--I know we are still in the 
comment period on that. I have had some concerns about that 
rule being broadly applied in terms of precipitating capital 
flight. As I understand it, it is estimated--and I realize it 
is hard to get a gauge on something like this, but it is 
estimated it could be as much as $1 trillion of foreign 
investment in U.S. financial institutions.
    Have you at the Treasury looked at the implications of 
capital flight, in other words, money going elsewhere, should 
that rule be fully implemented?
    Mr. O'Neill. We are looking at it. As you say, it is in 
process, and we are sensitive to the issue of not creating a 
disadvantage for investors who choose to be in the United 
States. But I think we also feel a keen responsibility to 
enforce the law, to enforce the tax law and other laws of the 
United States. So it is a constant process of examining how one 
can accomplish multiple purposes without running into oneself. 
It is not always so easy.
    Dr. Weldon. I read your guest editorial in the Washington 
Times that dealt with this issue. You referred to the American 
investor who goes to the Cayman Islands to escape U.S. capital 
gains tax. Would you agree that a preferable approach to that 
is to lower the U.S. capital gains tax as opposed to pursuing 
these people through administrative and legal actions?
    Mr. O'Neill. Well, you know, I am on the record as saying I 
would like to get rid of a whole lot of attributes of our 
current tax system. Hopefully, as soon as we are done enacting 
the tax bill that is in front of the Congress now and make good 
on the President's pledge that we are finally going to fix 
Social Security, we can turn our attention to a simplification 
that goes far beyond the question of capital gains and 
straightening out a tax system.
    One thing I have found--it is something in a way even when 
I was outside the Government I have been working on, because I 
am interested in and long have been interested in issues of 
public policy--you can be sure if you go to almost any audience 
I have ever appeared before in the last 20 years and suggest to 
them you know some way and you have some intent of reducing the 
9,500 pages of our Tax Code to, say, 95 pages, people will get 
up on their chairs and stomp their feet. I have yet to find 
anyone who likes the Tax Code the way it is, and not just for 
the question of perverse implications of the way capital gains 
are applied, but for all of the reasons that offend people and 
make it more difficult for them to relate to their Government, 
which we keep piling on.
    So I would love to see us make major changes to our tax 
code.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from New York, Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Just in brief, in response to some of the questions I heard 
Congresswoman Waters and Congressman Sanders indicate, we talk 
about debt relief with reference to Africa, but it is a known 
fact that when we gave much of that money to dictatorships and 
to other rogue governments, to me it is similar to what we have 
in some of our urban cities today, something called predatory 
lending, where you lend money out to folks that are not able to 
pay it back, you know, but for other reasons, and then they 
have to pay it back, so then you take back their house and they 
put everything in it. So that should be considered when we are 
looking at the question of debt relief, debt forgiveness, as 
far as to many of the nations in Africa.
    But let me go to my question. I just wanted to put that 
out. In last year's foreign operations conference report, there 
was language to eliminate the World Bank and IMF-promoted user 
fees. I am sure you are aware the language requires the U.S. to 
oppose any World Bank, IMF or regional development bank loan or 
debt relief agreement that includes user fees or other charges 
for primary education or primary health care.
    In the Administration's fiscal year 2002 budget, they 
support striking that language. I want to know, what is your 
position? Are you in favor of removing this language?
    Mr. O'Neill. We are trying to simplify the language. We are 
certainly in full accord with the idea that these restrictions 
and the intent of the words is appropriate. We are just trying 
to do some simplification.
    If I may comment on your earlier question, because it has 
indeed come up a few times before about this issue of lending 
to so-called dictatorships, you know, there is a fact case that 
I think is analogous, and it is an engagement I have had with 
the Russian Finance Minister in the 4 months I have been here 
now.
    When I first met him in Palermo, the media was reporting 
that the Russians were thinking about defaulting on their so-
called Paris Club debt. The reason they were going to, at least 
what he said to me in Palermo, was, well, you know, we would 
like to pay it, but our Duma, that is to say their legislature, 
wouldn't appropriate the money. It caused me to say to him, you 
know, it is really an interesting thing. When you make a 
contractual relationship with a sovereign state, at least one 
would like to believe that you have made a real contractual 
relationship in the way that we think about enforceable 
contracts. So I frankly don't give a damn about some part of 
your government that doesn't want to pay their fair owings to 
the rest of the world. That is your problem. Otherwise, if we 
can't have an understanding of what the rule of law is, I don't 
know how we can deal--I don't know how any institution, the IMF 
or the World Bank, can proceed on a basis that if they make a 
loan and the people who were there who made the agreement turn 
out to be rogues, we forgive the whole country because the 
rogues took it all.
    It is awfully hard for me to understand how to extend this 
principal that if the top guys are bad, we forgive the whole 
country. It is a very difficult doctrine to me. Not to say I am 
not sympathetic to actually wanting to prosecute the devil out 
of people who absconded with the resources of the people they 
were charged to lead; I have lots of sympathy with that. But I 
worry about the extension of a doctrine that says, well, the 
people got ripped off by their leaders; we will keep sending 
money, because maybe the new leaders will be better than the 
old ones.
    Mr. Meeks. Except until some of those situations, some of 
those leaders we put there to practice our doctrine, we knew 
they were bad, we gave them the money so they could do what 
they were doing for the protection at that time against the 
Russians in the cold war. So we knew they were bad, we knew 
they were raping the country, but we didn't care, because we 
had a different goal or different reason for giving the money. 
Now that it is over and we are talking about democracy, and the 
cold war has ended and we are talking about promoting democracy 
elsewhere, and now we have countries where they have legitimate 
leaders and elections and a democratized system, but they can't 
go anyplace because of the debt that was placed on them in the 
past, they can't educate their people, they can't provide 
primary health care, so therefore they are not able to go, so 
they are smothered. But there is some responsibility, I think, 
on us and the IMF and the World Bank to recognize those factors 
so we can help promote democracy, as we say.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from California, Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Secretary, I want to thank you. Having read your 
statement here, I thought you did a remarkable job. I would 
like to actually cite it as a case example for saying a whole 
bunch with a few words.
    Mr. O'Neill. Thank you.
    Mr. Ose. I wanted to say I appreciated your respect for my 
time, and I will try not to waste yours.
    Mr. O'Neill. Thank you.
    Mr. Ose. In your remarks as written, you made a couple of 
points here which you have reiterated with Congressman Meeks 
about the certainty of the judicial systems in the countries 
into which the IMF lends money and the ability to recover; the 
fact that the multinational development banks ought to spend 
their resources in areas where they have expertise, which I 
thought was a remarkable breath of fresh air; and using 
results-based performance indicators to actually measure what 
it is we are getting for our money.
    I want to strike specifically at that last point. I know 
where you come from in private business, and I have not been 
near as successful as you, but I do aspire. In a typical 
lender-borrower situation, the lender has the control of 
releasing any money under a loan. In other words, you can't get 
it until you have satisfied that lender. The purpose of that is 
to ensure the borrower's performance to the terms and 
conditions of the loan.
    In many cases, unfortunately, it is apparent that, as it 
relates to IMF or World Bank or maybe some of the international 
development banks, after the fact that the loan funds that had 
been extended were not used as they were originally agreed 
upon. In other words, the conditions and terms were violated, 
and that those funds were then diverted to other uses. The 
thing I keep coming back to is how do you prevent the 
diversion?
    My question is, are you satisfied by the controls that the 
IMF presently uses to ensure that loan funds are used for the 
intended purposes, and, if not, do you have any specific 
suggestions that could be implemented to improve the 
accountability over how those loan funds are used?
    Mr. O'Neill. I think this is an area where we can expect, 
maybe even demand, improvement. If you use as an example the 
case of what happened in the money that went to Russia, it is 
almost as though there were not even the simplest of 
conventions, for example, second signature requirement, as you 
suggest, to release funds.
    But, of course, I am sure you understand from the line of 
your question these are complex matters, and it is not as easy 
as having a second signature, say, in the example where maybe 
an individual is buying a house and you can go and look and see 
if the structure is being actually built. Oftentimes these 
monies are going into a world of fungible money where it is 
difficult to tell what is happening to the overall resources of 
a country in the financial system, where, say, you are dumping 
$5 billion, because there are many, many tens of billions of 
dollars in question that are flowing in and out every day.
    But it is possible, I think, to establish certain ratios 
and levels, maintenance of levels of balances that one could 
then be quite certain that monies flowing from the IMF and the 
World Bank didn't simply disappear into the world of fungible 
money, where the money from the people of the world got taken 
away by badly inclined leaders or people who know how to 
manipulate financial things.
    So, yes, I think it is possible to do better, and as we 
work with the IMF and the World Bank, this is an area that we 
will develop in more detail with them.
    Mr. Ose. Mr. Chairman, I don't recall, are you going to 
allow questions subsequent to the closing of the hearing? Are 
you going to leave the record open?
    Chairman Oxley. Yes.
    Mr. Ose. If I might, I would be happy to submit it in 
writing, and then you can have the appropriate person make 
specific recommendations.
    Mr. O'Neill. Great. We will do that.
    Mr. Ose. Thank you, Mr. Chairman.
    Chairman Oxley. The gentlelady from Ohio.
    Mrs. Jones. Thank you, Mr. Chairman.
    Good afternoon, Mr. Secretary. I guess I am the last one. 
But I want to go back over a few questions that you answered 
for some of my colleagues.
    In response to Congressman Gregory Meeks' inquiry with 
regard to some of the Sub-Saharan countries and debt relief, I 
don't want to paraphrase what you said, but, anyway, you 
remember what your response was about--strike that. Let me 
start over and say, do you recognize that in many of the 
African countries where we entered into agreements with them, 
that none of the leadership or anyone in any logical descending 
order--like our Congress goes from the 105th to the 106th, 
107th, that kind of setup doesn't exist in those countries? You 
recognize that, don't you?
    Mr. O'Neill. I do.
    Mrs. Jones. So, therefore, it is my opinion, one lowly 
Member of a 435-Member body, that that is something that ought 
to be taken into consideration when you consider whether those 
loans ought to be forgiven or not. Specifically we do it in our 
country all the time, bankruptcy, people are out from under the 
debt. Somebody pays it off, and that group goes and creates 
another business, and maybe that business is successful. In 
many of these countries, there is the opportunity--for example, 
many of them are a diamond in the rough, and they are real 
diamonds. For us to not take that into consideration with 
regard to forgiveness of debt, in my opinion, is illogical. I 
don't want to say it is irresponsible, but illogical.
    Would you agree with me on that?
    Mr. O'Neill. I think we need to look at these individual 
country situations one at a time, and I really do think it 
would be valuable to the Congress to roll up the implications 
of debt forgiveness across--both principal and interest 
forgiveness--across all of these arrangements that have existed 
sometimes for 50 years with 18 or 25 different intervention 
programs, and also look at the experience we are having with 
the 22 countries that are now running through the established 
process to begin getting debt forgiveness, and then bring these 
facts together and talk about what the policy of our country 
ought to be not just with regard to the IMF or the World Bank, 
but with regard to bilateral loan arrangements.
    Mrs. Jones. Maybe multilateral as well.
    Mr. O'Neill. And the multilateral development banks. For 
sure I think we should open the scope of this question and 
bring some more facts to the table and see how we should 
proceed.
    I think you should have no doubt that I think what we have 
begun to do with the HIPC initiative is well-advised and 
directionally correct. It is really a matter of how fast we 
should move and what the scope of our activity should be.
    Then I want to say again, because I think this is really an 
important point, we need to stop thinking about these countries 
from the point of view of individual program interventions. The 
idea of saying to a sovereign country that, because the IMF has 
forgiven or the World Bank has forgiven principal and interest 
on a loan, that that should then give us the automatic right to 
force them into yet more borrowing--even in the private 
sector--because we have these wonderful intentions about 
improving their education system or their health system. This 
is a bridge too far in terms of our understanding of what it 
means to run a country, as distinguished from sending grants or 
loans to a country.
    Mrs. Jones. I just want to extend it to say, then, so if 
you don't want us to determine what the country should do with 
the dollars, are you saying, then, that the countries ought to 
have the ability to say this is what I would like to do and 
then receive the dollars? Or are you saying just leave them out 
there floating somewhere?
    Mr. O'Neill. No, no, no. I am saying, as I said earlier, 
that I think we should have much more limited understanding of 
what we mean by conditionality, and as we do conditionality, 
because indeed it will come from individual institutions and 
streams of money, that we need to do conditionality in the 
context of a complete country, not as though a program carried 
with it the right of establishing ever-larger notions of 
conditionality, which I think are sometimes inconsistent with 
each other and unenforceable in any event.
    Mrs. Jones. I would like to echo my colleagues' concern 
about the AIDS issue and the dollars being allocated to assist 
these countries, because it may come to a situation where there 
is a grandmother raising 55 children, which makes no sense when 
we could come in and help out the countries.
    Chairman Oxley. The gentleman from Texas has been very 
patient, and I recognize the gentleman for 5 minutes. Then we 
will close down.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Fascinating testimony, Mr. Secretary. Just a couple of 
points.
    First, I do want to go back a little bit to the question of 
conditionality with respect to IMF loans or bailouts or 
whatever we might call them. I would recommend that you go back 
and look at the South Korea package, because I was in South 
Korea as that was going through, and I remember sitting--I was 
with the prior Chairman, and we sat down with Kim Dae-Jung 
right before he was sworn into office, and he was having to 
face the fact that for the first time the Koreans were going to 
have to pass legislation to allow layoffs by private 
corporations and look at the idea of establishing an 
unemployment compensation program, and the markets were looking 
at how they could engage in more transparency, all things that 
we thought were good for them as a form of conditionality, and 
I still believe that today.
    So I think you can draw a lot of comparisons to Turkey and 
what you are doing there.
    I guess the point I would make is that I am not sure that 
things were done all that poorly, given the situation at the 
time; that we did what we had to do, given what the impact 
might be. I think you are on the right track, quite frankly, 
with Turkey, but I don't think there is a lot of difference.
    I want to go to the conditionality with respect to HIPC, 
because this is sort of what I was getting at, and I think the 
GAO report, which I am sure your staff has looked at, is quite 
telling.
    When we first started the HIPC legislation a couple of 
years ago, I was one of the ones that raised the idea we ought 
to treat this almost like a bankruptcy and ought to write down 
the debt, and we also ought to say that countries that 
participate in this stay away from the window, even if it is 
the soft loan window, for a period of time.
    Now, that is going to require a policy on our part, as well 
as our partners through the Fund and the Bank, to be willing to 
step up to the plate, because obviously these countries can't 
survive without some capital infusion.
    What you are saying is appealing, although I hope that the 
Administration--and I realize you all are just getting in and 
you are trying to figure this out, that this is the direction 
that you want to go in, because I do think it is a mistake, and 
it really is just a short-term bridge that we are giving them 
to say, we are going to wipe your debt off, but you are going 
to have to come back and borrow again, and we are going to be 
in the same problem 5 years from now, because it is highly 
unlikely that any of these countries or any country is going to 
achieve that level of real growth over that period of time to 
get out of there, particularly a lesser developed country. So I 
hope that is the case.
    Finally, I am curious what the Administration's viewpoint 
is with respect to packages like with Turkey and others. If you 
go back, there was a lot of criticism of Mexico, a lot of 
criticism of South Korea, of Thailand and other Asian countries 
that conditions included contractionary economic policies in 
the fiscal area. But I am curious what the viewpoint of the 
Administration is as to how you would otherwise build 
confidence for currency when your goal is to try and stabilize 
the currency and exchange rates.
    Mr. O'Neill. Well, first of all, you know, my own 
experience with this and observation of what we have done in 
the last 50 years with the very best of intentions is if we 
don't have, we ought to have a lot of humility about how much 
we actually know and understand about the straight path to 
improving the standard of living in the world and reducing the 
level of poverty that exists in the world, because we have 
spent, I suppose--around the world we have probably spent, not 
just in the U.S., but with everyone--$1 trillion, and I would 
say we have precious little to show for it.
    When you look at where we have taken some fairly strong 
interventions, I think even with the best of intentions, to 
help to accelerate the standard of living and economic growth 
in countries, the results have been pretty pale tea. So I think 
we are well advised to be pretty humble about what we know and 
how well we are able to deploy it.
    I remember reading, I think, in maybe 1959 or 1961 Walt 
Rostow's ``Five Stages of Economic Growth,'' and it wasn't very 
revealing, it wasn't very helpful, and there is still nothing 
much better than what Walt Rostow wrote more than 40 years ago. 
So I think we have a long way to go to actually understand how 
to do all of this.
    Having said that, I do think that we can improve the likely 
outcomes by insisting on the things that we know are necessary. 
This is repetitive, but I don't think you can find a place 
where good growth and reduction in poverty and improvement in 
the standard of living exists where there are not a rule of law 
and enforceable contracts and at least directionally a 
reduction in the level of corruption. Those things we know are 
necessary.
    Someone said earlier, and I would stipulate this point, 
that without education there is probably no hope at all. In 
that regard, you know, I said when I was at the Asian 
Development Bank meeting a couple of weeks ago, I think what 
the President has said about ``no child left behind'' ought to 
be the mantra for all of us when it also comes to questions of 
our position on international advancement.
    Education needs to be a primary focus. But, again, I think 
it is really critical that we not look at nation-states, even 
from the most genuine, sincere concern about absence of 
education, and act as though the rest of the country didn't 
exist, because it does. If they are ever going to have hope of 
financial success, there are some things they need to do. I 
think it is really quite telling that Russia had tax rates that 
were very high, expropriation-level tax rates, and they were 
collecting almost no money. When they reduced their tax to a 14 
percent straightforward flat tax, they tripled their revenue.
    So there are some things that we do know that are 
therapeutic in moving a nation toward a more governable 
position. Again, we need to balance our humility and insist on 
the fundamentals that we are pretty sure about.
    Chairman Oxley. The gentleman's time has expired.
    Mr. Secretary, thank you again for your testimony. I share 
the opinion of the gentleman from Texas, it is most 
fascinating.
    Without objection, the record for this hearing will remain 
open for 30 days to permit Members to submit questions in 
writing to the Secretary and have his responses placed in the 
record.
    The hearing is now adjourned.
    [Whereupon, at 4:40 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 22, 2001

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