[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE STATE OF THE INTERNATIONAL
FINANCIAL SYSTEM AND THE
INTERNATIONAL MONETARY FUND
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 28, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-58
U.S. GOVERNMENT PRINTING OFFICE
78-187 WASHINGTON : 2002
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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:
February 28, 2002............................................ 1
Appendix:
February 28, 2002............................................ 33
WITNESSES
Thursday, February 28, 2002
O'Neill, Hon. Paul H., Secretary, U.S. Department of the Treasury 7
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 34
Bereuter, Hon. Doug.......................................... 36
LaFalce, Hon. John J......................................... 39
Waters, Hon. Maxine.......................................... 42
O'Neill, Hon. Paul H......................................... 44
Additional Material Submitted for the Record
Weldon, Hon. Dave:
Written questions for Secretary Paul H. O'Neill.............. 58
THE STATE OF THE INTERNATIONAL
FINANCIAL SYSTEM AND THE
INTERNATIONAL MONETARY FUND
----------
THURSDAY, FEBRUARY 28, 2002
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.
The committee met, pursuant to call, at 1:05 p.m., in room
2128, Rayburn House Office Building, Hon. Michael G. Oxley,
[chairman of the committee], presiding.
Present: Chairman Oxley; Representatives Leach, Bereuter,
Lucas, Paul, Gillmor, Weldon, Ose, Biggert, Tiberi, LaFalce,
Frank, Waters, Sanders, Sherman, Inslee, Gonzalez and Lucas.
Chairman Oxley. The hearing will come to order. Good
afternoon. This hearing of the Committee on Financial Services
will please come to order. Pursuant to the Chair's prior
announcement, I'll recognize myself for 5 minutes for an
opening statement, as well as the Ranking Minority Member, the
Chair and Ranking Minority Member of the Subcommittee on
International Monetary Policy and Trade for 3 minutes each.
All Members' opening statements will be made part of the
record and it is so ordered.
Today, the Committee is meeting to hear testimony from the
Secretary of the Treasury, Mr. Paul H. O'Neill, on the state of
the international financial system, IMF Reform, and compliance
with IMF agreements. This hearing is mandated by the fiscal
year 1999 foreign operations appropriations bill, which
provided for an $18 billion increase in U.S. funding for the
International Monetary Fund--IMF. To ensure that the IMF would
effectively use these funds, Congress included as a
requirement, authored by Representative Castle, a senior Member
of our Committee, that the Treasury Department submit an annual
report on the progress of IMF reforms and that the Treasury
Secretary testify before this Committee on the state of the
international financial system.
As I am sure you are aware, Mr. Secretary, this Committee
heard from Federal Reserve Board Chairman Alan Greenspan just
yesterday about the conduct of monetary policy and the state of
the domestic economy. Inasmuch as economic growth in the United
States is necessarily intertwined with that of the remainder of
the world, our Nation's economic growth is greatly impacted by
disturbances and/or crises in the international economy, such
as that currently occurring in Argentina. As a result, this
Committee welcomes this opportunity to both oversee U.S.
international economic policy and at the same time looks very
much forward to your insights into where that economic policy
is heading.
At your appearance last year, you testified that reform of
the international financial institutions was a key priority for
this Administration and emphasized the need for the IMF and the
World Bank to focus more narrowly on their core objectives.
You highlighted a number of issues, among them
transparency, accountability, IMF crisis prevention, converting
loans to grants, increased education in poor countries, and the
use of results-based performance indicators. The Department's
October 2001 report provides a helpful review to your
testimony, as well as an early insight into the success the
Administration has had in pursuing congressional directives
codified in Section 1503 of the International Financial
Institutions Act related to market-oriented reforms, trade
liberalization, sound banking systems, work-out systems for
sovereign debt and a host of other issues.
With a year as Secretary under your belt, the Committee
looks particularly forward to your assessment of progress on
these fronts.
In light of the almost daily news on Argentina's financial
turmoil, and the IMF's more than 20-year relationship with
Argentina, I would expect that you will receive quite a number
of questions about this long-term relationship and how
Argentina could possibly find itself in the financial plight
that it currently faces.
Turkey is also a subject of interest, although perhaps less
so than Argentina, since it has not faced suspension of IMF
assistance. There is also a very strong interest in the
Japanese economy. Although the Japanese are not recipients of
IMF assistance, the IMF is conducting a Financial Sector
Assessment Program in Japan. We would certainly welcome your
thoughts on the prospects that Japan will finally address the
long-term problem of non-performing loans in its banking
system.
While I am personally not of the opinion that the IMF and
World Bank have done their jobs in ways that call for radical
changes in the manner in which they undertake their
responsibilities, I do nevertheless feel that the Treasury
Department's annual review, as it relates to IMF reform, is and
will be of particular importance on a going-forward basis, and
I look very much forward to receiving your views on this and
other matters of import that you would like to discuss this
afternoon.
Let me just take a moment in closing to say how much I
personally appreciate the strong leadership skills that you
have frequently exhibited during your service at Treasury to
date. Please also know that this Committee appreciates the good
work that you and other members of your team have accomplished,
such as reform of the Multilateral Development Banks and the
International Monetary Fund; combating the financing of
terrorism, and working very closely with us on our money
laundering legislation; the reconstruction of Afghanistan;
attempts to raise the level of sustained global economic
growth; and lastly, ongoing efforts to strengthen the bilateral
economic relationship between the United States and Russia.
With all that being said, Mr. Secretary, let me welcome you
to your third appearance before our Committee. It's good to
have you. And I now yield to the gentleman from New York, the
Ranking Member, Mr. LaFalce.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 34 in the appendix.]
Mr. LaFalce. Thank you very much, Mr. Chairman.
Secretary O'Neill, welcome. You appear before us at a very
important time for the global economy and for United States
policies as they relate to the global economy. Today, I would
like to highlight two areas. First, the on-going negotiations
to replenish the World Bank's International Development
Association, so-called IDA, and the discussions related to the
creation of a mechanism for handling debt crises, particularly
in the aftermath of the Argentine debt default.
First, I'd like to offer my support for your efforts to
shift more of IDA assistance toward grants. The grants
initiative is a natural extension of our debt relief efforts
which are already bearing some fruit in the heavily indebted
poor countries, never enough, but they are freeing up some
budgetary resources in those countries to devote to critical
social spending. Yet, each year that we continue to provide 99
percent of IDA assistance in the form of loans, particularly
for non-economic expenditures, such as AIDS relief, nutrition
and education, we chip away at the benefits that debt relief
provides to these countries. So, in effect, we forgive debt
with one hand and pile on new debt with the other.
You don't think and I don't think that this is a viable
long-term development strategy. Few of the objections that
critics to the grants proposal have ring true to me. In
particular, that a shift to grants inappropriately moves the
World Bank onto the United Nations turf as the international
grant making institution. I think those arguments smack of
defending the status quo at the expense of doing what's best
for the world's poor. So that's where I agree with you.
Now, I do think though that the intransigence of the
Europeans on this issue may reflect some other problems with
the United States' position when it comes to funding for IDA
and for official development assistance in general. Some
individuals who I greatly respect, for example, David Beckman
of Bread For the World, has said that these critics are
suspicious of the grants proposal because they've long
perceived the United States to be stingy when it comes to
development assistance. And I think that perception is correct.
You've attempted to counter that perception by offering
increases in the IDA contribution over the next 3 years,
starting at $850 million in 2003 and increasing it to just over
$1 billion by 2005. So far, so good. But then you condition
those on what I think you call performance targets. And here's
where I begin to have reservations and doubts, Mr. Secretary.
Now, I believe that the United States should commit, at a
minimum, to the upper range of the funding levels you've
proposed independent of what I think are artificial performance
targets. As you know, Nobel economist Joe Stiglitz has said
that--and he used to be the Chief Economist for the World Bank
and Chairman of the Council of Economic Advisors, I have great
regard for Joe--that even if the United States doubled its IDA
contribution, we could be confident that the money would be
well-spent absent performance targets. His point is that the
World Bank has already come a very long way in evaluating
successes and failures and in using that information to improve
development assistance. As a result, a large number of viable
development projects go unfunded for lack of adequate donor
support.
Of course, we should look to benchmarks for progress as we
allocate funds to all of the MDBs, but here's where I'm
concerned. I'm concerned that the performance target
initiatives will encompass areas that are inherently difficult
to measure and do not lend themselves to use as annual
benchmarks. For example, you've rejected school enrollment as
an appropriate metric in favor of outcome-oriented measures
such as ability to read and write. Well, I share your desire to
focus on outcomes, but one only needs to consider the painfully
slow process of seeking education performance measures in the
United States of America to recognize the very practical
problems with doing the same in the world's poorest countries.
Rather than a finely-tuned matrix of empirical measures, I
fear that what we will really get is a highly subjective
judgment from Treasury officials about whether a target has
been met or not, something akin to the OMB scorecard for agency
performance that was unveiled in this year's budget. And with
Mitch Daniels desperate to find cost savings around every
corner, there will be enormous pressure to keep U.S. funding
for IDA as close to the baseline as possible. And so while I do
not dismiss and absolutely reject the use of benchmarks or
performance targets entirely, I have great reservations and
doubts and concerns. I'm willing to await the details before
final judgment, but you're going to have to convince me on that
one.
Let me go very briefly to the so-called international
bankruptcy regime, and I'll only take a minute. I've been a
long-time advocate for the creation of a debt workout
mechanism. I've put provisions in the 1986 and 1988 trade bills
along those lines. Argentina has demonstrated, once again, such
a need. There's always a country almost every year. But I think
now we have some momentum. Ann Krueger is the new Deputy
Director of the IMF, and she has been advocating some type of
bankruptcy mechanism.
Now I know that John Taylor--is John here today? No.--made
some recent comments, and it would appear that his comments are
reflective of the Treasury's, that you part ways with the IMF
on how best to structure the proposal, not how to get to the
end, but on the means to the end. I'm eager to move the
discussion beyond the academic and toward a concrete plan. I
think it's very important. And perhaps it might be desirable to
advance this through legislation too, but not necessarily. It's
something I would dialogue with you on, and with the Chairman,
of course. I thank you very much, Mr. Secretary.
[The prepared statement of Hon. John J. LaFalce can be
found on page 39 in the appendix.]
Chairman Oxley. The gentleman's time has expired.
The Chair is now pleased to recognize the Chairman of the
International Monetary Policy and Trade Subcommittee, the
gentleman from Nebraska, Mr. Bereuter.
Mr. Bereuter. Mr. Chairman, thank you and thank you for
scheduling these hearings. And Secretary O'Neill, thank you for
your appearance today. I have a particular concern I didn't
bring to your attention today, but I want to recognize and
state my respect for you and the leadership you're bringing to
the Department, and may I also mention preliminarily that our
subcommittee recently held a hearing on IMF as it relates to
Argentina, and Secretary John Taylor was very cooperative and
very helpful to us in that hearing, and we will shortly be
having another hearing with critics and supporters of current
IMF policy, and if I have the time and questions, I'll pursue a
few things in that area.
I wanted to mention to you specifically though today that
last year, the subcommittee not only passed important
legislation related to the regional multilateral development
institutions, specifically the Asian Development Fund and the
International Fund for Agricultural Development, but also
passed policy changes and on a wider variety of the regional
development banks.
For tactical reasons, important tactical reasons, we have
linked that legislation with the reauthorization of the Export-
Import Bank legislation, wanting to bring them to the floor at
the same time. We passed those on October 31st of last year.
But, because of authorized or unauthorized threats of veto from
Treasury because of problems between the Export-Import Bank and
the Treasury Department on the use of Eximbank's Tied Aid War
Chest transactions, we've been at an impasse.
Last month, I was finally successful in bringing together
Treasury, Export-Import Bank officials and the White House
representatives to see if we can't find some resolution to what
I think has been an arbitrary and inappropriate position and
statement on the part of Treasury officials early in last year
on several projects.
I think they violated their own vaguely described criteria,
and we have to have some changes, in my judgment. I understand
that every Administration would like to have a clean,
straightforward reauthorization under most circumstances, but I
think reforms are really essential in this area. The
subcommittee has worked well on trying to bring itself to a
conclusion that was acceptable to all, and I think we have
succeeded, but I do need to have a resolution on this issue.
Just because of things that have happened in the last few
weeks, I believe it is now much more difficult, in fact, to
pass an Export-Import Bank reauthorization. We've already had
it extended to March 31st through an appropriation bill, but I
know I will resist, and I think this Committee would resist an
end run around the Committee through the appropriations process
because we really need to have some reforms. And I would hope
that we might shortly find a resolution.
Mr. Secretary, I sent you a letter on this subject on
February 15th. To my knowledge, we haven't received a reply.
However, we are having significant problems in opening our
irradiated mail, so if you reply, please don't respond by the
U.S. Mail, because we're still getting Christmas cards and our
people are getting sick as a result of opening irradiated mail
now. So fax, personal delivery or whatever, but we need to have
a solution on this.
I conclude, Mr. Chairman, by mention to the Secretary that
I understand we'll be expecting a significant reauthorization
legislation request on other issues this year from the
Administration, African Development Fund, the Global
Environmental Facility, and most controversially and most
significant in terms of dollars, the International Development
Association. You will need the Committee's cooperation and
assistance on this, and we will need yours.
Thank you, Mr. Secretary, and thank you, Mr. Chairman.
[The prepared statement of Hon. Doug Bereuter can be found
on page 36 in the appendix.]
Chairman Oxley. The gentleman's time has expired.
The Chair is now pleased to recognize the Ranking Member of
the aforementioned subcommittee, the gentleman from Vermont,
Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman.
Mr. O'Neill, welcome and thank you for being with us. I
just very briefly in my opening remarks want to touch on three
issues that I hope you will be responding to in questions later
on. That is, number one: the IMF; number two: the Export-Import
Bank; and number three: the huge trade deficit this country
currently has and its impact on manufacturing, something I
suspect you know something about.
Mr. Secretary, needless to say, in the United States and
throughout the world there has been a lot of concern about
globalization and the impact that globalization has on people
in the developing world as well as working people in this
country. My particular concern is that one of the aspects of
globalization, it seems to me both in the United States and
abroad, is that it creates a growing gap, an increased gap
between the rich and the poor. In the United States today we
have the most uneven distribution of wealth and income of any
major nation, in which the richest 1 percent of the population
owns more wealth than the bottom 95 percent. I see that as a
very, very serious problem, and that phenomenon exists
increasingly in developing countries, as well, where the elite
of those countries own enormous wealth, while the poor in many
cases get poorer.
Second, as I think you know, I just returned from a trip to
Russia which was in the unfortunate position of having been
guided in its transition by the IMF, among other institutions.
And some gentlemen in Russia said, ``Well you guys were smart,
you ignored your economic advisors. You sent them to Russia.''
The result is, in many ways--not totally I understand--but, has
been a disaster among men in Russia. As you may know, in the
last 11 years, life expectancy has declined by 10 years, which
is a-historical, never happened before in the history of the
modern world. You have senior citizens, older people, living on
$25 a month in pensions. We saw in Moscow, which is the
wealthiest area of the country, old people begging out on the
streets. It was not a pleasant site.
The IMF also apparently has created disasters in Asia, and
according to some people at least, has done a very poor job in
Argentina. According to a recent op ed in the Wall Street
Journal, the IMF's quote was: ``30 programs in Argentina
contributed to the collapse of tax receipts, sky high interest
rates to compensate for currency uncertainty, and investments
stand still and deadline riots and the fall of the government.
The IMF's policy pattern is as clear in Argentina as in
previous collapses around the globe. It gives countries bad
economic advice, then lends heavily to them, allowing them to
waste the new funds, and watches as the government's popularity
plunges.''
I would hope that you would agree with me that the IMF is
an institution in desperate need of some structural adjustment
itself. I can remember several years ago at a subcommittee
hearing we had the U.S. representative to the IMF before us. I
think we had to threaten a subpoena to get her, as a matter of
fact, but she was there. And I asked her about some of the
votes that had taken place in the IMF, and later on she told
us, to my amazement, is there are relatively few votes, that
kind of consensus agreements are worked out and it seems to me,
for the well-being of this country and for developing
countries, that there needs to be infinitely more transparency,
not quiet back room dealings. Very often, the people who are
most effected by these austerity measures, who see education
and health care budgets cut, read about it in the newspaper. In
a sense, these measures are forced on their governments who
will not receive loans unless the governments go along with it.
So, in terms of the United States, the U.S. has a huge role
in the IMF, and if we are interested in winning the support of
poor people around the world, developing countries, I don't
think we want to be part of a process which imposes austerity
programs on those people which often cause a great deal of
suffering among the poorest people in those countries, so maybe
we'll talk about the IMF later.
Second issue----
Chairman Oxley. The gentleman's time has--can you get to
that in questioning?
Mr. Sanders. Very briefly, if I can. Export-Import Bank, as
you may know, Mr. Secretary, the Export-Import Bank approved a
$300 million loan for Enron in a project in Dahol, India, to
build a natural gas power plant, even though the World Bank
repeatedly refused to finance that project because it was not
economically viable, so we'll want to be talking about Export-
Import Bank, their loans to Enron, and in general, the non-
productive work that that agency sometimes does. Thank you very
much.
Chairman Oxley. The gentleman's time has expired.
We now turn to the Secretary of the Treasury, the Honorable
Paul O'Neill. Welcome back to the Committee, Mr. Secretary.
It's good to have you back, and please feel free to begin.
STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY, U.S. DEPARTMENT
OF THE TREASURY
Secretary O'Neill. Thank you, Mr. Chairman, Congressman
LaFalce. We prepared a fairly long statement which I'd like to
have included in the record, which tries to summarize and then
develop in some detail the things that we've been doing over
the last 13 months.
Chairman Oxley. Without objection, the full statement will
be made part of the record.
Secretary O'Neill. Thank you very much. And, Mr. Chairman,
with that, what I'd like to do is make just a few opening
remarks, and then turn to your questions. Thank you for
inviting me here today to discuss President Bush's
international economic agenda and our efforts at the Treasury
Department to advance that agenda.
Before we turn to today's important topic, I'd like to take
a moment on something else. You are all Members of the
Financial Services Committee and you know how important the
full faith and credit of the United States is. You know we're
going to reach a debt limit in late March. I urge you to act
quickly to permanently increase the debt limit. Delay creates
uncertainty that can threaten our economic recovery and
undermine U.S. leadership as we pursue the war on terrorism.
You may want to come back to this.
But, with that, let me turn to the subject at hand.
When I accepted the job of Secretary of the Treasury,
President Bush directed me to meet a number of important
challenges. One of those challenges, one I take very seriously,
is our Nation's role in international economic development. The
President's message to me was very clear: if we care, and we
have simple respect for human dignity, then we must finally
deliver on a half-century of unfulfilled promises. We must
raise the standard of living of poor people living in the world
today.
The leaders of the free world joined together more than 50
years ago with a commitment to speed the progress in the
underdeveloped world. Over those 50 years, we've witnessed
incredible feats of human progress. Today, more people than
ever before in the history of the world have the opportunity to
reap the benefits of their labor and creativity in free
markets, and to create wealth. And yet, for many nations,
progress has been slow or non-existent. And it causes a
question to be asked often, I think, why are so many people
still poor?
The nations that have failed lack systems that support the
realization of new ideas. Most of the building blocks for
progress are not expensive: good government, the rule of law,
respect for property rights, a commitment to free markets, and
a commitment to peaceful relations with neighboring countries
are the essential ingredients. But for many countries, these
foundations for development are out of reach. They lack
capital, know-how or encouragement from the international
community, and in some cases countries have gone down the wrong
road because of the policy prescriptions from the international
community or perverse incentives that our international
assistance programs themselves have created.
Let me take a few minutes to discuss some of the ways we're
trying to improve the system. To unleash human economic
potential, it is vital that economies have a sound and stable
environment to grow and attract private business. Capital is a
coward. It goes where it feels secure, and can grow.
Cultivating macroeconomic conditions that support growth and
attract capital is the job of the International Monetary Fund.
Rather than serving as a firefighter for crises, as it has in
the past, we believe the IMF should become more like a
gardener, nurturing the seeds of private sector growth. Thus,
our first task is to prevent the eruption of crises that
undermine and reverse growth.
With our encouragement, the IMF is taking steps to
strengthen its early warning systems so that it can better
preempt crises before they explode. Greater transparency is
also fundamental, both on the part of the IMF and its member
countries, so that financial markets can discern the true
performance and potential risk of individual economies and the
system as a whole.
With our support, the IMF is also narrowing the focus of
its involvement in member economies. As the IMF has
acknowledged, the organization has at times allowed its
activities to expand beyond the scope of its primary mission,
overlapping with the mandates of the Multilateral Development
Banks in areas such as promoting agricultural reform and
judicial reform. This has diminished the Fund's effectiveness
in pursuing central objectives. We believe the fund should
focus on monetary, fiscal, exchange rate, and financial sector
policies that lay the macro-economic framework for growth. In
addition, we're making clear that there are limits on official
support to countries in unsustainable situations that have a
history of making bad policy choices and avoiding reform.
Despite several recent incidents, there remains no clear
consensus approach for dealing with unsustainable situations,
and the uncertainty that remains creates too much pressure for
large-scale lending by the IMF, and may contribute to decreased
investor willingness to invest in emerging markets. To help
reduce this uncertainty, we're working to develop a sovereign
debt restructuring mechanism that will provide a more
predictable framework for debt workouts. Having such a workout
strategy may help reduce the pressure for large-scale
financing, and it may also create increase capital flows to
emerging markets at lower interest rates.
Let me turn now briefly to the World Bank and the
Multilateral Development Banks. As President Bush has said: ``A
world where some live in comfort and plenty, while half of the
human race lives on less than two dollars a day is neither just
nor stable.'' Poverty today remains widespread and deep. It's
clear that we can and must do better. Rising productivity is
the driving force behind increases in economic growth and
rising per capita income. We are urging the multilateral
development banks to focus more intently on operations that
raise productivity, concentrating on education and health,
promoting private enterprise, promoting good governance and
opening economies to trade and investment. Productivity is now
receiving more emphasis in the debate on MDB policies within
the institutions and among the other shareholders. We are also
urging the MDBs to establish monitoring and evaluation systems
that measure development results.
Private sector development is crucial to economic growth
and poverty reduction. MDBs should play a larger role in
promoting needed investment climate reform and in channeling
technical assistance on project finance to fund viable private
sector projects in countries that have adopted core standards
for a sound investment climate.
Another significant initiative is President Bush's proposal
that up to 50 percent of the World Bank and other MDB funds for
the poorest countries be provided as grants rather than as
loans. It simply doesn't make sense to pile more debt on the
poorest nations of the world. Those debts have to be repaid by
taking from people who live on less than two dollars a day. How
can such new debt loads help them develop a vibrant, self-
sustaining economy? It would be irresponsible to assume that
some time in the future, donors will be willing to finance
another massive international debt reduction program for them.
We continue to negotiate with our international partners to
achieve a successful agreement on this initiative.
While increased global trade is vitally important to the
U.S. economy, it's also the cornerstone of our development
efforts. Increased trade raises the standard of living of
people here in the United States and in the rest of the world.
Bilaterally, the United States is negotiating free trade
agreements with Chile and Singapore and seeking meaningful
commitments from countries seeking to join the WTO. Regionally,
we're working hard to create a Free Trade Agreement of the
Americas and the Doha Agreement last November gives us the
opportunity to expand trade globally. President Bush feels that
U.S. leadership is essential to meet the challenges of
international development. The United States should be a
locomotive of global economic growth and a champion of economic
development in those parts of the world that have lagged
behind. Economic growth produces peace, stability and
democracy. These are important national goals that have gained
significance since the September 11th attacks and the start of
our war on terrorism.
Mr. Chairman, I'd be happy now to take the questions of
yourself and your committee Members.
[The prepared statement of Hon. Paul H. O'Neill can be
found on page 44 in the appendix.]
Chairman Oxley. Thank you, Mr. Secretary. Let me begin by
asking you a question that started really yesterday with
Chairman Greenspan's testimony in which he indicated that he
did not see a large spillover effect on the U.S. economy from
the situation in Argentina and Japan. He also stated he did not
see much potential of contagion for surrounding countries or
regions in either case. You may have seen some press reference
to that. Would you care to comment on that particular
statement?
Secretary O'Neill. Of course, I always agree with the
Chairman, or almost always.
Chairman Oxley. He indicated you served on the same board
at Alcoa.
Secretary O'Neill. That's right. We've been associates and
colleagues for more than 30 years now, and it's true that we do
very often agree with each other. To the specific question of
direct effects on the U.S. economy from Argentina and Japan, I
agree with him, though I did not see the press accounts. But I
would go on to say this.
In the case of Japan, they've now had 11 years of average
growth of 1 percent, when their economic potential is something
on the order of 3 percent. And while I think it's very hard to
draw a connection between their slow rate of growth over this
period of time--three recessions in the last 11 years--it is
nevertheless true that our world is now so fundamentally
interconnected that when a major economy like Japan, which is
the second largest in the world, runs at significantly less
than its potential, it has an effect in two different important
ways. First of all, it has a material effect on the living
conditions and the average income of the Japanese people
themselves. I think that's the most important and telling. But
second, it means that their economy is creating less capital
that could be used for the purposes of economic development in
the broader world at large. And so, I think it is very
important that all economies, especially the very largest ones,
act as locomotives for the rest of the world so that we can
together help to overcome the problems I've addressed in my
prepared statement of so many billions of people still living
in the world today with income levels that are so small-- that
it's almost impossible to conceive being able to live on less
than a dollar a day, which is what billions of people are
doing.
Chairman Oxley. I want to get back to Argentina perhaps a
bit later, but in my opening remarks I specifically mentioned
Turkey, and I had the opportunity to visit there last June, I
believe it was, May or June right at the time that Gemal
Durbesh had been brought back from the World Bank to become the
finance minister, and I must say I was most impressed with him.
Could you give us a brief update on where Turkey is in their
efforts to try to get their economy back on track?
Secretary O'Neill. I'd be very happy to do that. Turkey is
a very interesting case, because when I was here last year, I
would say most of us considered Turkey and Argentina to be in
the same place. They were both having enormous problems. They'd
had multiple IMF programs. And I think shortly after I was here
last year, the IMF told to Turkey that there were certain
preconditions that it had to meet before more money was sent.
President Ecevit and Minister Dervis set out to get some very
difficult legislation through their equivalent of our Congress
and only after they had met the conditions that were suggested
to them,-- which frankly seemed very sensible, and were not
about impoverishing the country or squeezing social spending,--
the money began to flow.
And while I think they still have a very difficult economic
situation, they are markedly different from where they were
this time a year ago, or even where they were nine months ago,
in spite of the fact that their tourism industry evaporated
after September 11th for a period of time. President Ecevit was
here about 6 weeks ago, and I had an opportunity to spend some
time with him. I was very impressed by his articulated
determination to keep on the track of a sustainable economic
position for his country. I was very impressed by his quickness
of mind and command of the issues. So this is not a case where
just Minister Dervis is a very impressive person. The
president, himself, is a very impressive person, and I thought
some cabinet members that were with him were equally impressive
in their understanding of what needed to be done and their
apparent commitment to do it.
Chairman Oxley. Thank you. My time has expired.
The gentleman from Vermont, Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman.
Mr. Secretary, I would like to focus on two issues at this
point; the Export-Import Bank, and the trade deficit. In terms
of Enron, the Export-Import Bank approved a $300 billion loan
for an Enron-related project in Dahol, India, to build a
natural gas power plant even though the World Bank repeatedly
refused to finance this project because it was not economically
viable according to Human Rights Watch, Amnesty International,
and other groups. Enron subsidiaries paid local law enforcement
to suppress opposition to its power plant, in which they
arbitrarily beat and arrested dozens of villagers.
I wonder if, when I'm finished, if you could give us some
information on that, or get some information to us on that.
Second of all, in terms of Export-Import Bank in general,
the ostensible purpose of the Export-Import bank is obviously
to create American jobs, right? That's its theory. Yet, some of
the major recipients of Export-Import subsidies, Halburton,
AT&T, Bechtel, Boeing and General Electric, have laid off
hundreds of thousands of American workers over the last 10 or
20 years. So the average American I think would say, why are we
pouring and subsidizing some of the largest corporations in the
world, very profitable, who, in fact, have announced to the
world that they're shutting down plants in the United States
and moving to Mexico and China, and we are giving them
subsidies in the name of job creation. I think on the surface
it is insane and I wonder if you would comment on that.
Third point I would like to ask you to comment on. In your
remarks you talk about trade, promoting global free trade, and
you say, and I quote: ``trade has created million of jobs that
pay above-average wages and has helped promote the global
growth upon which America's own growth and prosperity
ultimately depend.'' Yes. No question. Trade has created
millions of jobs. Yet, there is another side to that equation.
We have a $400 billion trade deficit. Speak to the people in
the steel industry, speak to the people in the northeast
kingdom of the State of Vermont, speak to the textile workers.
When you have a $400 billion trade deficit and $100 billion
trade deficit with China, the reality is that China is now our
51st state in our manufacturing sector. Every major corporation
in America has gone to China that pay people 20 cents an hour,
rather than hire American workers at a living wage.
Now, I am not against trade. Trade obviously works when it
is based on fair trade. I would hope that you will speak and
raise the issue of what I consider to be a fiasco in terms of
our trade policies which have impacted millions of American
workers. Mr. Secretary, a young person without a college degree
who goes to the job market today is earning 20 percent less
than was the case 25 years ago, because there aren't
manufacturing jobs there; there are McDonald's jobs there. And
I know that you are smart enough to understand this, and I
would hope that we could go beyond the rhetoric the trade is
just great. It ain't great when you have a $400 billion trade
deficit, OK, and we've got to deal with that issue, and it's
not talked about enough. So that's enough of my rhetoric. I
would appreciate your response to those issues, please.
Secretary O'Neill. Thank you very much, Congressman. To the
first issue of Eximbank intervention or program support for the
investment in India, I don't know anything about this, but from
reading the newspaper accounts, I understand this was done
sometime in the Clinton Administration 3 or 4 years ago.
Mr. Sanders. Right. It's certainly not a new policy, no.
Secretary O'Neill. Right. This is not something that the
Bush Administration had anything to do with.
Mr. Sanders. Oh, but they supported it, and they're
actively involved. It's bipartisan, sir, bipartisan.
Secretary O'Neill. I'd be happy to find out from the
Eximbank what facts they looked at in making a decision.
Mr. Sanders. I would appreciate it if you could get back to
me. Talk a minute about Export-Import, the general philosophy
on the issue that I raised.
Secretary O'Neill. You know, I do think the Eximbank is
there to support job creation and protection for companies in
the United States. You know, I didn't honestly come prepared to
defend the Eximbank today in great detail. But I'm sure there
must be thousands of programs that they have supported over
time, not only for big firms, but small firms. As a matter of
fact, I think the issue of contention that Congressman Bereuter
was speaking about had to do with a fairly small firm or
transaction,-- it was a very small transaction involving a
company from his district.
Mr. Sanders. That's all true. But, does it make sense to
you that if General Electric announces to the world that it is
part of their program, they're going to be moving companies to
China and to Mexico, and then they come in and ask for an
Export-Import loan, does that make sense to you?
Secretary O'Neill. I don't know. I guess I'd like to look
at the circumstances. Maybe we can couple these together and I
can talk to you from personal experience. When I was in my
previous incarnation, or previous two, I made investments in
China. I didn't make investments in China so that I could pay
people, as you said, 20 cents an hour and be in competition
with U.S.-based industry. I made investments in China because
it was a market of 1.2 billion people and I thought my duty to
my shareholders was to make sure that they participated in
world economic growth, and I wanted to be an on-the-ground
supplier of valuable goods in the Chinese market. And I did the
same in 36 different countries, Congressman. It was not so that
I could hurt my workers in the United States, which numbered
50,000 and I more than tripled in the time I was there. It was
so I could make good on the idea of being the very best company
in my industry everywhere in the world.
Mr. Sanders. Look, I respect that, but there are many
companies who have done some very different practices, laid off
American workers, moved to China, no question about that. Maybe
you and I can discuss that at some point.
Last question----
Chairman Oxley. The gentleman's time has expired.
Mr. Sanders. Trade deficit $400 billion, $100 billion with
China----
Chairman Oxley. The gentleman's time has expired.
The gentleman from Nebraska, Mr. Bereuter.
Mr. Bereuter. Thank you, Mr. Chairman. I wasn't going to
bring up the Export-Import Bank again, but I would say to you
that when Treasury steps in and reverses the decision of the
Export-Import Bank on two transactions, one of which has, by
the company's estimate, follow-on sales of $100 million a year
on a manufactured product, this is not a small issue for me or
my constituents.
I want to go, however, to two questions, Mr. Secretary.
One, I don't expect you to be necessarily familiar with the
details of this, but there's a small institution, relatively
speaking, International Fund for Agricultural Development. They
are not reimbursed for their contributions to the highly
indebted countries, the HIPC Initiative. All the other
development institutions are.
I sent a letter to Deputy Assistant Secretary Schurs
February 4th, because he or someone from the department was
headed for a donor's conference in Rome on February 7th. And I
know that the U.S. was going to discuss this issue. At least it
was on the agenda, as to why IFAD cannot be treated like the
other multilateral institutions with respect to HIPC.
Second, I think it's actually courageous and perhaps very
good policy to move part of the loan activities of the World
Bank and other multilateral institutions to a grant basis.
There will be a lot of questions raised about it in Congress,
but at least it's an issue that has reason for support. And I'd
like to know the reactions that you've received from other
countries that, to this point, have not at least appeared to be
supportive.
Finally, I want to share a story with you about the IMF.
How at times I think their policy can actually be very
counterproductive and how I think that the social costs created
by some of the conditions, entirely appropriate conditions,
have to be better met in coordination with the World Bank or
the regional development banks.
I chaired the Asian-Pacific subcommittee for 6 years, and I
was chairman during that period of time when the Asian
financial crisis started, which began, as you know, in
Thailand. Thailand had a lot of problems in bank regulation and
incestuous relationships between the private sector and
commercial and public banks. Crony capitalism, in short, but
they were not a fiscal basket case by any means. They had
fiscal resources.
Then it spread to the Republic of South Korea. They also
did not have fiscal problems, but when Senator Roth and I met
with the finance minister in Seoul, who was also, I think, the
deputy prime minister, we asked him if he was considering
accelerating public works projects, given the fact that they
had the fiscal resources, financial resources to do so. Port
development, highway constructions, things that were ready to
go. And he said, ``Oh, I don't have that option under the IMF
Directive.'' Even though they knew they were going to have
unrest on the streets, high unemployment rates at a time when
they could have financed it early-on in Thailand and in South
Korea, they were told they were not allowed to do that. I think
that is exactly counterproductive advice, and, of course, soon
they did have fiscal problems and they had unemployment
problems. So there is one example.
You could go back to what happened in Latin America on the
advise that was probably appropriate in a macro-economic sense,
but not accompanied by the cooperative work of the World Bank,
or the international development institutions in a regional
nature. So I remember how the Treasury, in a previous
Administration, actually led the effort to give bad advice
through the IMF to Thailand and the Republic of Korea. And then
to top it off, when Thailand got in deep trouble, the United
States, its ally, was not there to help them. They got money
from Hong Kong, they got money from the PRC, and from many
countries, but we weren't there.
Secretary O'Neill. Well, I appreciate your questions on the
first issue. Bill is here with me, and we will get you
something on the agricultural development funds.
Your other two questions are wonderful questions. On the
response that we're getting to proposing that we move from
loans from the multilateral development banks to grants, many
of you know we had some initial reactions that said that this
was a very bad idea. And as we prepped them, the people who had
voiced their opposition, tell us their reasons. One reason was
``Well, these are banks and banks don't make grants,''-- didn't
have anything to do with what's the right thing to do for world
economic development. It was institutionally couched. And when
people saw that wasn't a very useful argument,-- I mean, they
were embarrassed after a while to make that kind of an
argument,-- they started saying more directly what I think they
really thought, which is ``We're really worried that you're
using this as a way to reduce U.S. financial participation for
helping the low-income countries to develop.''
And, as was noted by the Chairman, in the President's
budget, we've proposed that we increase the amount of money
that's available for these multilateral institutions to make
the point that this is not about being stingy, this is not
about cutting back, this is about getting performance and
getting results for our money in terms that are meaningful to
the people in these countries,-- which is to say that their
living standard goes up, not that we just send more money, but
that something very important happens.
And in the last couple of months, I would say we're making
more and more progress with other countries on this issue to
the degree that the Development Minister from Norway, Minister
Hilde Johnson, has put forward a proposal that says we should
identify things like aid to post-conflict countries, aid for
HIV prevention projects, aid for countries that have average
incomes of less than a dollar a day,-- and we would say aid for
primary education,-- that these things should be done as
grants, they should not be done as loans. And the response now
has improved, and that would make a substantial difference in
the level of money distributed through grants instead of loans.
I won't tell you which one, but one of the European finance
ministers said that was all fine as long as the total didn't
exceed 10 percent,-- to which I said, tell me why 10 percent.
And if you agree that these human-driven ideas are the right
ideas, why do you say 10 percent is as far as we can go?
There's not a good answer to that question. And so I would say
we are making progress. It's slower than I would like, but we
are making some progress.
On the question of IMF--and I'll do this quickly, Mr.
Chairman, as I see you're looking at the time--I agree with you
that the IMF has in the past insisted on some policies that
taken broadly and from the point of view of the leadership of a
country don't make any sense. We've been working with the IMF
over the last year to hopefully cause them to rethink how they
relate to the world. Let me just to take a specific area, which
makes great good sense to me, where I think we need to change
our idea of what's acceptable in the world. For the longest
time, I would say for 50 years, through our practice and our
words and our loans, we have basically taught the developing
world that if you're a low-income country, it's OK to be,-- in
fact, we encourage you not to be an investment-grade country.
What that means is that your debt is very, very suspicious and
you have to pay a very high interest rate in order to get
people to take your sovereign paper. Now if you think about it,
it is the worst of all possible things to say to people who are
living on less than a dollar a day, that you get the treat of
paying 18 or 20 or 25 percent interest rates on your sovereign
debt, because we're encouraged to do that by the development
community. It is a very bad idea.
And I think the only reason that we've permitted this to
happen is because we constantly forget who pays the interest
rate charges on sovereign debt. The people who make and live on
less than a dollar a day pay it. The government doesn't have
any money it doesn't apart from the people. And so we've been
working to change the standard of what it means to be a
developing country and to say therefore we should not ask
developing countries to take more debt burden, which means the
interest rates they have to pay go to 20 or 25 percent.
Chairman Oxley. The gentleman's time has expired. Before I
yield to the gentleman from Massachusetts, Mr. Secretary, there
was an article in the Wall Street Journal talking about the
same issue you were talking about, particularly Norway's
minister of international development and the 10 percent issue.
You were more outspoken in your speech. Let me quote from the
Wall Street Journal:
``Mr. O'Neill's response was scornful. `Europeans say more
than 10 percent is too much,' he told a couple of hundred
guests at the Institute for International Economics and Center
for Global Development. `I say the hell with it. Tell me a good
reason.' '' So I think we know where you stand on that issue.
The gentleman from Massachusetts.
Mr. Frank. I thank the Chairman. Without a little
scornfulness, Mr. O'Neill, people might not have recognized
you, so I'm glad that he gave us a little context.
I was pleased to see you single out aid to Afghanistan in
your statement. We obviously have a moral obligation. I think--
like everyone else here, I agreed with what we did there, but
having, in self defense, engaged in that military action in
which tragically, innocent people got killed and I do wish the
Pentagon was a little less grudging in acknowledging that and a
little more careful about it, but it's inevitable. Obviously,
we have a moral obligation to help rebuild, but I'm a little
troubled.
What's our contribution for the first year to the Afghan
reconstruction fund?
Secretary O'Neill. I've forgotten.
Mr. Frank. I'm told it was about $200 million, and the
total we're talking about here is, well, I just heard that it's
going to cost us $30 billion a year for the war, and I'm
troubled by the 150-to-1 disparity. I think frankly we are not
meeting our moral obligation as a Nation to provide more
funding. Obviously, you don't want to provide money that people
can't use, but everything I read says we have people who are
hungry, we have police officers and others not being paid, and
I was impressed, Mr. Secretary, and I appreciate the passion of
your rhetoric about the unsustainability of a world with such
enormous disparities where people, through no fault of their
own, are living so degraded.
To be honest, I think we can do more, and I like the
direction that you talk about going in. But let's start with
Afghanistan. There was really no moral justification for a 300-
to-1 disparity or 150-to-1 disparity. I have trouble with my
math. Between $30 billion and $200 million, in terms of what we
contribute.
Now let me say with regard to the grants, and I agree, and
I've read some of these arguments. One of the ones that seemed
to be silly to me was well, if we make it a grant instead of a
loan, the country won't have ownership of the program. I think
that's the kind of thing people say when they have nothing else
to say. But there is one legitimate question here. And I must
say, I appreciate the care with which the Administration has
differentiated its approach on the grant versus loan from the
Meltzer Commission. The Meltzer Commission was an
intellectually respectable operation, but it was far more
critical of these institutions than I think that I am, and I
believe, I was pleased to see, the Administration was.
So, what is important, and I think that gives rise to some
of the fear that this is the way to get rid of these things.
The problem, as you know, is that some of the financing that we
do for future projects comes out of the reflows, and it would
seem to me if the U.S. Government would just commit to making
up any gap in financial availability of funds, that would come
from the lack of the reflows, we could do away with that and we
would have virtual unanimity. Can't we just say that, Mr.
Secretary? That we would agree to make up, through an
appropriation process, any gap caused by the cessation of
reflows?
Secretary O'Neill. I think the amount of money that we've
suggested over the next 3 years stepped up through this
performance idea would more than take care of the reflow
associated with the U.S. proposal.
Mr. Frank. Well, I agree, although we do understand that in
the first couple of years, the reflows are fairly small, so
would there be any objection in principle, or let me put it
this way. Shouldn't we, to advance--because I think moving to
grants is a very good idea--but, wouldn't it be helpful if we
said that we, to the extent that you and I and others can
commit people yet to come, that our policy would be that in the
future, to the extent that there continued to be a need, we
would continue to make up for any loss through the lack of
reflows?
Secretary O'Neill. The concept--I don't see anything wrong
with that. I'm not sure about your rules and what that means
for 10-year commitment for scorekeeping and----
Mr. Frank. Well, one thing we've learned is anything we say
today we could all undo tomorrow. But it does help, I think, to
set the policy. After all, the move from loans to grants isn't
binding. It could be undone. But we committed ourselves.
Secretary O'Neill. I agree with you.
Mr. Frank. Thank you. Let me then just make the last point.
Again, I was struck, and I appreciate your passion on the issue
and I think that is appropriate. Part of the problem we have,
of course, is--and I guess when you talked about capital being
a coward; I love that phrase, I think that's true. Capital is
very mobile. Unfortunately, that gives capital an awful lot of
sway in the world that it can sometimes beat down other
considerations. One of the problems is that when countries are
told to do the things that make them investment safe, the money
to help alleviate the short-term social pain isn't there and
that makes it harder to get these things accepted in a
democratic society. Let me cut to the bottom here.
I believe that as the wealthiest Nation in the history of
the world, given the way you have framed this issue, even
though you're talking about more, we're still not doing enough.
We found $48 billion, we're going to find $48 billion over my
objection to increase military spending. I think it's more than
we needed. But, when we were threatened, we found $48 billion.
I think we could do more with regard to precisely the
issues you talk about. Now obviously we don't want to send
money where it can't be well-spent, but alleviating hunger,
dealing with AIDS, these are precisely the areas you talked
about where grants could do some good, would you not agree that
the world could absorb a significantly higher level than we're
talking about, and can't we try to find somewhat more than we
are doing? And that includes, I believe, just to close, Mr.
Chairman, further pressing the international institutions fully
to fund the HIPC. I think we as a bilateral effort have done
more than they've done. We're not talking about an enormous
amount of money; maybe it's billions more, but I think it would
go pretty far. And as far as the rest of the world, you know,
they've been critical of us because we're not doing enough;
let's call their bluff, let's see them and raise them and see
what they do in this poker game.
Chairman Oxley. The gentleman's time has expired.
Does the Secretary wish to respond?
Secretary O'Neill. Maybe just to say one thing. One reason
for wanting to be very, very forceful with the IMF and the
World Bank in developing performance measures is so that we can
create a basis for saying to the American people, not only
should we do more, but we can assure you we're going to get
real value for all of the money that flows through these
institutions. My own view is that as we can demonstrate that we
know what we're doing, we can make a case the American people
will believe in and the Congress will be able to act on.
I've asked Jim Wolfensohn of the World Bank to do
something, which he's in the process of doing and hopefully
we'll have before the Monterey conference, which is to write a
report that learns the lessons of the last 50 years and says
precisely and specifically what has worked and why it has
worked. And even more precisely and specifically what hasn't
worked and why it hasn't worked. Because I believe we have done
a pitiful job of learning from experience, and as a
consequence, our Government and other governments have not been
believable when they say that they know what they're doing in
this area of economic development. After 50 years, not only are
people living on less than a dollar a day, there are places in
the world where the living standard is worse now than it was 50
years ago when we began this effort. I believe we can do
better, and then I believe we will command the resources to
expand and improve what we're doing.
Chairman Oxley. The gentleman's time has expired. The
gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. Mr. Secretary, in
wake of the terrorist attacks on September 11th, I think world
leaders have been examining and reexamining the whole issue of
global poverty and the fact that it does provide a breeding
ground for terrorist movements. Some have argued for a renewed
effort by developed countries to commit .7 percent of the GNP
to global assistance and it certainly is a standard that
neither we nor our allies can begin to meet. So could you take
a moment and share with us how you feel the events of September
11th have changed the focus of our international development
policy?
And could you talk about U.S. assistance to the World Bank
and the multilateral banks within the context of the battle
between democracy and these radical groups?
Secretary O'Neill. Well, I think if you go back and look at
what the President said at the World Bank in July, you will
find that he said how important it is that we fulfill our
responsibility in the broader world to work on meaningful
economic development. So I would say, yes, all of us were
affected in lots of different ways by the events of September
11th. I don't think the President's view, and frankly my view,
of the importance of working on these issues was changed in a
marked way by September 11th. I thought for a long time, it's
not worthy of civilized people who live like we do not to be
concerned and making some progress in helping other people to
improve their living standards.
I think it is also true that, as I was saying earlier, that
the IMF and the World Bank have fallen short of what they can
do, and therefore there is a real need for a reassessment and
redirection and realization of turning rhetoric into reality
for people on the street.
Mrs. Biggert. Well, certainly you know this Committee has
played a role in the formulation of the Patriot Act and
certainly looking at money laundering, and that's been linked
again to the terrorist activity and trying to suppress them.
What role then do you think that the IMF should play in the
money laundering issues?
Secretary O'Neill. This is a subject that we've worked on
with Horst Kohler and his people at the IMF, and they've been
very responsive to our request in being supportive and helping
to encourage the association of all the countries in the IMF
with our efforts on a worldwide assault on terrorist finances.
We've been talking with them. As a matter of fact, I had
breakfast with Horst Khler and Ann Krueger a week or 10 days
ago and talked about them becoming a clearinghouse where
countries would report on the actions that they've taken to
establish appropriate mechanisms, and I think we'll get that
done fairly quickly. And to connect back to your earlier
question about how we're changed by the events of September
11th, I must tell you it never occurred to me when I came here
that I would be spending a significant fraction of my time
designing systems to interdict and confiscate the funds of
people who would do the horrible things that were done on
September 11th.
I would also say to you, I think we've done a good
beginning job of connecting the world and the institutions of
the world to help us in this worldwide fight. In that regard,
on Sunday morning I'm beginning a 5-day trip to the Gulf states
to meet with the leaders of the Gulf countries to work with
them to further tighten our ability to deal with terrorist
financing. This is not a finished piece of business. We're in
the early stages.
Mrs. Biggert. Right. Thank you, Mr. Chairman.
Chairman Oxley. I thank the gentlelady. The gentleman from
Texas, Mr. Gonzalez is recognized for 5 minutes.
Mr. Gonzalez. Thank you very much, Mr. Chairman.
Good afternoon. My question has to do with NADBank, which
is headquartered in my district, and for the past few weeks or
months there's been discussion from Treasury about plans that
would significantly restructure it and narrow its focus. My
concern or course is great. Our problem has been, Mr.
Secretary, that we have not been able to obtain from Treasury
anything in writing as to what the proposal consists of. So, I
would ask you today if you would provide me with that within,
let's say, the same time next week. Do not mail it, that is
true; email or fax. But it's my understanding that we have not
been able to obtain anything that specifically outlines what
Treasury has in mind, and further any time line.
And my second request would simply be, I know there would
be discussions in Mexico, and prior to any finalization of any
agreement with Mexico relating to NADBank, could you again
provide me, prior to finalization, the specifics. And when I
say, prior, you know, what would be appropriate, I would just
simply ask you to put yourself in my shoes as to what would be
that appropriate courtesy. And that's the only thing I have
right now is NADBank because that's still a very hot issue,
when I get back this weekend, as a matter of fact. Thank you.
Secretary O'Neill. We'll be happy to do that.
Chairman Oxley. Thank you, Mr. Gonzalez. The other
gentleman from Texas, Mr. Paul is recognized for 5 minutes.
Mr. Paul. Thank you, Mr. Chairman, and welcome, Secretary.
I'm glad that we're here talking about reform of the IMF. Of
course, my belief is it's probably beyond reform, and that
someday we might look at a more appropriate position on the
IMF, and that is just for us to get out of the IMF. I have
never seen anything that can morally justify our participating
and taking money from poor people in this country to pump into
the IMF. I've never yet seen any economic benefit come from the
IMF, and I have not yet found anybody who can give me
constitutional justification and authorization for us to belong
to an international organization which serves special
interests.
I've never had a constituent in my district come up and
say: ``Ron, I really want you to vote for the IMF funding this
year.'' It has never happened. I'll bet it hasn't happened in
anybody's district. But we do get lobbied for it. We get
lobbied for the IMF appropriation by the banks and large
corporations. So there must be a special reason they come to us
and ask us for this appropriation and for us to stay in the
IMF, especially in the midst of a crisis. You mentioned in your
testimony that you would like to head off these crises, but I
don't see how that's going to work either because sometimes
when there are maladjustments in an economy, the crisis is
really the market telling you you'd better do something. If
there's something wrong with currency balances or imbalances,
then you really need a crisis.
But to try to prevent this by micromanaging, you get into a
situation where you're becoming the biggest economic
interventionist conceivable. So I think we're more or less
trapped.
But I do have two brief questions. You favor debt relief
for some of the Third World countries. Why is it that we always
have to appropriate that money? You know, if they owe us the
money or we loan them the money, why don't we just say, you
don't have to pay us? It obviously, or somewhat implies that
this money goes to a corporation or to a bank and that's why
they lobby us for it. They can't pay it anyway, so just relieve
them of it, but don't appropriate the money. But, we always
have to appropriate the money.
Now, I have a quick question on the Exchange Stabilization
Fund because it works so closely with the IMF. I believe the
Exchange Stabilization Fund has more than $35 billion, which is
more or less a slush fund, and it can come to the rescue, along
with the IMF, to bail out these large corporations and the
banks. I have a bill that would make the Exchange Stabilization
more responsible, whether they are dealing in gold, or whether
they're participating in a bailout, why can't they do that like
it should be done through a direct appropriation or direct
approval by Congress. Would you support something along that
line where Exchange Stabilization Fund would be more
responsible to the Congress?
Secretary O'Neill. Let me start with the broadest question
that you asked about the IMF. As I've already testified, I
think there is a need for reform of the IMF and the World Bank.
I think there's a very good case to be made for U.S.
participation in the IMF and in the World Bank that goes
directly to the self-interest of the people of the United
States. It is evermore true that the world is interconnected.
The affairs that were remarked on earlier--when Thailand and
Malaysia and that part of the world, Korea, saw a rolling
financial collapse--was not of transient interest to the people
of the United States. They may not have known it and they may
not have understood it, but when the rest of the world verges
on losing its position as a market for U.S. goods, believe me,
that's a real issue for U.S. farmers, because a huge part of
the product of our great farm community goes offshore, and it's
true of lots of our other goods.
And so I think we have a decided, clear interest in the
economic improvement of and stability in the rest of the world.
And saying that, I would also join you in saying I don't want
U.S. taxpayers' dollars to be thrown away. I want them to be
used for leverage to create more stable conditions, so that
those markets that we are ever--increasingly dependent on are
there and they're stable and they pay good prices for our
products. So I think there is a very good reason to have these
organizations.
Chairman Oxley. The time of the gentleman's expired, but
you certainly may continue.
Secretary O'Neill. May I just say one word in response to
his Exchange Stabilization Fund question. In the 13 months that
I've been at the Treasury, we have not used the Exchange
Stabilization Fund to bail out anyone. And the flexibility that
exists in the Exchange Stabilization Fund has been around for a
very long time. In reviewing the history of the use of the
fund, I think almost without exception, it has been used for a
good public purpose. I'd be happy to discuss individual
instances with you if you think there's some evidence to the
contrary. But I do think that in a world that can turn on a
dime, it makes sense for Administrations, both Republican and
Democrat, to have some flexibility to respond to crisis
conditions. And so I think the Exchange Stabilization Fund has
served us well as a country, and I would hope that we don't put
restrictions on it that make it more difficult to act when we
must act in a hurry.
Chairman Oxley. Thank you, Mr. Paul.
The gentleman from California, Mr. Sherman, is recognized
for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman. There are those who
think that the war on terrorism is just an overblown rhetorical
flourish. I hope they're wrong, because Iran and Iraq are right
now trying to develop nuclear weapons. If they're successful, I
believe they'll smuggle them into this country, and I believe
that the equation is simply millions of dollars flow to the
Iran or Iraq regimes this decade and that leads to millions of
dead Americans next decade.
But right now it seems as if we're doing business as usual
with the IMF and the World Bank. Iran has received $232 million
from the World Bank, $145 million for a ``sewer system'' and we
at least opposed that, and $87 million for health and nutrition
which we have not really bothered to oppose. Now you can say
health and nutrition, these are wonderful things, but what if
an American, through an intermediary, had sent $232 million to
the Nazi Regime, and said well don't prosecute me for treason,
here's a letter from the Fuhrer that says the money is going to
be spent on sewers and health care systems.
When you look at the IMF, Iran has borrowed $530 million,
Syria another $100 million. Now we're told they're simply
borrowing back their own capital, but look at the incredible
benefit they're getting. They are members in good standing of
the IMF, but they don't have to sacrifice liquidity, they get
their money back. Imagine a partnership where some partners
have to contribute capital and others contribute capital and
then they get it back.
So clearly, hundreds of millions of dollars of benefit
going from the IMF and the World Bank to those that the
Administration calls the ``axis of evil,'' but are actually the
receivers of subsidies from the American taxpayer. Now we can
just make some mild protests, easily ignored, so mild that
nobody even heard them. I believe that there are Members of
this Committee that don't know that the IMF and the World Bank
is distributing funds, dispersing funds due to previously-
granted loans to Iran while we speak. Our protest was so soft
it didn't even reach this room.
Or we can instead threaten to pull out of these
institutions, create a U.S. Bank instead of a World Bank so at
least we can tell our constituents that our money is not
subsidizing those that the President calls evildoers.
Are we going to continue to do business as usual with these
institutions and tell the American public in the surface we're
at war with terrorism, and then somewhere deep in the financial
pages, our money goes to the IMF and the World Bank, their
money goes to the axis of evil.
Have we told our European and Japanese friends that we hold
them responsible for hijacking our money and sending it to
those who are doing everything possible to develop weapons of
mass destruction so that they can kill millions of Americans?
And are we going to hide behind the idea that, oh, gee,
there's nothing we can do. We were outvoted and there's just no
replacement for these institutions. And if we hide behind that,
can we at least go on the front page? Can the President of the
United States at least explain to the American people that
their money is gone to Baghdad, and especially that their money
is going to Teheran, it is going to Damascus, and that when 10
years from now, God forbid, millions of Americans are killed by
an Iranian or Iraqi nuclear weapon, and we hold hearings in
this room, if it's still here, who financed the Iran or the
Iraq nuclear bomb, and unfortunately, part of that may be us.
I'd like your comments. Are we going to continue to do
business as usual?
Secretary O'Neill. I must tell you I'm just staggered by
that representation. It's simply not true.
Mr. Sherman. The IMF and the World Bank do not make loans?
Secretary O'Neill. You said the American taxpayers, your
constituents were sending money. That's just not true.
Mr. Sherman. No, my constituents, we have capital at risk.
Secretary O'Neill. I'm sorry, Congressman. I tell you I
care about these issues really deeply.
Mr. Sherman. As do I.
Secretary O'Neill. And I care a lot about what we say to
the American people out there about what we're doing. We have
never, ever supported sending the American taxpayers' funds to
Teheran, or to Damasacus.
Mr. Sherman. We have allowed our funds to be hijacked by
others and sent there. It's our money mingled with European
money that is going to Teheran right now.
Secretary O'Neill. I'm sorry, that's not true.
Mr. Sherman. The money isn't being----
Chairman Oxley. The gentleman's time has expired.
[The following information was subsequently furnished by
Secretary O'Neill for the record.]
Secretary O'Neill was correct in stating that
Treasury has never ``supported sending the American
taxpayers' funds to Teheran, or to Damascus.'' It is
true that the U.S. has not supported World Bank Group
projects for Iran and Syria. The following offers
greater detail.
World Bank Group borrowing countries are divided into
IBRD-only; therefore, they are ineligible to receive
IDA assistance and receive none of the funds the
Congress annually appropriates to IDA. To meet its
lending requirement, the World Bank uses paid-in
capital from its shareholders to raise funds in the
market. That borrowed money is lent to countries as
``IBRD loans,'' which they repay with interest and an
overhead charge.
The U.S. has opposed all World Bank Group projects
for Iran or Syria, consistent with U.S. law and policy.
IBRD lending to Iran resumed im May 2000 with the
approval of two IBRD loans to Iran--a $145 million IBRD
loan for the Teharan Sewerage Project and an $87
million IBRD loan for the Second Primary Health Care
and Nutrition Project. The U.S. voted against these
projects, but other shareholders voted in favor. There
have been no loans to the Syrian Government. It should
be noted that Syria has been in arrears to the World
Bank since 1986.
Chairman Oxley. The gentleman from California, Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
First, Mr. Secretary, I want to thank you for coming. I
know you're very busy. I appreciate your taking the time. I'm
especially appreciative of the effort that the Administration
is putting toward establishing partnerships both within and
without the North American Development Bank, with our good
friend, Mexico, to the south. The old real estate saying with
which I'm familiar, is ``you only want to own that which
touches yours.'' Frankly, dealing with the problems in our
backyard, are the height of leadership and I want to compliment
you and your colleagues for doing that.
I want to go on to another question. We've had a lot of
conversation today about the highly indebted poor countries.
There are basically two classes of borrowers at the IMF.
There's the HIPC countries and there's everybody else. I
believe in a previous appearance here, you made a very clear
that people who borrow money should repay it.
Secretary O'Neill. Right.
Mr. Ose. Could you give us some sense of the borrowers, for
instance the large borrowers not in the HIPC group, but
everybody else and the status on their loans, please?
Secretary O'Neill. Bill is reminding me there are almost no
arrears in those that are not in the HIPC countries. You know,
and I think to your point, we're making real progress on the
idea that we should expect even very low income countries that
they should be moving toward investment--grade sovereign debt.
What that status would provide is a significant cushion against
bad times in sovereign countries that have investment--grade
debt. They would have in effect a balance sheet that lets them
deal with unfortunate circumstance. We're moving in that
direction. It's part of the reason we've been so forceful in
saying we don't want to make loans to countries that are
already saddled with debt that they can't pay because we're
creating the next HIPC round.
Mr. Ose. I do think your point is very well made in the
sense of creating a, if you will, a pit that you both throw
money into forever. Let me go back to my first comment about
the relationship with our good friend to the south. Could you
give us some sense of the partnerships, both private and
public, that are undertaken to date by the Administration with
Mexico?
Secretary O'Neill. I would say we're making wonderful
progress. Both President Bush and Vincente Fox have worked hard
at this relationship since the very beginning of the
Administration. We had a conference about 10 days ago, chaired
by Deputy Secretary Dam, and we're in the process now of
pulling together a whole array of ways that we can strengthen
the relationship between the U.S. and Mexico, and the economic
integration between the U.S. and Mexico, to the benefit of both
sides of the border. It's very interesting as we work this
issue. Maybe one could argue that these should not be new
discoveries, but to discover the amount of fees paid by people
who are working on the U.S. side, and have relatives and family
in Mexico that they're sending money back to. It's surprising
to learn that often times they're paying 20 or 25 percent fees
to financial intermediaries to move their money back and forth
across the border. You know, it just cries out for a solution
and we're in the process, I think, of making those connections
that will make a huge difference in the value of funds earned
in the U.S. and repatriated to families back in Mexico.
Mr. Ose. If I may make one observation on that particular
point there have been discussions amongst us, particularly
between me and the Chairman about trying to craft some
statutory language that would facilitate the transfer of funds
back and forth across the border between family members, and I
look forward to interacting with you on that particular issue.
Thank you, Mr. Chairman.
Chairman Oxley. Thank you and thank you for your leadership
on this issue.
The gentlelady from California.
Ms. Waters. Thank you very much, Mr. Chairman. I'd like to
thank you for the time and I would like to thank Secretary Paul
O'Neill for his willingness to testify before the Financial
Services Committee today. I would also like to thank Chairman
Bereuter for his comments on the International Fund for
Agricultural Development and its contributions to HIPC.
To the Secretary. Unfortunately, the HIPC Initiative has
failed to provide a lasting solution to the problem of poor
country debts, because the IMF and the World Bank have refused
to provide their fair share of debt relief. While the U.S. and
the G7 countries agreed to cancel virtually all of the
bilateral debts that poor counties owe them, the IMF and the
World Bank are reducing these countries' debts by less than
half. At least 18 of the 24 countries that have received debt
relief are still spending more money on debt payments than they
are on health care.
Zambia provides an excellent illustration of why deeper
debt relief is necessary. Zambia is a deeply impoverished
country with a per capita income of only $330. The infant
mortality rate exceeds 1 percent of live births, and 27 percent
of Zambian children under five are malnourished. Almost 10
percent of the population is infected with the AIDS virus and
650,000 children have been orphaned by AIDS. The HIV/AIDS
epidemic has also ravaged the educational system by causing a
shortage of trained teachers. Yet, Zambia's debt payments have
actually increased following the receipt of debt relief.
Moreover, Zambia still spends more than twice as much money on
debt payments as it does on health care.
The President's budget includes a request for $850 million
to replenish the International Development Association--IDA--
through which the World Bank provides concessional loans to
poor countries. The Financial Services Committee is expected to
consider legislation this year to authorize a replenishment of
IDA. IDA replenishment provides this Committee with an
excellent opportunity to evaluate the progress of the HIPC
Initiative and consider legislative language to provide deeper
and more effective debt relief to impoverished countries.
Mr. Secretary, are you willing to consider expanding the
HIPC Initiative to provide deeper debt relief? Do you think
that the expected replenishment of IDA this year will provide
an appropriate opportunity to consider additional debt relief
legislation? How much debt relief do you believe the IMF and
the World Bank should provide?
Secretary O'Neill. Well, thank you for your questions. As
you've indicated, and I think we had a little bit of a
conversation last year about HIPC, there are still significant
debt loads in many countries. That's part of the reason the
President has said that we should not pile more loans on low--
income countries, that we ought to move toward grant funding,
especially for the lowest of low--income countries. And there's
still much more to do. I think there's no doubt about that. One
could think about expansion of HIPC as we see performance under
the HIPC Initiative. Again, I think I said to you last year,
one of the concerns I have about what we've done, or what the
agencies have done, with HIPC is that they have presumed that
having a forgiveness of certain kinds of loans, that countries
are then in a financial condition that they can use the money
that's theoretically freed up in interest payments and
principle to go do other things of our determination. This is
of great concern to me because it makes a presumption, I think,
as you said in your own remarks, which is too often not true.
The fact that certain debts have been forgiven doesn't mean
that a country suddenly has a balance sheet that can support
additional spending. It may not, in fact, be the right thing
for the people of the country.
So one of the things that we've worked hard on is to try to
get not just the Fund and the World Bank, but the so-called
NGOs, the non-governmental agencies, to take a broader
perspective on how we all think about what we're doing, so that
in effect, we're not saying to the president of a country, do
our bidding and we don't care what your other circumstances
are. We've forgiven the part of the debt that you owed to us
and therefore you must do our bidding for something else. I
think this is a mistaken notion which we've been working hard
to try to overcome.
But I think I agree with you, as I said earlier, that we
should be building a case for more on the back of demonstrated
performance that shows we know what we're doing, and we know
what we're doing in a way that shows up in the average income
levels of the people in these countries, not in some other
measure that may be satisfying to us, but doesn't do any good
in terms of the human living standards.
Ms. Waters. Mr. Chairman, if I could get unanimous consent
for 30 seconds?
Chairman Oxley. Without objection.
Ms. Waters. Thank you. Mr. Secretary, I would like to get
back to the conversation that we had about technical assistance
to some identified countries to have some demonstration of how
we can help countries use some of their resources to deal with
the problems of poverty. I just asked my staff if we had
followed up. I think there's a letter in to you about that, and
I'd like to get on the road in helping to make that initiative
a possibility.
Secretary O'Neill. I'd like very much to do that.
Ms. Waters. Thank you.
[The prepared statement of Hon. Maxine Waters can be found
on page 42 in the appendix.]
Chairman Oxley. The gentlelady's time has expired.
The gentleman from Columbus, Ohio, Mr. Tiberi.
Mr. Tiberi. Thank you, thank you, Mr. Chairman. Mr.
Secretary, with respect to Argentina, I have some constituents
who are U.S. citizens who are natives of Argentina who work at
Ohio State University, have expressed a dire concern about
what's happening in South America and that they believe
Argentina is a key to stabilizing the entire region. What's
your view on that theory and how we should proceed to the IMF?
Secretary O'Neill. Well, I must tell you I've spent a good
deal of time with the people at the Treasury and the State
Department, spent a good deal of time being engaged with
Argentina. In the 13 months that I've been at the Treasury,
Argentina represents a measurable fraction of what I've spent
my time on, because we join you in believing Argentina is a
very important country. It's been a great friend and ally of
the United States for a long time. About 2 months before we
arrived, the Clinton Administration before us, had worked with
the IMF to agree to a program for Argentina that at the time I
think was judged to be the largest ever including both what the
IMF was doing and what private resources were doing. As I
recall, the amount of money that was in the first program, the
Clinton Administration program, was $43 billion.
In April all of that was gone, and we worked with the IMF
and agreed a new program with Argentina that was some $20
billion. In August, that was all gone. And at the end of
August, we agreed, quite reluctantly I might say, to one more
round which encompassed $8 billion. And as you know, it didn't
save the government of Argentina because they couldn't pay
their bills.
It's not for want of trying on the part of the United
States and the IMF that this failure has occurred. It was a
long time in the making and there are difficult circumstances
in Argentina which can only be fixed by the responsible
officials in the Argentinian government. One of those problems
is an ability on the part of the provinces, the equivalent of
our States, to make binding obligations on the national
government without the national governments having any say--so
whether that's OK or not. As a consequence, the debt at the
national level is so large that the revenue system only
produces maybe 60 percent of the money that's required to pay
the interest on the debt. This is a problem that can only be
fixed in Argentina. We've had continuing conversations with
President Duhalde and with the Finance Minister. I must say I
am encouraged, that I think they are working in the right
direction. Floating the peso was a good judgment.
Today's newspapers report that they think they've fashioned
a solution to this provincial/national government issue. I
haven't seen any details yet, but I'm hopeful because it is
also clear that before more money shows up in the form of IMF
assistance, the holes in the bottom of the bucket must be
fixed.
Mr. Tiberi. Thank you, Mr. Secretary. Just to follow up, a
number of Latin American countries are in a similar boat to
Argentina. Ecuador is one that is trying to negotiate with IMF
right now. Can you update us on that particular negotiation?
And how does the proposed cut in the Andean Regional Initiative
impact that negotiation?
Secretary O'Neill. I'm happy to say--and as I do I knock on
wood--that because of the way the Argentinian situation has
been handled, that we've at least accomplished a pushback on
the notion that existed in Washington a year ago or a year-and-
a-half ago that we and the world were hostages to so-called
contagion,-- both economic and political contagion,-- and that
if there was a problem in one country, no matter if it was on
the other side of the world, that it spelled doom for emerging
countries and developing countries all over the world.
You know, I said at the beginning of this Administration I
thought contagion was a man-made phenomenon and that it was
possible for us to prove it wasn't necessarily so. We've worked
hard to do that. And you know, I think as long as we are
consistent--by we, I mean those of us in the developed world
whose money is at risk or involved with IMF and the World
Bank--as long as we are true to principles that we will help
people with sustainable situations, and we won't bail people
out who don't have sustainable situations, contagion doesn't
need to exist in the world.
Chairman Oxley. The gentleman's time has expired.
The Chair is pleased to recognize the gentleman from Iowa,
Mr. Leach.
Mr. Leach. Thank you, Mr. Chairman. And I know it's been a
long day for the Secretary. Let me just make a couple of
comments. One, your statement is unusual in the sense that
you've talked about many subjects that weren't asked by the
Committee and I think that's to be very much respected. You've
gone beyond the Committee request.
Second, your leadership in terms of the grants issue is
very impressive, and in terms of the European dissent from our
position, based upon the lack of support the U.S. may have in
the future for the international financial institutions, I will
only say that obviously these institutions are always
controversial. But I think Congress would be sympathetic to
Treasury leadership, and that there is clear growing
understanding in the United States, which will be reflected in
Congress, of the need to balance the terrorism approach with
the cause of terrorism remedies.
And one of the impressive aspects of the creation of the
World Bank and the IMF was not that they were necessarily
created after the War, which they were, but the design at
Bretton Woods was during the War, 1944 and at the same time,
the United States was enmeshed in War, it was attempting to
deal with the issue of the causes of war as well as the causes
of the Great Depression. And these are things that we can't
skip. I would also say that I'm very appreciative that the
Treasury has come down in favor of support of the World Bank
AIDS Trust Fund, and I would only suggest that I think there
would be more support in Congress for a higher funding level,
and I hope you keep an open mind to that extent.
And the big picture is that we lost Americans on 9/11, but
in Africa every two days more children die of AIDS than were
killed in 9/11, and if there's an international world
emergency, it has to be AIDS. And so I really think at this
time, when we think of the international financial
institutions, that has to be the forefront.
Finally let me say with regard to these that, as you know,
George Soros has come forth with a program involving special
drawing rights. It's fairly complicated. It may not have
perfect support in lots of places, but I think it's the type of
initiative that people ought to keep a little bit of an open
mind and try to work with and see if there are modifications.
At least it has some hope for producing more resources on an
immediate timing basis. So I hope Treasury is not fixed in
cement completely and totally on that issue.
Finally, because time is a little problem, I was really
pleased in your opening statement that you mentioned the tax
issue and international dimension of the tax issue. This
Committee, as other committees of the Congress, have looked at
aspects of Enron and to me, one of the obvious facts is that
some of the legal aspects of Enron are in some ways deeper and
more troubling than some of the illegal. And in particular,
what appears to be a growing tendency of American corporations,
not just Enron, to seek tax havens for that reason, to avoid
taxation and to avoid American regulation.
The United States Treasury has historically been the
bedrock institution that should lead concerns in this area. So
I hope that the Treasury has task forces that are looking at
this issue. I think Congress would be very sympathetic to
initiatives that look at the tax have issue in as serious a way
as possible. I don't know if you're prepared to comment on
that. I hadn't intended to raise it, but you raised it in your
testimony. Do you wish to comment on that?
Secretary O'Neill. I'd be very happy to if you'd like.
Mr. Leach. Please.
Secretary O'Neill. Let me just say one quick word about
George Soros and his idea about special drawing rights. I have
a lot of respect for George Soros. He's someone I've known, and
I've seen him quite a bit in the last couple of months. I have
a lot of respect for George because he's spending $750 million
a year of his own money, not somebody else's money, his own
money, to work on these issues of economic development. So I
have a lot of time for him and for his ideas. I must say, and
I've said this directly to him, I'm concerned about the special
drawing rights idea, because it's first of all complicated and
I'm one who believes that as we work on these issues of
economic development, we should do it in a way that's very
transparent. If it's our intent to give more resources, I would
like for us to appropriate the resources and say to the
American people, we know what we're doing, and here's the
evidence for what we're doing, and we're not using some clever
devices to avoid direct engagement with the people, because I
think this is so important it needs to be a direct
conversation.
Now to the issue of so-called tax havens and tax structure.
All the Members of this Committee are well-schooled in these
things, and you know these two important things: that every
aspect of the tax code was voted by the Congress and signed by
some president. It's also true that there are characteristics
of the tax code that a well-educated tax lawyer can look at and
see, under a certain set of circumstances, that a company or a
whole industry or many companies can reduce their legitimate
tax bill by applying provisions that are in the tax code.
There's no doubt about that, we all know that, and we call it
tax avoidance.
There are other things that are done that people do that
are illegal and they're called tax evasion. And in cases where
people are doing tax evasion, I've got to tell you I am really
dedicated to the proposition that the IRS and the law
enforcement organizations of the United States pursue to the
ends of the earth people who would cheat their fellow citizens
by not paying their determined tax bill.
Having said those two things, I would say again what I say
repeatedly. Our tax code is an abomination. It is just
unbelievable how complex we have made these issues so that it's
fairly difficult, I think even for the well-intentioned to
figure out their tax bill. As I said the other night in a
speech in Chicago, it's true there are five different
definitions of a child in the U.S. tax code. You would think it
would be easy to know whether or not, for taxpaying purposes,
you have a child in your house. Not so easy. And the most
complicated definition of a child is the definition having to
do with the earned income tax credit, which means the lowest
income people in our country are being asked to figure out the
most complicated definition of what a child is when they apply
for their entitlement to the earned income tax credit.
The Commissioner of Revenue has said to me, if he had to
make this application, he would need assistance to do it, and I
give you that individual--what I think is a real hole in the
way we've got our tax code structured,-- because I think people
can connect to it. But the same kind of thing exists on the
corporate side. Unbelievably complicated we made it, and I
think we need to unmake it. In the next few weeks we at the
Treasury are going to be presenting to Members of the Congress
white papers on these subjects about what we can do for tax
simplification to reduce the possibility that people will have
the excuse that they didn't understand, so that the law can be
clear and companies are very clear in what their tax obligation
is to the rest of the American public.
Mr. Leach. I appreciate that. My time has expired, but I
hope that your statement is not implying that the issue of tax
avoidance isn't serious, and the issue of American corporations
going offshore to avoid American taxation isn't something the
Treasury isn't going to be looking at, because I don't think
you intended to, but when you make this distinction between
evasion and avoidance, I hope you're not implying that the
avoidance issue isn't serious too.
Secretary O'Neill. I think it's a very serious issue and I
think it's something we should look at together. What I was
saying was that all of the opportunities for avoidance were
enacted by the Congress and signed by a president. I'm not
saying the Executive Branch doesn't have a hand in this. All of
the opportunities for legal avoidance were enacted by Members
of the Congress by a majority vote. I would be happy to work
with you not only to eliminate the opportunities for avoidance
but to make the tax code understandable.
Chairman Oxley. The gentleman's time has expired.
The Chair would say I hope the Ways and Means Committee
doesn't get a copy of this transcript.
[Laughter.]
Chairman Oxley. We could have some problems.
Mr. Secretary, we appreciate your appearance again, your
testimony and your insightful answers to a number of questions
that obviously covered a wide range of issues. The Chair thanks
you. The Chair notes that some Members may have additional
questions which they may wish to submit in writing. Without
objection, the hearing record will remain open for 30 days for
Members to submit written questions to the Secretary and to
place his responses in the record, and it's so ordered.
Mr. Bereuter. Mr. Chairman, I ask that my opening statement
be made a part of the record.
Chairman Oxley. Without objection, so ordered.
And again, Mr. Secretary, with our best wishes, thank you
for being here. The hearing is now adjourned.
[Whereupon, at 2:55 p.m., the hearing was adjourned.]
A P P E N D I X
February 28, 2002
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