[Senate Hearing 107-796]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-796
 
    REPLENISHMENT AUTHORIZATIONS FOR THE WORLD BANK'S INTERNATIONAL 
 DEVELOPMENT ASSOCIATION, THE ASIAN DEVELOPMENT FUND, AND THE AFRICAN 
                            DEVELOPMENT FUND
=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 12, 2002

                               __________

       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                JOSEPH R. BIDEN, Jr., Delaware, Chairman
PAUL S. SARBANES, Maryland           JESSE HELMS, North Carolina
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       GORDON H. SMITH, Oregon
PAUL D. WELLSTONE, Minnesota         BILL FRIST, Tennessee
BARBARA BOXER, California            LINCOLN D. CHAFEE, Rhode Island
ROBERT G. TORRICELLI, New Jersey     GEORGE ALLEN, Virginia
BILL NELSON, Florida                 SAM BROWNBACK, Kansas
JOHN D. ROCKEFELLER IV, West         MICHAEL B. ENZI, Wyoming
    Virginia

                   Antony J. Blinken, Staff Director
            Patricia A. McNerney, Republican Staff Director

                                 ------                                

                 SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
                   POLICY, EXPORT AND TRADE PROMOTION

                   PAUL SARBANES, Maryland, Chairman
BILL NELSON, Florida                 GEORGE ALLEN, Virginia
PAUL D. WELLSTONE, Minnesota         CHUCK HAGEL, Nebraska
ROBERT G. TORRICELLI, New Jersey     LINCOLN D. CHAFEE, Rhode Island
RUSSELL D. FEINGOLD, Wisconsin       MICHAEL B. ENZI, Wyoming

                                  (ii)







                            C O N T E N T S

                              ----------                              
                                                                   Page

Atkinson, Caroline, adjunct senior fellow in international 
  economics, Council on Foreign Relations, senior director, 
  Stonebridge International, Washington, DC......................    23
    Prepared statement...........................................    25
Ayittey, Dr. George B.N., distinguished economist in residence, 
  American University, Washington, DC............................    38
    Prepared statement...........................................    41
Beckmann, Rev. David, president, Bread for the World, Washington, 
  DC.............................................................    28
    Prepared statement...........................................    30
Meltzer, Dr. Allan H., professor of political economy, Carnegie 
  Mellon University, Pittsburgh, PA..............................    33
    Prepared statement...........................................    36
Orr, James C., executive director, The Bretton Woods Committee, 
  Washington, DC.................................................    15
    Prepared statement...........................................    18
Taylor, Hon. John B., Under Secretary of the Treasury for 
  International Affairs, Department of the Treasury, Washington, 
  DC.............................................................     4
    Prepared statement...........................................     5

                                 (iii)

  


    REPLENISHMENT AUTHORIZATIONS FOR THE WORLD BANK'S INTERNATIONAL 
 DEVELOPMENT ASSOCIATION, THE ASIAN DEVELOPMENT FUND, AND THE AFRICAN 
                            DEVELOPMENT FUND

                              ----------                              


                      THURSDAY, SEPTEMBER 12, 2002

                           U.S. Senate,    
     Subcommittee on International Economic
               Policy, Export, and Trade Promotion,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:40 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Paul S. 
Sarbanes (chairman of the subcommittee), presiding.
    Present: Senators Sarbanes and Allen.
    Senator Sarbanes. The subcommittee will come to order. We 
apologize to all of our witnesses, but there was a vote. We do 
not control when that happens. When it does happen, we have to 
respond, so that explains our slight delay in starting the 
hearing this morning.
    The Subcommittee on International Economic Policy, Export, 
and Trade Promotion of the Foreign Relations Committee meets 
today to consider replenishment authorizations for three 
important institutions of the multilateral development banks--
the World Bank's International Development Association, 
commonly referred to as IDA, the African Development Fund, and 
the Asian Development Fund. IDA is the concessional loan window 
of the World Bank, and provides economic and technical 
assistance to poor countries of the developing world.
    Traditionally, those loans have been disbursed at no 
interest with a 10-year grace period, and 30 to 40 years to 
repay the loan with a marginal service fee to cover 
administrative expenses. Actually, the repayment rate on IDA 
loans has been quite good, at about 95 percent.
    Last year, President Bush proposed that 50 percent of IDA 
loans be converted into grants. This led to an extended 
discussion with other participating countries in IDA and, after 
extensive negotiations, an agreement was reached in June of 
this year, just a few months ago, whereby 18 to 21 percent of 
future IDA loans would be converted into grants.
    The Treasury Department in late July, just before the 
August recess of the Congress, sent up reauthorization language 
for IDA, providing an 18 percent increase over the previous 
replenishment in the amount of $2.85 billion over 3 years. 
Obviously, we will be interested in hearing about this request 
this morning from the Treasury and then from our panel.
    The Treasury Department has also requested $354 million for 
the 9th replenishment of the African Development Fund, the 
concessional loan window of the African Development Bank. I 
understand negotiations over this replenishment have not yet 
been completed, and again I think there are discussions taking 
place on the loan and grant issue, and also at the urging of 
the United States, a push to increase the proportion of 
resources devoted to health, education, agriculture, and 
private sector development.
    The third item on the agenda will be examination of the 
replenishment for the Asian Development Fund, which is a 
concessional loan window of the Asian Development Bank. The 
Asian Development Fund operates in 29 countries, and is 
involved in a number of projects aimed at poverty alleviation. 
The Treasury Department has requested $412 million for this 
replenishment, and the House passed legislation authorizing 
this amount for the Asian Development Fund.
    We have a distinguished group of witnesses to hear from 
this morning to address these issues. The lead-off witness will 
be the Under Secretary of the Treasury for International 
Affairs, John Taylor, to present the administration's position. 
Secretary Taylor has been at the Department since June of 2001 
and has been very much involved in the recent replenishment 
negotiations. He previously served as a member of the Council 
of Economic Advisors under the previous Bush administration and 
has been a professor of economics at Stanford.
    Our second panel has five distinguished witnesses from the 
private sector, but I will defer introducing them until we go 
to that panel, and so we will hear shortly from Secretary 
Taylor, but first I will yield to Senator Allen, the ranking 
minority member of the subcommittee.
    Senator Allen. Thank you, Mr. Chairman. I would first like 
to begin by thanking you, Mr. Chairman, Senator Sarbanes, for 
scheduling this hearing and, of course, for all the witnesses 
who are here to testify and speak about this very important 
matter.
    I do thank you, Mr. Chairman, for having timely hearings on 
these matters so we have the due deliberations, and to the 
extent everyone else has slowed down, what you are doing here 
with this subcommittee for our full committee is very helpful.
    The chairman has eloquently described and summarized the 
history and the issues of IDA and the African and the Asian 
Development Funds. One thing I would like to share here with 
the committee and those who are listening is my very strong 
belief that political and economic performance criteria are 
necessary and should apply to not just loan forgiveness matters 
or transferring loans into grants, but also other types of 
development assistance. I think that economic assistance to 
states will only foster development if those states are 
responsible and accountable for their actions.
    We need to make sure that every dollar that is getting 
allocated, whether it is our dollars or those from others who 
are part of these development banks, needs to be utilized in a 
way that is obviously beneficial, but you would also like to 
see the underlying reforms and improvements made to those 
countries.
    Now, you can say that in a broad sense, but I think it is 
important to have measurable results from all of these loans 
and all of these grants. The assumption behind many of these 
funding mechanisms is that if the international community would 
help generate more financial capital, fiscal infrastructure, 
and technical know-how, then the recipient countries would 
develop. However, I think we ought to be exploring options that 
would require recipient nations to meet certain attainment 
criteria and incrementally offer aid based on that progress. In 
other words, it is their incentive grants. It is not just a 
grant to have a good time with it and do what you would like, 
so long as it stays within these parameters of the purpose of 
the loan, but have it over several years, and I know that Mr. 
Taylor and I have talked about that, and that is to me a very 
good idea, and a proper way of putting in criteria and reform 
measures that will make sure that there are reforms.
    As part of those criteria that I think we ought to develop 
in evaluating nations in need of aid, it would be beneficial to 
include the ideas of property ownership. Reform should include 
encouragement for a country receiving funding to institute a 
fair and equal policy for, say, land ownership, intellectual 
property ownership for its citizens. I think land ownership or 
private property ownership is a source, a good basis for people 
caring about their business, caring about that property, and it 
also is a key concept for individual freedom.
    I also think it thereby makes the country more conducive 
and desirable for others to come in and invest. Where that gets 
to my last point is that these policies need to make sure that 
these countries are putting into place a good, credible system 
where they're operating under the rule of law, where there is a 
fair and just justice system, or civil justice system, so if 
there are disputes, contracts will actually be enforced, and 
thereby make that country and the people of that country a more 
desirable place for companies to come in and invest, not just 
big companies, but even what we consider smaller investments. 
They are not going to go into these countries unless contracts 
are going to be upheld in a fair way.
    So I know that Under Secretary Taylor shares many of these 
views. We had the opportunity to discuss them last week, and I 
do think the challenges that are facing these development funds 
are important. I feel that you are bringing forth many good 
ideas that I think should have support from the international 
community as well, and whether they are grants, whether they 
are loans, the multilateral development banks really can have a 
tremendous influence, a greater influence than anyone else in 
getting these reforms in place for the benefit of not just the 
freedoms, but the economic opportunities for the people in 
those countries, and I look forward to hearing from Secretary 
Taylor this morning.
    Again, thank you, Mr. Chairman, for holding this hearing.
    Senator Sarbanes. Thank you very much, Senator Allen.
    Secretary Taylor, we would be happy to hear from you.

   STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY OF THE 
TREASURY FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Mr. Taylor. Thank you very much, Chairman Sarbanes and 
Senator Allen, for inviting me to testify at this hearing on 
the authorization of the replenishments for IDA, African 
Development Fund and Asian Development Fund, and also to 
comment on some of the Bush administration's reform efforts for 
these institutions and the other multilateral development 
banks. I have some testimony which I would like to enter into 
the record and just summarize some key aspects of that.
    Senator Sarbanes. The full statement will be included in 
the record.
    Mr. Taylor. Thank you very much. The reform of the 
multilateral development banks [MDBs] has been a high priority 
for the Bush administration's international economic agenda. 
Raising the effectiveness of these MDBs is very important, 
because it is a key way to raise living standards for people 
around the world by improving their incomes through raising 
economic growth. We believe that a greater effectiveness of 
these institutions can do more to raise living standards than 
in the past.
    There have been three specific types of reform efforts that 
we have focused on. One is an insistence on measurable results. 
Secretary O'Neill has commented on this on many occasions and 
given many examples, including examples from his travels to 
developing countries.
    The second is to have a greater degree of emphasis on 
grants rather than loans as you indicated in your opening 
statement, Mr. Chairman, and President Bush proposed that last 
summer. And, through the negotiations, we have accomplished 
pretty much what he asked for.
    Then the third is to focus more on productivity growth. 
Productivity growth is the way in which living standards are 
increased. If you look at the countries that are rich and 
countries that are poor, the difference is how productive the 
workers are.
    So I am very happy to say that these long negotiations that 
took over a year have resulted in very good progress. The 
Treasury staff has worked very hard for a very long time, and I 
think this progress on these negotiations provides the grounds 
for our request for the authorizations that you mentioned for 
IDA as well as for the African Development Fund and the Asian 
Development Fund.
    We are requesting authorization of $2.85 billion, as you 
indicated, for IDA. That is the 13th replenishment. We are also 
indicating that that replenishment will involve three 
components, $850 million appropriation in the first year, $950 
million in the second year, and $1.05 billion in the third 
year. Those are increments of $100 and then $200 million.
    The idea of these increments is to have a greater focus on 
measuring results as a part of IDA. This is the first time ever 
that the increments will be based on very specific measures of 
performance on the part of IDA. For example, we are creating a 
whole new measurement system in IDA to measure performance, to 
measure results, and are looking at particular performance in 
three areas, immunization rates as a measure of improvements of 
health, primary school completion rates as a measurement of 
improvements in education, and the time and cost it takes to 
startup a business as a measure of improvement in private 
sector development. And if we do not see the improvements in 
three areas, the administration is not planning to seek the 
additional increments in the appropriations in the second and 
the third year, that is, the $100 and $200 million.
    We think this is just the start of a fundamental shift in 
the focus of the multilateral development banks to measurable 
results. It means stating in quantitative terms the expected 
results in individual projects and in overall country 
assistance before providing funding.
    The agreement also includes a substantial increase in the 
amount of funding in the form of grants, as we indicated, very 
close to the proposal of President Bush last summer, and I 
think importantly for the first time ever we can use part of 
IDA to help private sector development in particular by working 
through the IFC.
    Just very briefly on the African Development Fund, the 
negotiations for the 9th replenishment are not complete. We 
have reached agreement on using measurable results. The 
disagreements are still on the size of the components that will 
go to grants, and the overall size of the replenishment, but at 
this point we are very close to an agreement, and I expect it 
to be close to the kind of agreement that was reached in IDA 
13.
    So let me just conclude. The multilateral development 
banks, as I say, have been a very high priority for the 
administration. I think we are making progress on our key 
objectives within each of the institutions, and I think, 
therefore, these reauthorizations are warranted, and I could 
say personally I plan to work with the staff of International 
Affairs at Treasury to endeavor to be demanding with the 
institutions in setting high standards for these results, in 
order that they are more effective in raising living standards 
around the world.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Taylor follows:]

   Prepared Statement of Hon. John B. Taylor, Under Secretary of the 
     Treasury for International Affairs, Department of the Treasury

    Chairman Sarbanes, Senator Allen, Members of the Subcommittee, 
thank you for the opportunity to testify today on the achievements made 
to date on the Administration's Multilateral Development Bank (MDB) 
reform agenda and our specific authorization requests.
    My statement will cover the authorizations for the replenishment of 
the World Bank's International Development Association (IDA-13), the 
African Development Fund (AfDF-9), and the Asian Development Fund 
(AsDF-8), which are the focus of the Chairman's letter of invitation, 
Though not mentioned in the letter of invitation, I would like to urge 
your support for the Administration's pending request for authorization 
to implement reform of the North American Development Bank (NADBank), 
along the lines agreed by Presidents Bush and Fox. I also strongly 
encourage you to support the Administration's appropriations request 
for the recently concluded replenishment of the Global Environment 
Facility (GEF-3), for which authorization is provided by prior 
legislation. I would be happy to answer any questions about these 
requests today.
    Reform of the MDBs has been one of the highest priorities of the 
Bush Administration's international economic agenda. The MDBs are 
important instruments in helping to raise economic growth and 
prosperity around the world. But the effectiveness of the institutions 
in making a difference in the lives of the poor can be substantially 
improved. The MDBs can and must do a better job. I believe it is our 
obligation to be demanding of these institutions, to point out their 
successes and failures. It is our obligation not only to the people of 
the developing world who desperately need these institutions to be more 
effective, but also to American taxpayers. I believe that the American 
public wants to see results from the funds that we devote to 
development, and that their support for providing foreign assistance 
will increase if we are convincing and straightforward in presenting 
those results.
    From the start of the Administration, we have pursued three 
hallmark reforms--a greater focus by the institutions on increasing 
productivity growth; an insistence on measurable results; and an 
increased proportion of assistance to the poorest countries delivered 
in the form of grants rather than loans. Steady progress has been made 
on all these fronts, and this progress provides the grounds for the 
Administration's authorization requests for the MDBs. Congressional 
approval of these authorizations will allow us to continue our work to 
improve these institutions.
    President Bush's appropriations request for the MDBs in FY03 totals 
$1.437 billion. In the case of the increment for IDA, the authorization 
request is an 18% increase over the prior replenishment request. 
Importantly, the requested increase entails a new focus on measuring 
and achieving results from IDA funding. In fact, for the first time 
ever, part of the replenishment is contingent on achieving real results 
on the ground. Absent achievement of progress towards stated 
objectives, the Administration will not seek appropriations for that 
additional funding.
       ida-13; reforms to raise economic growth in poor countries
    When the International Development Association (IDA) was first 
proposed by the Eisenhower administration in 1959, raising productivity 
was the key goal of the institution. In the words of the very first 
article of IDA's Articles of Agreement, ``The purposes of the 
Association are to promote economic development, increase productivity 
and thus raise standards of living in the less-developed areas of the 
world. . . . The Association shall be guided in all its decisions by 
the provisions of this Article.'' More than forty years later, we have 
a long way to go in achieving these objectives. This Administration 
believes making IDA more effective demands that, among other things, we 
refocus IDA on this original mission of raising productivity growth.
    The negotiations for the thirteenth replenishment of IDA concluded 
in early July. This replenishment will enable the organization to 
provide a total of $23 billion in loans and grants to the poorest 
countries over the next three years. The Administration is requesting 
authorization to contribute up to $2.850 billion over the next three 
years. The FY03 appropriations request consists of $850 million for the 
first payment under IDA-13 and $24 million to clear one-third of U.S. 
arrears.
    In the IDA replenishment negotiations, the United States achieved 
agreement on three sweeping reforms fully reflective of the Bush 
Administration's MDB reform priorities:

   A significant increase in grant funding for the poorest 
        countries;

   A contribution scheme that allows shareholders to link the 
        contribution of additional resources to the achievement of 
        results; and

   A greater focus of IDA resources on key productivity-driving 
        activities, including private sector development.

    First, the IDA replenishment achieves the President's vision of 
last summer ``that up to 50 percent of the funds provided by the 
development banks to the poorest countries be provided as grants for 
education, health, nutrition, water supply, sanitation and other human 
needs.'' In fact, this landmark replenishment agreement means that IDA 
will provide nearly 100% of its assistance on grant terms for 
education, health, nutrition, potable water and sanitation in countries 
whose people live on less than a dollar a day. All of IDA's assistance 
for HIV/AIDS will be in grant form for all IDA-only countries, and up 
to 25% of such assistance to blend countries (those eligible for both 
IBRD and IDA) will also be in the form of grants. Up to 100% of IDA's 
assistance for natural disaster reconstruction will be in grant form. 
And up to 40% of IDA's assistance to post-conflict countries will now 
he delivered on grant terms.
    This is a significant achievement in terms of achieving the 
Administration's policy objective of helping poor countries make 
productive investments without saddling them with ever-larger debt 
burdens. Equally important, this approach will make a real difference 
in meeting the basic needs of poor people around the globe without 
significant costs to IDA.
    While an increase in the amount of grants will mean a reduction in 
IDA repayments over the next 40 years, it is important to note that for 
the recipient countries, these additional saved ``costs''--which are 
better referred to as ``foregone debt repayments''--provide real and 
material benefits. Even in terms of foregone repayments, the amounts 
are modest and spread out over an extended period of time. Given the 
grace period attached to regular IDA funding, there is virtually no 
reduction in the amount of IDA resources available to support borrowing 
countries over the first ten years.
    It will not take much to offset these foregone repayments even 
after the first ten years. In its recent study on IDA grants, the U.S. 
General Accounting Office (GAO) produced an excellent analysis, which 
was very helpful. I referred to it many times as a way to explain the 
financial impact of the grants proposal to other donors. It estimated 
that donors would have to increase their contributions at an annual 
rate less than the rate of inflation to offset the costs of grants--
that is a decline in real terms.
    Second, another key achievement in the IDA replenishment is a 
contribution structure that allows donors to increase their levels of 
funding if concrete measurable results are achieved. Donors and 
developing countries will benefit from routinely quantifying 
development achievements and understanding the reasons for success and 
failure. This will increase learning and accountability for development 
results.
    Donors agreed to measure progress towards two sets of results. The 
first set involves getting the new measurable results system started. 
This system must be established and other analytical underpinnings of 
IDA's work expanded. Timely and high quality diagnostic analyses--such 
as public expenditure reviews, financial accountability assessments, 
and investment climate assessments--are important tools for identifying 
the strengths and weaknesses in a country's ability to make the most 
effective use of IDA resources. The U.S. will provide an additional 
$100 million if IDA makes concrete progress in this area.
    The second set of results is in the areas of education, health, and 
private sector development. After careful consideration of both 
measurability (do the data exist in most IDA countries?) and relevance 
(do they reflect IDA's productivity growth and poverty reduction 
mandate?), progress will be tracked toward the following results:

   Education: Increase in aggregate primary school completion 
        rates across IDA countries as well as an increase in the number 
        of countries that have raised their completion rates.

   Wealth: Increase in measles immunization coverage across IDA 
        countries as well as an increase in the number of countries 
        with 80 percent coverage.

   Private Sector Development: Reductions in both the number of 
        days and the official costs required to start businesses in IDA 
        countries.

    Reflective of the importance of human capital investment and 
vibrant private sectors to increasing productivity, the U.S. will 
provide an additional $200 million if satisfactory results are achieved 
in the above areas.
    It is important to keep in mind that this is just the start of a 
fundamental shift of focus in the MDBs to measurable results. A new 
measurement system must be created to implement the results approach; 
it will begin with a small but important set of indicators. And it will 
evolve over time as the quality of data and evaluation systems in 
recipient countries are strengthened and as the MDBs, other 
shareholders, and developing countries realize that the U.S. priority 
on measuring results reflects a genuine desire to ensure that the 
lessons--both successes and failures--of 50 years of development 
assistance result in more effective assistance and less poverty around 
the world.
    More broadly, pursuing a results-based approach in IDA and the 
other MDBs will require real changes in operating style. It means 
stating in quantitative terms the expected results of individual 
projects and overall country assistance before providing funding. It 
means measuring progress towards stated results and assessing the 
reasons for success and failure. It means structuring projects in a way 
that steps up or cuts back funding contingent on achieving results.
    Third, IDA will devote significant resources over the next three 
years to projects and programs that raise productivity. The logic 
behind this approach rests in the simple fact that countries are poor 
because productivity is low. This requires concentrating IDA funding on 
addressing the basic causes of low productivity such as inadequate 
education, low business investment, and inadequate health care. For the 
first time, IDA funds can be used in the private sector, including 
increased collaboration with the International Finance Corporation 
(IFC), the arm of the World Bank Group that provides financial products 
to private sector projects in developing countries.
                        african development fund
    Negotiations for the ninth replenishment of the African Development 
Fund (AfDF-9) are not yet complete. With strong U.S. leadership, the 
AfDF negotiators have already agreed on an important set of policy 
reforms including an enhanced focus on measurable results, an improved 
link between financial support and results, and deepened coordination 
with the World Bank and bilateral donors. The AfDF has a good record of 
making information available to the public, and management has 
committed to improving disclosure policies. The institution is also 
developing specific expertise in the areas of regional integration and 
governance, and will he adopting a new private sector strategy this 
year.
    Two issues remain--the overall size of the replenishment and the 
proportion of assistance to be provided as grants. The AfDF is expected 
to adopt a grants program which is similar to the agreement on grants 
reached in IDA, with an emphasis on grants for urgent human needs such 
as education, health, and water and sanitation, linked to country 
performance and commitment to economic reforms. Discussions to date 
project a replenishment size of $2.9-$3.2 billion to fund AfDF 
operations over the next 3 years. The Administration is requesting 
authorization to contribute $354 million over the next 3 years. This 
represents an 18 percent increase in funding AfDF-8.
    The African Development Bank has been using its comparative 
advantage as a regional MDB to participate actively in the on-going 
elaboration of the New Partnership for African Development (NEPAD) 
initiated by African Heads of State. The Bank will he assisting, in 
particular, on promoting economic regional integration and improved 
banking and financial standards.
                         asian development fund
    Important achievements were made during the last replenishment 
negotiations on the Asian Development Fund (AsDF), including a 
performance-based system for allocating resources and a Memorandum of 
Understanding with the World Bank to strengthen collaboration and 
minimize duplication. More recently, a strategy for combating money 
laundering and terrorist financing has been developed by the AsDB.
    The Asian Development Bank--including its concessional tending arm, 
the AsDF--has moved quickly to assist Afghanistan, by participating in 
the multi-donor trust fund and by pledging support to finance the 
country's urgent reconstruction needs. The Bank has approved $15 
million in grants to support critical capacity-building in key 
ministries, such as health, education, and agriculture, and to assist 
with disaster preparedness. In the road sector, we are working closely 
with the Bank and USAID to accelerate the flow of donor assistance to 
critical roads.
    The Bush Administration intends to implement its MDB reform agenda 
for the AsDF much as it has with IDA, including the use of grants. Our 
ability to influence the policy direction of the institution will be 
helped over time by a reduction in our arrears.
                               conclusion
    MDB reform has been a priority of the Administration from the 
outset. I believe that steady progress is being made in achieving our 
key objectives within each of the institutions and that these 
reauthorizations will allow us to make further progress. Working with 
the international affairs staff at Treasury, I will endeavor to be 
demanding and to set high standards for the MDBs in order to make them 
more effective in raising living standards around the world.

    Senator Sarbanes. Thank you very much, Secretary Taylor. 
Concerning the $2.85 billion replenishment for IDA--if you go 
from loans to grants and if you are not going to cut back on 
the program, you are going to have to have additional 
resources. Would that be correct?
    Mr. Taylor. Because of the grants, rather than loans, there 
is less payment back in the future, but, as you indicated in 
your introduction, the IDA loans at this point have a 10-year 
grace period, and they also have an effective interest rate of 
.75 percent, and a 40-year duration, so these payments, these 
reflows come back into the future, and therefore have no direct 
implication immediately on the funding.
    However, and I want to add, because this is very important, 
a number of studies, a very significant one by the GAO showed 
that the actual increase in the funding that is necessary to 
make up for the difference that you are raising is very small, 
and in fact all it requires is that IDA funding be increased at 
a rate that is actually less than the inflation rate over the 
years, and that is enough to make up for the lost inflow.
    Senator Sarbanes. Can that be encompassed within the $2.85 
billion request?
    Mr. Taylor. Well, in a way the $2.85 billion is more than 
enough of that. Because as you say, it is an 18-percent 
increase, and according to the studies, if you have just a 2-
percent increase year after year, it is enough to make up for 
the loss of reflows, so it is more than enough.
    Senator Sarbanes. So in the IDA negotiations, where 
agreement was finally reached, the replenishment figure covers 
what is estimated to be the additional cost? I mean, are the 
donor countries all agreed on that?
    Mr. Taylor. No, it is not correct to say that the 
replenishment we have agreed to covers the additional cost. 
That additional cost, one way to think about it is, it is a 2-
percent increase year after year, say, for the next 40 years, 
which is less than inflation that's projected, but the 18 
percent just for this first 3 years. So it takes a good chunk 
of that, but it does not make commitments for IDA 14, IDA 15, 
IDA 16, et cetera, so the payments really in the future will 
determine the offset of the reflows, but the 18 percent is just 
for this replenishment.
    Senator Sarbanes. I thought I read somewhere that the 
donors were planning to meet in the near future to discuss the 
additional resources necessary to cover going from loans to 
grants. Is that correct?
    Mr. Taylor. There will be continuing meetings through the 
time where IDA 13 plays itself out, and then in preparation for 
negotiations in IDA 14, we have agreed there will be a review 
of the grants, the whole grants operation to see how that is 
working in plenty of time before IDA 14. And one of the 
elements to consider would be to review the cost, if you like, 
of the loss in the reflow. But the whole grants proposal is 
going to be reviewed on an ongoing basis.
    Senator Sarbanes. Well, I am having difficulty getting an 
answer to my question. Let me continue to pursue it.
    Does the shift from loans to grants, is that funded by this 
replenishment, or does it remain unfunded as a matter that 
continues to be on the agenda of the donor IDA members?
    Mr. Taylor. The 18-percent increase alone does not fully 
make up for the lost reflows from the loans.
    Senator Sarbanes. Is it intended to make up for any of it, 
or is it intended to be an additional replenishment? With the 
funding of the loan-to-grant shift being dealt with separately?
    Mr. Taylor. It is being dealt with separately. The 18 
percent is a good chunk of it, but the rest of it will be dealt 
with separately into the future, so when IDA 14 is considered, 
and IDA 15 is considered, then a deliberation will take place 
on whether additional contributions are appropriate at that 
time. And it is going to be based on many things in addition to 
the lost reflows, I think most important how measurable results 
are working, how effectively the institution is working. All 
those things will come into play, just like how big IDA 14 will 
be.
    And if I could just say one other thing on this, the lost 
reflows are a reduction in the payments that the poorest 
countries in the world have to make, so the grants are a way in 
which we can provide more resources in the future by having 
less in the way of interest payments from these very poor 
countries to help make them more sustainable.
    Senator Sarbanes. I understand. The question now is whether 
you are borrowing from the future to cover the present, or 
whether there is going to be a flow of resources that will 
assure that the level that is going in for program purposes 
remains constant or, indeed, continues to increase.
    Mr. Taylor. We are trying to make the resources effective 
right now.
    Senator Sarbanes. I understand, but are you doing that by 
pulling in from the future, or providing the resources?
    Mr. Taylor. We are providing more resources as a result of 
the grants. We have not reduced the amount we are putting in. 
We have actually increased the amount we are putting in and 
converted that from loans to grants, which is an increase in 
funding, so not only are we increasing funding by 18 percent, 
we are providing more funding in the form of grants rather than 
loans. Those are more resources.
    Senator Sarbanes. What was the basis of the resistance that 
you encountered in shifting from loans to grants?
    Mr. Taylor. I would say that it's, as any new idea there is 
resistance. It came from positions that were held for many 
years. As you know, the World Bank has been thought of as a 
bank that makes loans.
    Senator Sarbanes. So you think there was no rational 
argument on the other side. It was just the resistance to a new 
idea.
    Mr. Taylor. In my opinion as an economist and economic 
financial analyst, the arguments in favor of the grants 
proposal were overwhelming, and it eventually carried the day.
    Senator Sarbanes. What were the arguments against it? Let 
me ask you to think as a lawyer, instead of an economist, who 
tries to see the arguments on both sides, and therefore has to 
be careful not to be absolutely convinced of the rightness of 
his cause, since he has to understand where the other side is 
coming from. What was their rationale? Because you encountered 
considerable resistance.
    Mr. Taylor. Yes. I was involved in the negotiations. I know 
it is important to understand the other side's perspective as 
best as possible. One perspective was that in some countries 
the institutions of government get in the way of changes.
    For example, the distinctions between loans and grants is 
sometimes a distinction between finance ministry operations and 
foreign affairs ministry operations, or development ministry 
operations, where the loans tend to be from finance ministries, 
so shifting from loans to grants is effectively in some 
countries shifting from one ministry to another. You can 
understand how that can get in the way of change. That is an 
example of a reason.
    Another reason are the things you just mentioned, Senator, 
that what would be the cost of this operation. And as I say, 
thanks to a lot of good work, including that of the GAO, people 
pointed out that there really were not costs in any sense of 
the word, because you can make up for the loss reflow simply by 
keeping the contributions growing at a very small nominal rate, 
less than the rate of inflation. So that was very serious and 
good discussions about those technical issues, but ultimately 
when people looked at the numbers, the proposal made a lot of 
sense.
    I think another thing that eventually carried the day here 
was the recognition by many people who are concerned about the 
debt burden in poor countries, realized that grants would be a 
way to reduce debt burdens in the future, and that became very 
important in the end for all parties.
    Senator Sarbanes. Now, I gather you went to a range of 18 
to 21 percent grants?
    Mr. Taylor. Yes, out of total IDA funds, that is exactly 
right.
    Senator Sarbanes. But your proposal was for 50 percent?
    Mr. Taylor. The President's proposal was for 50 percent of 
funding to the poorest countries, for areas in social services, 
health, education, and water, and that is pretty close to what 
the agreement was.
    IDA funds are also used for projects, for roads, which will 
be in the form of loans in the future.
    Senator Sarbanes. Is the performance standards that you 
mentioned--you have this stepped-up contribution over a 3-year 
period, the performance targets. Were they adopted by IDA? Are 
they part of its framework, or are they a separate U.S. 
determination?
    Mr. Taylor. It is a combination. If I can answer your 
question as best I can, it is a combination. The overall 
framework is provided by IDA. That is, the performance 
measures, the improvement in completion rates of schools, et 
cetera, the agreement to provide a new measurement system for 
measuring. That is part of IDA and part of the agreement. The 
World Bank will be creating this new measurement system.
    The United States is the only country which will, at this 
point in time, gear its contributions of $100 million and $200 
million to this amount. I believe it is the only one at this 
point.
    Senator Sarbanes. Now, was that accepted by IDA? As part of 
the----
    Mr. Taylor. Yes. We have an agreement. The whole document 
that is agreed to this, that is exactly right.
    Senator Sarbanes. Has agreed to what now, specifically?
    Mr. Taylor. To these performance measures and to the U.S. 
proposal that the United States will provide $100 million more 
only if these goals are achieved, and then in the second year 
$200 million more only if the goals are achieved. They agreed 
to that as part of the framework.
    Senator Sarbanes. Are other countries coming in 
conditionally, in the same way?
    Mr. Taylor. No. I believe no other countries have, just the 
United States, but the other countries have agreed to the 
United States proceeding that way, and also to the new 
measurement system that is going to be developed.
    Senator Sarbanes. Senator Allen.
    Senator Allen. Thank you, Mr. Chairman. In following 
through some of the questions, in order for the taxpayers to 
support and for the Congress to support additional funds that 
the President has generously put forward, I think we need to 
know that these funds will not be squandered, and that there 
will be some positive changes made in these countries. You 
specified, some of the educational and health matters that 
obviously are important.
    And you mentioned performance criteria and measurable 
results. Could you please tell us, elaborate more on what will 
be the performance criteria, what will be the measurable 
results? So the American taxpayers know that these grants, and 
how many of them are going to be grants, obviously paid out 
over a period of years is your proposal, but what will be those 
measurable results, tangibly, that we could see, that look at 
this investment of however many dollars it may be, here is how 
this has impacted this country, benefited their lives, maybe 
their education, maybe their health, but also making those 
countries, allowing the people of those countries to have 
greater opportunity for economic success in life, as opposed to 
just worrying about the bare necessities.
    Mr. Taylor. We are just beginning this process of insisting 
on measurable results, and so ultimately I hope that there is 
much more in the way of a good answer to your question, 
Senator, but thus far I think the answer can be good.
    We are agreed that there should be an improvement in 
education as measured by completion rates in primary education, 
so that means more kids are completing primary school. We have 
agreed that there should be some improvement in immunization in 
the area of measles. That is actually a good measure, because 
you have to have a good health system, delivery system, 
refrigeration, et cetera, in order to make this improvement. 
And third, improvement in the time and cost to startup a 
business.
    So those are a start. All those are important for the well-
being of people, and for economic growth to be started. 
Ultimately, I would like to see even more of these kinds of 
measures in the programs, and as we go forward in order to 
achieve those goals, of course, there is going to have to be in 
each grant and each loan specific performance measures by time, 
what happens each quarter, what happens each year, and that 
will be a process that will be taking place in the months and 
years ahead, but the specifics that I indicated are actually in 
the IDA agreement now.
    Senator Allen. I think all those are fine. Obviously, 
education is important for any individual. Of course, what they 
are being taught is another matter. I am not sure that we care 
to get into the details of the curriculum of their countries, 
but nevertheless, what you find in some countries is, if people 
are illiterate, the basic things that we care about in their 
country, if they are illiterate they are going to have very few 
opportunities in life.
    Now, the prompt permitting I think is fine, and that is 
good, but you still could have prompt permitting for business 
startups, but in the event that contracts are not being adhered 
to, if there is not fair adjudication of disputes, if that 
prompt permit is given to someone whose property is 
capriciously taken, or the value of it diminished without 
compensation or due process, then that is a problem, and I 
would hope that beyond those things of prompt permitting for 
business startups and so forth, that you get into some of the 
underlying aspects.
    I know that the Meltzer Commission has proposed that the 
World Bank adopt a results-oriented, or results-based 
performance system, where organizations implementing bank 
programs would be paid only if they achieved the goals 
specified in their program plan. The new IDA 13 plan says the 
World Bank will establish a results-based system for measuring, 
monitoring, and managing its development programs.
    Now, will it look anything like the procedure proposed by 
the Meltzer Commission as you go forward, and if not, how does 
the International Development Bank, or Association plan to 
maintain accountability and avoid putting money into failed 
programs?
    I know there are a lot of questions in there.
    Mr. Taylor. The measures are important to quantify and 
meet, and I think we have made good progress on that. As I 
indicated. There are additional measures, as your examples 
indicate, Senator, that could have to do with test scores for 
kids, rather than simply completion rates. Completion rates, as 
you know, is not the best measure when you can promote kids 
easily. And with respect to other kinds of measures, the 
question is, what is the penalty if you do not meet the 
measure?
    I think that is implicit in your question, and I think for 
particular grants, if there is a grant and the performance 
results are not being achieved, then the grant should be 
pulled. We should stop. If things are not being accomplished as 
planned, then someone has to say no, this is not going to the 
right place, it is not being done in the right way, and so you 
move in a different direction, so that is the kind of carrot 
and the stick that goes along with the actual measures 
themselves.
    Senator Allen. Well, I think what you are trying to do is 
in the right direction. I want to work with you in the years to 
come. I think some of the initial criteria may not be as strict 
as I would like, but you also have to be understanding. This is 
a new approach, and I think it is a refreshingly new approach 
of reform to make sure that if our money, our taxpayers' money 
is being used, we want to make sure it is being used in the 
right way. And it is not just for our benefit; it is for the 
benefit and the foundational changes that need to be made, 
fundamental changes as well in some of these countries.
    And so count me as somebody 100 percent behind performance-
based results, performance-based lending, and I think that your 
concept of paying out over the years to see if progress is 
being made in education, you are not going to do it quarterly. 
That is going to have to be more of an annual or long-term 
situation. You cannot turn an education system around in 1 year 
in another country, any more than you can turn it around in our 
States in our Union, but some of these ideas that the Meltzer 
Commission has put forth, I am glad to see that you are fairly 
well parallel with them, and commend you and want to work with 
you in the years to come.
    Mr. Taylor. Thank you. Senator, could I just say one thing 
in response to that?
    Senator Allen. Sure.
    Mr. Taylor. There is another very important change that is 
going on in U.S. foreign aid policy, and that is the 
President's proposal for the Millennium Challenge Account. That 
is not part of these proposals, of course. These are 
multilateral, and therefore it requires multilateral 
negotiations and all of the donors to these institutions to 
participate in, but in the Millennium Challenge Account which 
the President proposed and we are working to implement right 
now, it does include rule of law issues, it does include 
contracts being enforceable, so it actually is beginning to 
move even further in the direction that you indicate is 
important, and we think is important as well.
    And that is not the subject of this testimony, but I think 
that is another example where there is an increase in funding 
being proposed of substantial magnitude, in this case a 50-
percent increase in our foreign assistance, but only when it 
goes to countries that are performing well in terms of the 
policies you indicate, and getting good results, so that, 
combined with this 18-percent increase in IDA I think 
demonstrates the philosophy that there can be increased support 
for developing countries, and it is going to be effective if we 
have this approach that we are proposing to take.
    Senator Allen. Well, I am glad you added that, too, because 
while it is not the specific focus of this hearing, the larger 
question is, how are we going to help developing countries 
develop so that they live healthier, better, more prosperous 
lives; and thank you for bringing that up, because I do think 
that is an important part of our overall foreign aid policy.
    Thank you, Mr. Chairman. I have no further questions.
    Senator Sarbanes. Mr. Secretary, I understand that we are 
running considerable arrearages to the multilateral development 
banks, is that correct?
    Mr. Taylor. Yes, that is correct.
    Senator Sarbanes. And even on IDA, and both the Asian 
Development Fund and the African Development Fund, we are in 
arrearages as well, is that right?
    Mr. Taylor. That is correct. The amounts vary by 
institution, but that is correct, and I would say, Senator, 
that one of, I think, the other important things to mention 
about our proposals for appropriations in the 150 account is a 
3-year plan to clear all of our arrears. We think these arrears 
are a mistake. It is not good budget policy, and we have laid 
out a plan in the next 3 years to clear those arrears out, and 
the first year a third of them are proposed to go as a part of 
our appropriations.
    Senator Sarbanes. Does it handicap our efforts in these 
multilateral development banks, the fact that we are in 
arrearages when we try to impact the direction of policy?
    Mr. Taylor. Sure. It is an issue people raise, I think 
therefore it is important to clear them out.
    Senator Sarbanes. And how unusual is it? Are there many 
donor countries that are in arrearages, or do we tend to stick 
out in that regard?
    Mr. Taylor. Because of our system, we tend to have more of 
an issue than other countries. The parliamentary systems, it is 
easier just to have the funds go exactly as negotiated by the 
government, but I would have to get a more specific answer to 
you, if you would like the details on that, Senator.
    Senator Sarbanes. Well, we thank you. Mr. Secretary, we 
thank you very much for your testimony.
    Mr. Taylor. Thank you.
    Senator Sarbanes. If the panel would now come forward, our 
second panel features five witnesses from outside the 
government, James Orr, the executive director of the Bretton 
Woods Committee, a group of chief executives, former Cabinet 
officials and others who joined together to promote reforms and 
increase public understanding of the World Bank, the IMF, and 
the multilateral banks. Jim Orr actually served for 8 years as 
legislative counsel for the International Trade and Development 
Subcommittee over in the House of Representatives.
    Ms. Caroline Atkinson, adjunct senior fellow in 
international economics at the Council on Foreign Relations, 
and senior director of Stonebridge International, a consulting 
firm. Ms. Atkinson from 1997 to 2001 was senior advisor to the 
Secretary and Senior Deputy Assistant Secretary for 
International Affairs at the Treasury, and she has worked at 
the IMF, and as an economics writer and columnist for the 
Washington Post, the Times of London, and the Economist.
    Reverend David Beckmann, president of Bread for the World, 
a leading NGO dedicated to eliminating world hunger. Bread for 
the World is a member of the Coalition for World Bank Reform, 
an umbrella organization of NGOs. Reverend Beckmann served for 
several years on the board of directors of Bread for the World 
before becoming its president in 1991.
    Actually, prior to that he spent some time as a World Bank 
economist focusing, or trying to move the bank in the direction 
of poverty reduction.
    Dr. Allan Meltzer, who has been here with us a number of 
times before, professor of political economy at Carnegie Mellon 
University in Pittsburgh. He has been there now a very long 
time----
    Dr. Meltzer. For 46 years.
    Senator Sarbanes [continuing]. And is a visiting scholar at 
the American Enterprise Institute. Dr. Meltzer was a member of 
President Reagan's Council of Economic Advisors, and of course 
he has authored a number of important academic studies.
    George Ayittey, and I hope I pronounced that correctly, is 
distinguished economist in residence at American University, 
previously a fellow at the Hoover Institution, and was a 
Bradley Resident Scholar at the Heritage Foundation. And we are 
very pleased that all of you could come and be with us this 
morning, and I think I will simply begin with Jim Orr, and we 
will move straight across the panel.

  STATEMENT OF JAMES C. ORR, EXECUTIVE DIRECTOR, THE BRETTON 
                WOODS COMMITTEE, WASHINGTON, DC

    Mr. Orr. Thank you very much, Chairman Sarbanes, Senator 
Allen. It is a pleasure to be with you today. As Senator 
Sarbanes mentioned, I am here representing the Bretton Woods 
Committee this morning, which is a group of 700 opinion leaders 
across the country who have banded together to work to help 
improve the effectiveness of the World Bank and the IMF and to 
support them where they need support.
    Senator Sarbanes. Self-proclaimed, or so designated by 
others?
    Mr. Orr. Self-proclaimed, Senator, but perhaps you could 
fit a line designating us congressionally in the next 
authorization bill.
    Senator Sarbanes. I doubt that is going to happen.
    Mr. Orr. I am going to talk mostly about IDA because that 
is the program I know more about, and briefly about the African 
fund and the Asian fund.
    Our sense, Mr. Chairman, is that IDA is deserving of 
continued strong support from the Congress for a number of 
reasons. First of all, it is the main program that the United 
States has to help the world's poorest countries. As we all 
know, many of these people live on a dollar or two a day. IDA 
and the other soft loan programs at the regional development 
banks pay for the bulk of the infrastructure development and 
social services in 80 or 90 of the poorest countries in the 
world, and it helps guarantee a basic level of social welfare 
that could not possibly exist without these programs. 
Ultimately IDA paves the way for self-sustaining growth, and 
that is its purpose. It is also worth pointing out that much of 
the assistance goes to countries that are strategically very 
important to the United States.
    I am going to comment briefly on the effectiveness of the 
World Bank. We have already heard a great deal about this 
subject this morning. I have to say I bristle slightly when I 
hear these discussions, because it is possible for someone who 
joined us today for the first time to get the idea that no one 
has ever thought about World Bank effectiveness until the last 
few years, and that is just not true. I would say that of all 
the bilateral and multilateral programs in existence, IDA and 
the World Bank have been the most effective in promoting 
development over the last 30 or 40 years.
    Clearly, improvements in effectiveness need to be made. We 
are all supportive of that, but we have to remember that IDA 
works on one of the most challenging problems that faces 
mankind today. It is not for lack of great talent or serious 
effort that there are still many countries that lag way behind 
in development. It is just a very hard business. No one knows 
exactly how to do it. IDA and the other development 
institutions have changed strategies a dozen times over the 
last 50 years trying to do a better job, but I would not want 
the impression left that the institutions have been ineffective 
until now, because that is not the case.
    I think one of the best measures of effectiveness is the 
fact that over the lifetime of IDA 32 countries have graduated 
out of eligibility for soft loans into eligibility for hard 
loans, loans based on market rates of interest, and that is an 
impressive statistic. We all wish that 100 countries had 
graduated, and perhaps they will.
    Certainly, it is appropriate to be skeptical about 
effectiveness, and all of us welcome the innovations made by 
the Bush administration and this Treasury Department, many of 
which had their roots in proposals by the Meltzer Commission, 
which I am sure you will hear more about. Supporters of IDA 
certainly welcome the demand that IDA and the other regional 
development banks' soft fund window should be subjected to 
tougher standards.
    Another point I would like to make is that people often do 
not feel that IDA recipients are grateful for this support, and 
I had a personal experience which perhaps is worth relating in 
this regard. Two years ago, I accompanied a group of nine IDA 
Ambassadors to visit lawmakers, mostly on the House side, I am 
sorry to say, but it was remarkable to hear these Ambassadors 
talk about how IDA funds had been used in countries from Haiti 
and Nicaragua in our hemisphere to Africa and South Asia and 
East Asia. They were extremely grateful for the sacrifice of 
the American taxpayers to fund IDA, very positive about the 
work of the World Bank, and I think this is something Congress 
should hear more, because I sense they do not hear it very 
often.
    IDA is evolving in many ways to meet the challenges of 
today. Transparency has been one of the main areas where I 
think the World Bank and IDA have made the most progress in the 
last 10 years. It is quite startling to see how much 
information about what the World Bank is doing is now available 
to the public.
    A good example is the IDA replenishment agreement that you 
talked about with Under Secretary Taylor. When the agreement 
was still in draft form, it was circulated to the NGO community 
and put up on the World Bank's Web site, and NGOs were given an 
opportunity to comment on it and suggest improvements, and 
scores of NGOs took the World Bank up on this offer and made 
constructive criticisms, many of which were embodied in the 
final IDA replenishment proposal, so we have come a long way 
with transparency. There is certainly more to be done in this 
area.
    Another place where I think this administration has been 
pushing the bank that is very important is the emphasis on 
private sector development. I think most members of the Bretton 
Woods Committee would agree that private sector development is 
the key to self-sustaining growth, and it cannot be emphasized 
enough.
    Sometimes help for the private sector gets lost among a 
list of very worthy objectives at the bank, like education and 
gender equality and fighting environmental problems and 
infectious diseases, but the private sector is ultimately the 
best hope for these countries. I cannot think of a single 
country that has graduated from the ranks of the poorest 
countries to the ranks of emerging market countries without 
having first established a vibrant private sector.
    John Taylor mentioned briefly this--may I finish my 
sentence?
    Senator Sarbanes. Sure. Why don't you just view the timer 
as an indication that you should start drawing to a conclusion. 
It is not as a guillotine.
    Mr. Orr. Thank you, Mr. Chairman. John Taylor mentioned 
that one of the performance criteria for IDA to get the 
remaining money in the next 2 years is improvements in poor 
countries in the amount of time it takes to start a business. I 
had the privilege of visiting Nicaragua last spring, the 
poorest country in Latin America. A new World Bank study shows 
that in Latin America it takes three times as long and costs 15 
times as much to establish a small business as it does in an 
OECD country like the United States, and I think in that 
statistic, and in the fact that Nicaragua still lacks a fully 
functioning vibrant private sector is part of the reason why 
that economy lags behind.
    I will save the rest of my comments for questions.
    [The prepared statement of Mr. Orr follows:]

  Prepared Statement of James C. Orr, Executive Director, The Bretton 
                            Woods Committee

                              introduction
    Mr. Chairman, Ranking Senator Allen, and members of the 
Subcommittee, it is an honor and pleasure to appear before the 
Committee today. My name is Jim Orr.\1\ I am Executive Director of The 
Bretton Woods Committee, a public education foundation dedicated to 
promoting sensible reforms and building understanding for the work of 
the Bretton Woods institutions--the World Bank, the International 
Monetary Fund, the World Trade Organization and the regional 
development banks.
---------------------------------------------------------------------------
    \1\ In compliance with Congressional rules, a brief biographical 
statement appears at the end of this statement.
---------------------------------------------------------------------------
    The Bretton Woods Committee is comprised of about 700 members from 
across the country. Typically, they are opinion leaders: heads of 
businesses, universities, labor groups and NGOs and former government 
officials. We are proud of the fact that all the former Secretaries of 
the Treasury and State are members, as are a good number of former 
Members of Congress. Our co-chairmen are former Congressman Bill 
Frenzel and Gerald Corrigan, the one-time president of the New York 
Federal Reserve.\2\
---------------------------------------------------------------------------
    \2\ Truths in Testimony rules require a statement about the receipt 
of any federal grants or contracts. As a matter of policy, The Bretton 
Woods Committee accepts no government support of any kind. Nor does it 
accept funding from the international financial institutions. It is 
supported solely by voluntary contributions of its members.
---------------------------------------------------------------------------
    I am here today to express our strong support for continued U.S. 
funding of IDA--the International Development Association of the World 
Bank, and in addition to support replenishments for the Asian 
Development Fund and the African Development Fund. In line with my 
experience, however, I will speak mostly about IDA, but in many cases 
my comments can be applied to all three institutions. In my testimony, 
I will stress the historical and future significance of IDA and discuss 
some of the ways it advances U.S. interests.
                              what is ida?
    The International Development Association is the World Bank's 
concessional lending window. Designed to be a channel for the ``haves'' 
of the world to help the ``have-nots,'' IDA provides long-term loans at 
zero interest to the poorest among the developing countries. These 
loans carry maturities of 35 or 40 years with a 10-year grace period on 
the repayment of principle. IDA lends to countries that have a per 
capita income of about $900 or less and lack the financial ability to 
borrow from the World Bank's primary lending institution, the 
International Bank for Reconstruction and Development, or IBRD. At 
present, 79 countries, comprising over 2.5 billion people and more than 
half the total population of the developing world, are eligible to 
borrow from IDA.
                             history of ida
    IDA was created in 1960 at the initiative and insistence of the 
United States, and today it remains the single largest source of donor 
funds for basic social services--health, education, clean water, 
sanitation, infrastructure, etc.--to the world's poorest countries. 
During the 1950s it became increasingly evident to World Bank 
shareholders that the Bank must turn its attention beyond its primary 
mandate--postwar reconstruction of Europe--toward assisting the world's 
poverty-stricken nations, many of whom were newly independent from 
colonial rule, plagued by economic and political instability, and 
unable to afford the development loans on commercial terms 
traditionally offered by the World Bank. To fill this void in 
development financing, U.S. President Dwight D. Eisenhower urged World 
Bank shareholders to create the International Development Association 
(IDA), giving the Bank the resources and mandate it needed to address 
the problems of the poorest nations and their citizens. Since 1960, IDA 
has lent $107 billion to 106 countries to address the basic needs of 
billions of people surviving on less than a dollar or two per day. It 
uses the same criteria to evaluate loans as that of the World Bank's 
IBRD facility, and aims to fund projects that build needed 
infrastructure, protect the environment, improve conditions for private 
industry to develop, and support reforms aimed at liberalizing 
countries' economies.
    As the members of this Committee know, whereas the IBRD raises most 
of its funds on the world's financial markets, IDA is funded largely by 
contributions from the governments of the more wealthy member 
countries. Donors get together every three years to replenish IDA 
funds. IDA lending is a cost-effective way for the U.S. government to 
promote its development goals, since each dollar contributed by the 
United States is matched by over seven dollars from other donors and 
repayments from borrowing countries.
    As the Committee is also well aware, there has been a consistent 
record of bipartisan congressional support for IDA, dating back to the 
1950s. Interestingly, it was a Republican Senator who initially 
proposed creation of the program. It has been supported by every 
president since Dwight Eisenhower. It also enjoys support from a broad 
array of interest groups, ranging from poverty and church groups to the 
business community.
    America's business community has a strong interest in seeing the 
IDA program succeed. By advancing living standards from one generation 
to the next, peace and stability are more likely, and thus, IDA helps 
promote a more stable world economic environment. IDA borrowers are 
precisely the countries that have the greatest need for the exports the 
United States specializes in, such as animal feed to upgrade diets, 
technologically-enhanced crops, renewable fuel sources, and modern 
capital equipment to improve countries' manufacturing base. Many of 
today's IDA countries will be tomorrow's emerging markets.
                       impact and success of ida
    Over more than forty years IDA has, by and large, been successful 
in achieving its objectives. IDA lending has impacted the global 
development community on a major scale, and its success rate compares 
favorably with private and public sector investments around the world.
    Over the years, thirty-two IDA borrowing countries have seen their 
economies develop and grow beyond the point where they are no longer 
eligible to use IDA funds, thus enabling them to ``graduate'' from IDA 
to reliance on commercially-priced lending. The list of graduates 
includes Chile, China, Costa Rica, Egypt, Morocco, Thailand and Turkey. 
Other former IDA borrowers, such as Korea, have made enough progress 
that they now contribute funds to IDA as donors.
    Further, living conditions and basic services have improved 
dramatically in most IDA borrower countries. On the whole, life 
expectancy, literacy and nutrition have increased over the past 
generation. While there have been development failures among IDA 
borrowers in parts of Africa, for instance, it is important to note 
successes in regions like South Asia, where IDA funds and policies 
helped fuel the Green Revolution. Thanks to IDA, over 6,700 health care 
facilities in Asia were constructed or upgraded, and then equipped and 
staffed to provide basic healthcare to rural populations.
    In the Caribbean, IDA policies have helped turn around Haiti's 
devastated power sector--giving users access to about 20 hours per day 
of electricity, in contrast with only 6 hours per day just a few years 
ago. IDA lending has succeeded in parts of Africa too, over 45,000 
primary school classrooms in African countries have been constructed or 
refurbished, and more than 5 million textbooks (most locally developed 
and produced) were supplied to primary schools, enabling about 1.8 
million children to benefit from access to primary education.
    A recent empirical study performed by the World Bank's research 
department measured the effectiveness of development aid throughout the 
1990s and found that the effectiveness of IDA resources improved over 
the course of the decade, and was far more effective than the overseas 
development assistance (ODA) in general. The study concluded that IDA 
funding was better targeted to the specific needs of poor countries 
that maintain reasonably good policies.\3\
---------------------------------------------------------------------------
    \3\ Dollar, David. ``Has Aid Efficiency Improved in the 1990s?'' 
Revised Draft, World Bank Development Research Group. Washington, DC, 
March 15, 2000.
---------------------------------------------------------------------------
    A major, independent evaluation of IDA's record between FY1994-
FY2000 performed by the World Bank's independent audit agency (the 
Operations Evaluations Department) recently found IDA's compliance with 
more than 150 undertakings to be satisfactory, with some modest 
qualifications. The report cited that over the seven-year review 
period, IDA significantly enhanced its relevance and the performance of 
its portfolio became a more selective lender and more responsive to 
borrowers, and recast its mission to address new concerns of poverty 
reduction. IDA also improved its presence in the field and diversified 
its policy instruments. The report concluded that, with IDA's help, ``a 
number of poor countries are in a better position now than at the 
beginning of the evaluated period to achieve broad-based growth and 
poverty reduction.'' \4\
---------------------------------------------------------------------------
    \4\ Gwin, Catherine. ``IDA's Partnership for Poverty Reduction: An 
Independent Evaluation of Fiscal Years 1994-2000.'' World Bank 
Operations Evaluation Department, Washington, DC, 2002.
---------------------------------------------------------------------------
                                concerns
    However, a number of legitimate criticisms about IDA resources, 
policies and effectiveness have been raised by members of the IDA 
community, including some of IDA's most ardent supporters. For one, 
IDA's track record needs to be better: progress in poverty reduction 
has been disappointing in some pockets of the world, particularly 
Africa, where living standards have barely kept pace with population 
growth. Neither donors nor borrowers must become complacent or be left 
unaccountable for such failure. Although IDA's effectiveness is 
increasing the translation of key IDA objectives into successful 
programs must become more clear and demonstrable.
    Key areas where IDA needs to focus new efforts include private 
sector development and gender, environmental and social development 
strategies. Some of the Bretton Woods Committee's members from the 
business and finance communities have taken a special interest in the 
need for more private sector development efforts. Most observers take 
for granted the fact that poor countries that reach the level of self-
sustaining growth will increasingly rely on private sector resources, 
primarily internally generated, but also foreign direct and portfolio 
investment.
    No country has broken out of the ranks of the ``poorest'' to 
achieve the status of an ``emerging market'' without first creating a 
well functioning private sector to permit capital formation and the 
building of local businesses, which employ workers and pay taxes to 
support other governmental services. At the same time, there is a 
critical need for an active civil society to keep pressure on the 
government for sound policies and regulations and help keep local 
institutions responsive and up to date.
    The Bretton Woods Committee recently established a working group 
called the Group to Assist Private Sector Development, or GAPS, to 
assist poor country governments and multilateral institutions in 
strengthening their private sector development strategies. After only 
five months of operation, GAPS members have launched numerous efforts 
to promote local and foreign businesses and capital formation in poor 
countries, and to offer advice on bilateral and multilateral assistance 
programs to help foster growth and competitive enterprises in IDA 
borrower countries.
    GAPS ideas have already been well received in official development 
circles. Its members are working now with various cabinet departments 
on a proposal to establish a U.S. Government-sanctioned Private Sector 
Volunteer Office to help harness volunteer efforts from the U.S. 
private sector to assist other low-income countries. Ultimately, we 
hope we can organize a major effort to allow U.S. executives to deliver 
pro bono advisory services on local governance, corporate reform and 
capital market development plans to a few selected IDA countries.
                          ida-13 replenishment
    IDA donor countries addressed these and other concerns when they 
concluded negotiations in June on the thirteenth replenishment of IDA. 
The new replenishment prioritizes the following four objectives:

   To promote sound policies that will lay a secure basis for 
        productivity growth and poverty reduction in IDA borrowing 
        countries;

   To ensure IDA assistance is effective and delivers 
        measurable results;

   To improve IDA's coordination, transparency and consultation 
        to increase operational effectiveness; and

   To provide for a substantial replenishment of IDA resources 
        to support countries demonstrating commitment to good policies 
        and sustainable growth.\5\
---------------------------------------------------------------------------
    \5\ lnternational Development Association. Additions to IDA 
Resources: Thirteenth Replenishment. The World Bank Group, July 9, 
2002. Washington, D.C.
---------------------------------------------------------------------------
    Donors agreed IDA policies must be more closely tied to countries' 
overall poverty reduction strategies, and that greater emphasis should 
be placed on improving policies toward education, gender, infectious 
disease, private sector development, rural development, and governance.
    New to the agreement is an emphasis on lending effectiveness and 
tying aid to performance by rewarding countries that make the most 
progress by granting them access to additional resources. Donor 
representatives called for a results-based system employing specific 
indicators to measure and enhance effectiveness and improve borrower 
accountability performance. They also arranged to include an incentive-
based supplemental financing mechanism to allow additional donor 
contributions to be added based on progress to be tracked during this 
three-year IDA cycle.
    Finally, donors recommended that IDA continue to build on its 
progress with respect to strengthening elements of transparency and 
coordination within its programs.
                          grants versus loans
    A final issue of contention during the discussion of increasing IDA 
resources has been whether to replace IDA loans with grants. The United 
States has pressed IDA donors to convert a greater percentage of IDA 
loans to grants. The Bush administration has argued that chronically 
indebted and impoverished countries cannot afford additional debt 
build-up. Those opposed to the administration's proposal have worried 
that, without substantial new resources sustained over many years, a 
significant increase in grants would eventually deplete IDA resources.
    Under the compromise reached in the IDA negotiations, donors agreed 
to convert between 18-21 percent of IDA instruments into grants, 
recognizing the special difficulties facing some of the poorest and 
most vulnerable IDA-eligible countries. The use of grants will be 
expanded for education, health, nutrition, sanitation, HIV/AIDS, and 
natural disaster reconstruction programs, as well as for countries 
recovering from conflict.
    Initially, The Bretton Woods Committee expressed concern about the 
proposal to convert up to 50 percent of IDA loans to grants. While 
grants make great sense, we were worried about the feasibility of the 
proposal for two reasons. First, a large-scale move to grants ran 
somewhat contradictory to the original intention of the IDA to create a 
culture of investment and credit within developing countries. Second, 
and more important, given the declining trend of official U.S. 
development assistance over the last two decades and the large increase 
in IDA contributions that would be required to sustain future resources 
in the face of lost future income (reflows) caused by replacing loans 
with grants, we were not convinced that the United States and other IDA 
donors would commit the financial resources needed to sustain a healthy 
IDA program. Our concerns about the viability of this proposal were 
strengthened by a CRS study by Jonathan Sanford detailing the 
significant donor contribution increase that would be required to 
maintain IDA resources should IDA donors adopt the Bush 
administration's 50 percent grants proposal.
    However, the new compromise to convert approximately 20 percent of 
loans to grants appears feasible, so long as the U.S. and other major 
IDA contributors continue to replenish IDA funds in the future.
    The Bretton Woods Committee also considers the U.S.-initiated 
recommendations in the new IDA agreement to establish an accountability 
function for borrowers and a monitoring and evaluation system to be 
important steps toward improving IDA effectiveness. We urge that 
framers of this proposal include indicators of private sector 
development, which can help in alleviating poverty. The Committee 
stands willing to offer its advice and support to help make this 
possible.
    The significant strides that IDA has made over the past decade has 
helped it to become the most efficient international institution in 
terms of lending based on country performance. IDA has proven itself as 
the most cost-effective way to fight extreme poverty on a large scale. 
The proposals that IDA donors have made for this replenishment will 
further strengthen IDA's capacity, sharpen its focus on policy and 
institutional performance, and equip it to meet future challenges.
    Just as important, IDA squares with U.S. strategic and humanitarian 
interests, directly serving and supplementing America's own aid 
objectives. Moreover, it helps the United States solve devastating 
global and regional problems that have taken on an added importance to 
the Nation in the last year.
    Now, Mr. Chairman, let me make a few, brief remarks about the 
African Development Fund and the Asian Development Fund. The African 
Bank and Fund have made tremendous strides in recent years to close the 
gap between that institution and its sister institutions. AFDB 
President Omar Kabbaj deserves a great deal of credit for overcoming a 
bureaucracy resistant to change and in helping modernize the Bank and 
institute many reforms. Friends who have visited Bank headquarters 
recently say there is a new sense of optimism on the staff that the 
Bank can make an important contribution as an African institution.
    The Bank has adopted an impressive new strategic plan for 2003-
2007. It is carving out the special niches where it believes it has a 
comparative advantage in African development. The African Bank is 
making a new effort to implement results-based management, tracking 
what the Bank is actually achieving through its loans and technical 
assistance efforts. This includes building into all projects and 
programs from the beginning specific statements regarding what is 
expected to be achieved in the development area, monitoring the 
implementation of the project and finally measuring and evaluating what 
was actually achieved.
    As members of the Committee know, Bank governors will soon adopt a 
replenishment of the Fund's resources. The U.S. Treasury is using this 
negotiation to advance its policy agenda at the Bank, including more 
selectivity and focus in project selection and making new strides in 
improving Bank effectiveness, in addition, the African Bank should beef 
up its inspection function and perhaps implement an independent 
evaluation system.
    It remains true that some management systems at the African Bank 
remain well behind best practices at other regional development 
institutions. Lack of funding for training is one of the reasons for 
this. Perhaps Congress might want to consider making a special 
technical grant to the African Bank to help it pay for new training and 
other improvements in this area, I am sure such a grant would be well 
received by the Bank and put to good use.
    As for the Asian Development Bank, it remains a very efficient and 
well-run institution, despite having been slower than some other 
regional institutions to adopt the next generation of approaches to 
development lending. Many of its members feel it remains too much a 
``project driven'' institution, and that the time has come for it to 
concentrate more on increased participation, transparency, governance 
and other current imperatives.
    It should be noted that the Asian Bank is very active in 
Afghanistan now, helping finance the reconstruction efforts. In 
addition, the Bank has been very helpful in funding projects relating 
to APEC, an important U.S. priority.
    One of the biggest problems I see with respect to the ADB is the 
failure of the Congress to provide sufficient backing for it. It is 
something of an embarrassment that the United States--the member 
country that is the most active in pushing the Bank in new directions--
has yet to authorize or fund the newest ADF replenishment, which was 
negotiated two years ago. Similarly, Congressional appropriators for 
years have raided the ADB's accounts to pay for what they view as more 
pressing development priorities. When this happens and arrears build 
up, other countries take notice. Ultimately, this will undermine U.S. 
influence in the institution in ways the United States will not like. I 
would therefore urge Congress to authorize and fully fund the Asian 
Bank and other MDB windows, including making up the arrears.
    Thank you.
                                 ______
                                 

                Biographical Statement for James C. Orr

    James C. Orr is co-founder and Executive Director of the Bretton 
Woods Committee, a group of 700 corporate chief executives, former 
cabinet officials and other prominent Americans who have joined 
together to promote sensible reforms at and increased public 
understanding of the World Bank, the International Monetary Fund, the 
World Trade Organization and the regional development institutions.
    Mr. Orr has worked for thirty years in government and the private 
sector in international finance and development. In addition to his 
position with the Committee, he is also managing partner of James Orr 
Associates, a Washington, D.C. based policy consulting firm. In this 
capacity, Mr. Orr advises the firm's clients, which include 
international finance companies and corporations and government 
entities in the United Stares, Europe and Asia.
    Prior to the formation of his firm in 1983, Mr. Orr served both 
Republicans and Democrats during eight years as legislative counsel for 
the International Trade and Development Subcommittee of the U.S. House 
of Representatives. He holds an undergraduate degree in economics from 
Wesleyan University (1968) and a master's degree in international 
economics from the School of Advanced International Studies, Johns 
Hopkins University (1974).
    Mr. Orr has advised a number of national and international 
commissions dealing with aid and trade issues. He has performed 
specialized consulting assignments for major public and private 
financial institutions around the world. He is a frequent speaker on 
development and finance issues, international affairs, and trade 
issues. His writings include books and articles on the regulation of 
the U.S. financial sector, the activities of the multilateral 
development banks, Third World debt, international currency markets, 
etc.
    Mr. Orr serves pro bono on a number of boards of directors, 
including TechnoServe, Inc, a company working to create business 
solutions to rural poverty. He has inspected dozens of development 
projects in Latin America, and in Asia and Africa, both as a member of 
U.S. Congressional delegations and as a private businessman. He 
currently serves as a member of the Panel of Independent Experts, a 
group charged with assisting the Asian Development Bank in reviewing 
controversial development projects in Asia.

    Senator Sarbanes. Ms. Atkinson.

   STATEMENT OF CAROLINE ATKINSON, ADJUNCT SENIOR FELLOW IN 
 INTERNATIONAL ECONOMICS, COUNCIL ON FOREIGN RELATIONS, SENIOR 
      DIRECTOR, STONEBRIDGE INTERNATIONAL, WASHINGTON, DC

    Ms. Atkinson. Mr. Chairman, thank you for the opportunity 
to appear before the subcommittee. As you mentioned, Mr. 
Chairman, I had the honor of serving in the U.S. Treasury in 
the previous administration, and for those of you who are 
puzzled by the strange way I talk, I am actually an American 
born in the District of Columbia, and that was where I was able 
to work in the U.S. Treasury.
    While there, I had opportunity to see the importance for 
the United States of a well-functioning global economy and the 
contribution that can be played by the World Bank and other 
international financial and development institutions. I also 
saw the key role that the United States, often pushed by 
Congress, can play in helping to make these institutions as 
effective as possible.
    As Under Secretary Taylor and you have discussed, the IDA 
13 replenishment that you are now considering includes many 
important reforms in measurement and in policy objectives that 
were pressed by the United States.
    Following up on Jim Orr's comments, I would just like to 
note that the 79 countries that are IDA recipients, some of 
which also get support from the Asian and African Development 
Funds, are home to 90 percent of the world's very poorest 
people, who survive on less than $1 a day, and they include 
amongst them 1 billion children.
    Meeting essential human needs with the provision of basic 
health care, access to clean water, and education is, of 
course, critical to the hope of a better life and, as you on 
this subcommittee know all too well, development in the poorest 
countries is needed to make the world a stronger and safer 
place as well as a fairer one.
    The highly concessional terms that are provided by IDA and 
the other funds are essential to avoid adding dangerously to 
the debt burdens. They are also only possible because of the 
decision by the United States and other donors to provide our 
own budgetary funds in support of that.
    A lot of people have suggested recently, although as Jim 
says there has been a lot of talk over 50 years about how to 
make development succeed, and some feel that the evidence that 
we have seen that past foreign aid has been misused suggests 
that it is all ineffective and not worth taxpayers' money, but 
broadly accepted research and our experience does show that 
well-focused assistance, channeled as Senator Allen was 
stressing, to countries that own and champion reform, can make 
a huge difference, and IDA has been shown to be the most 
effective channel for making this linkage.
    A list of early IDA recipients who have now graduated 
includes such key U.S. allies and economic success stories as 
South Korea, Chile, Thailand, and Turkey. In fact, more than 
half of all the repayments that are now made back into IDA come 
from countries that no longer need to use these taxpayer funded 
programs. Some of them are even in a position to contribute 
back into IDA as donors, such as Korea. It is important to 
continue the full funding of these programs to allow other 
countries the opportunity to escape also from poverty.
    This subcommittee has traditionally recognized the enormous 
stake for the United States as the world's leading global power 
and a champion of freedom and openness in the further 
integration of the poorest into the world's economy, and just a 
couple of points on that. As we cannot help but remember this 
week, the United States is not impregnable to outside threats. 
There is, of course, not a simple equation between poverty and 
terror, but poverty, hopelessness, and failed states such as 
Afghanistan before September 11 last year provided a breeding 
ground for terrorism.
    The new focus in the multilateral development banks on 
governance and institution-building and legal reforms, largely 
at U.S. insistence, is critical for fighting corruption and 
helping to establish decent, more open, and better-functioning 
societies. The World Bank has launched for example, more than 
600 anticorruption programs and government initiatives in about 
100 client countries in recent years. IDA credits presently 
support governance reforms and legal reforms in Azerbaijan, 
Bangladesh, Mongolia, and other countries.
    More broadly, the United States is obviously a natural 
champion and a beneficiary of a vibrant and successful world 
economy with the openness and competition, trade, and capital 
markets that has marked our own success. Succeeding in the 
battle against global poverty is in the interests of all 
Americans, and it is, of course, critical that development go 
hand in hand with strong environmental standards and other 
hallmarks of a healthy society as, again, the United States in 
its contributions has pressed for.
    American leadership in the multilateral effort to attack 
poverty is both good economics and good politics. The money 
contributed by the United States to IDA in the comparable funds 
leverages resources many times that amount. Moreover, and I 
believe that Chairman Sarbanes is referring to this in his 
questioning with Under Secretary Taylor, an active leadership 
role and full funding and full payment gives the United States 
a more effective voice in determining the best use of that 
money.
    Finally, many of the new global challenges being addressed 
by the multilateral development banks can affect Americans 
directly. With two teenagers nearby in Loudoun County 
contracting malaria without leaving this area, we do not need 
much more convincing of the dangers to Americans of 
communicable diseases which thrive in the poorest countries. 
The impact of pollution and poor environmental standards in 
individual countries also, of course, can be felt far beyond.
    Often, the poorest countries can only move to address these 
global threats with the advice and financial support of others. 
IDA, for example, is committed to spend $1 billion to help 
African countries expand their HIV/AIDS programs, $500 million 
of which was spent in 12 countries last year. Money, in 
combination with strong government action, can work, as in 
Uganda and Senegal, for example, there is evidence that this is 
beginning to turn the tide on the epidemic of AIDS.
    I just wanted to speak briefly about the reform initiatives 
in the current replenishment. First, as Mr. Orr mentioned, the 
process by which agreement was reached was much more 
transparent and open than any before. Representatives of 
borrowers were in the discussions, and NGO comments were sought 
and taken account of.
    Second, the United States call for a greater share of 
grants has, indeed, led to a significant expansion in 
particular for the poorest countries for AIDS and HIV programs 
and for recovery from conflict and natural disasters. I think 
these additional grants can help to break the cycle of rising 
indebtedness and impoverishment. At the same time, IDA's 
ultimate aim is obviously to lift countries out of poverty and 
into participation in the global market, including the capital 
markets, and repayment of IDA loans is often a first step. I 
think the balance in the IDA replenishment is a good one.
    Finally, the critical push from the United States for 
linking finance to results gives much greater assurance that 
money will be well spent. I think it also helps to reinforce 
good governance. There is evidence where people in local areas 
know what money is being provided and what the goals of the 
finance are. They are much better at pushing for accountability 
in their own political regions, and that is obviously what is 
critical for successful development.
    Thank you very much.
    [The prepared statement of Ms. Atkinson follows:]

   Prepared Statement of Caroline Atkinson, Adjunct Senior Fellow in 
International Economics, Council on Foreign Relations, Senior Director, 
                       Stonebridge International

                              introduction
    Mr. Chairman, Senator Allen and other Members of the Subcommittee, 
it is an honor to appear before you to testify on the World Bank's 
International Development Association, the Asian Development Fund and 
the African Development Fund. My name is Caroline Atkinson I am an 
adjunct Senior Fellow at the Council on Foreign Relations and Senior 
Director of Stonebridge International, a global strategy group. Until 
January 2001, I was the Senior Deputy Assistant Secretary for 
International Monetary and Financial Policy in the United States 
Treasury, and a Senior Adviser to Treasury Secretary Lawrence H. 
Summers.
    In that position, I had ample opportunity to see the enormous 
importance for the United States of a well-functioning global economy 
and the contribution that can be played by the World Bank and other 
international financial and development institutions. I also saw the 
key role of the United States in making these institutions as effective 
as possible. Often led by Congress, the U.S. has pushed--successfully 
in many cases--for important reforms to promote aid effectiveness, to 
focus the World Bank and other Multilateral Development Banks on their 
main task to poverty alleviation, and to address new global problems, 
notably communicable diseases such as HIV-AIDS, that reflect increasing 
global interdependence.
    I am thus part of the bipartisan consensus that has supported IDA 
since it was first created over 40 years ago, under the leadership of 
President Eisenhower. I would like to speak today in favor of the 
replenishment authorizations for the World Bank's International 
Development Association, the Asian Development Fund and the African 
Development Fund.
          the role of ida and other multilateral aid programs
    The World Bank's IDA is the main source of development assistance 
to the poorest countries of the world that are unable to borrow from 
private capital markets and so are dependent on foreign aid for much-
needed capital. Indeed, IDA is now the single largest source of donor 
funds for basic social services in the poorest countries. The vast 
majority of the 3.6 billion people who live in the countries that 
receive funds from IDA, AsDF and AfDF have an income of less than $2 
dollars a day. The 79 IDA recipients are home to more than 60 percent 
of the world's population, and 90 percent of the very poorest people, 
defined as those surviving on less than one dollar a day.
    Looking to the future, there are now one billion children who live 
in countries that receive development assistance from IDA and the 
comparable funds linked to the Asian and African Development Banks. For 
these children in particular, meeting essential, basic human needs 
through provision of basic health care, access to clean water, primary 
and literacy education, is critical to provide a hope of a better life. 
As members of this committee know well, growth and development in the 
poorest countries are in turn needed to make the world a stronger and 
safer place, as well as a fairer one.
    The money provided to desperately poor countries by IDA, and by the 
Asian and African Development Funds, is only available because of the 
decision by the United States and other donor countries to provide 
their own budgetary funds to support these programs. Unlike the main 
World Bank lending agency, the International Bank for Reconstruction 
and Development (IBRD), IDA does not borrow money from capital markets. 
IDA's continued financing on highly concessional terms--essential to 
avoid adding dangerously to the debt burden of the poorest countries--
is possible because of the regular replenishment to its resources by 
the United States and other donor countries, now numbering 39. These 
countries also set the guidelines for IDA's policies. The IDA 13 
replenishment now under consideration incorporates important reforms to 
these guidelines, agreed by the donors.
    As global poverty has remained a scourge and it has become clear 
that substantial foreign aid in the past has been misused, with little 
or no impact on improving the lives of those in recipient countries, 
some have decried all such aid as ineffective. But careful research 
shows that well-focused assistance, channeled to countries and users 
that own and champion reform, can make a huge difference. A list of the 
early recipients of IDA aid includes such key U.S. allies as South 
Korea, Chile, Thailand, and Turkey. These and many others around the 
world have since made enormous strides in conquering poverty and 
diversifying their economies. More than half of the reflows of 
repayments into IDA now come from countries that no longer need these 
tax-payer funded concessional resources, and are paying back into the 
program that helped them to escape from poverty. In some cases, former 
IDA recipients, such as Korea, are even in a position to contribute as 
donors.
    Of course, there have also been many development and aid failures. 
But on the basis of widely accepted research by Paul Collier and David 
Dollar of the World Bank, IDA has been shown to be the most effective 
channel for linking foreign aid to sensible policies and good 
governance.
       the fight against poverty: the stake of the united states
    This Committee has traditionally recognized the enormous stake of 
the United States--as the world's leading global power and a champion 
of freedom and openness--in the further integration of the poorest in 
the world economy.
    As we cannot fail to remember this week, the United States is not 
impregnable from outside threats. There is not a simple equation 
between poverty and terror. But dreadful poverty, hopelessness, and 
failed states, such as Afghanistan before September 11 last year, 
provide a breeding ground for terrorism. The United States thus has a 
huge interest in supporting multilateral reform efforts to deliver 
economic growth and basic human services, alleviate poverty and 
disease, and help to build functioning societies. The new focus in the 
multilateral development banks on governance and institution building--
largely at U.S. insistence--is critical for fighting corruption in 
failed states and promoting decent and open societies. The World Bank 
has launched more than 600 anticorruption programs and governance 
initiatives in almost 100 client countries in the past six years.
    Earlier this year, IDA announced funding for measures to improve 
accountability and transparency in the public sector in Azerbaijan, 
crucial for monitoring expenditures targeted to poverty reduction. 
Legal and judicial reform in Bangladesh and Mongolia are also supported 
by IDA credits.
    More broadly, the U.S. is a natural champion as well as a 
beneficiary of a vibrant and successful world economy, based on the 
openness to competition, trade and capital markets that have marked its 
own success. Success in the battle against global poverty is in the 
interests of American workers and consumers, farmers and businessmen. 
All stand to gain as poor countries join the world economy, providing 
new markets for American goods and new products for Americans to buy. 
It is of course critical that development go hand-in-hand with strong 
environmental standards, protection of essential labor rights and other 
hallmarks of a healthy society.
    American leadership in the multilateral efforts to attack poverty 
is both good economics and good politics. The money contributed by the 
U.S. to IDA and the comparable Asian and African Development funds 
leverages contributions many times that amount. Every dollar that the 
U.S. puts into IDA is matched by seven from other sources. Moreover, an 
active leadership role gives the U.S. a more effective voice in 
determining the best use of that money. The United States, with 
Congress playing a key role, has called for, and achieved, important 
reforms in the World Bank and the other development banks, including a 
clearer focus on measures to fight poverty. Successful IDA programs 
range from microfinance for small enterprises in Asia and Africa to 
scholarships for Bangladeshi families who keep girls in school. In 
India, IDA is supporting the District Primary Education program to help 
areas where female literacy is below the national average. In Mali, an 
IDA financed health project helped to establish 300 new community 
health centers.
    Finally, many of the new global challenges being addressed by the 
multilateral banks can affect Americans directly, even if they stay far 
from the rural poverty or urban slums of the poorest countries. With 
two teenagers in nearby Loudon county contracting malaria without 
leaving this area, it is hard to ignore the dangers of communicable 
diseases. The impact of pollution or poor environmental standards in 
one region can also be felt far beyond.
    Often, the poorest countries can only move to address such global 
threats with the advice and financial support of others. The World Bank 
and other MDBs are playing a leading role in this field, with strong 
bipartisan support. In Africa, the Bank has launched a multi-country 
initiative to combat HIV/AIDS (MAP), recognizing that the disease does 
not respect national boundaries. IDA is committed to spend $1 billion 
to help African countries expand their prevention, care and treatment 
programs. Some $500 million was spent last year in 12 African countries 
and a further $500 million is slated for an additional 15 countries. 
The battle against HIV/AIDS is an example where the combination of 
external finance and advice with strong domestic commitment is key. In 
Uganda and Senegal for example, there is evidence that strong 
government action with financial backing from IDA is turning the tide 
on the epidemic.
    The World Bank has now committed $16 billion to projects with clear 
environmental objectives, IDA support for a biodiversity initiative in 
Uganda--with a $27 million credit approved in July to help the 
government manage its wildlife and cultural resources--is one example 
of a welcome shift in environment strategy towards a focus on climate 
change, forests, water resources and biodiversity.
                           reform initiatives
    Addressing poverty and making globalization work are crucial 
objectives. But if they are to be met, there must be a renewed focus 
not just on the quantity of development assistance but, just as 
importantly, on its quality. Americans need to see their money well 
spent, in pursuit of the goals they support. The U.S. Congress, 
together with this Administration and the one in which I served, have 
pressed hard for reforms in the MDBs so that the money the U.S. commits 
works to achieve success.
    The IDA 13 replenishment, which the Subcommittee is now 
considering, incorporates a number of key reform initiatives. First, 
the process by which agreement was reached was far more transparent and 
open than any before. The world has moved a remarkable distance towards 
the traditional United States' view in favor of openness and 
transparency. Representatives of borrowers and civil society were 
included in the replenishment discussions and documents were regularly 
posted on the World Bank Web site.
    Secondly, the U.S. call for a greater share of grants has resulted 
in a significant expansion of grants in particular for HIV/AIDs 
programs, recovery from conflict and natural disasters, and for the 
poorest indebted countries. There has been strong bipartisan support 
for additional grants to help break the cycle of rising indebtedness 
and impoverishment. I believe that a combination of grants and 
concessional loans is a good approach. Grants will help to tackle 
exceptionally severe circumstances and establish a basis for economic 
progress without adding to debt burdens.
    At the same time, IDA's ultimate aim must remain to lift countries 
out of poverty and towards participation in the global market, 
including the capital market. For some countries, managing their 
finances responsibly and paying back IDA loans is a first step in this 
process. There have already been success stories of countries that have 
made this step as they outgrew the need for the highly concessional 
help that taxpayers in donor countries provide through IDA and the 
other multilateral funds. Loan repayments (which only begin after a 
long grace period) also ensure that more money becomes available for 
new needs, bolstering the resources made available by donor 
contributions. I believe that the balance struck in the IDA 13 
replenishment--with 18-21 percent of new finance in the form of 
grants--is a good one that deserves support.
    Thirdly, the critical push from the United States for linking 
finance to measured results gives a much greater assurance that money 
will be well-spent. It is already leading to changes not just in the 
World Bank but in the way that other development organizations manage 
their lending. It will be crucial that this initiative be maintained so 
that good policies, access to increased finance and proper measurement 
of results are integrated in countries' own policies and programs. A 
better understanding of what works and how money has been spent will 
also reinforce good governance. When people in local areas can see what 
new funding has been received they will press more effectively for 
delivery of the promised services that it is supposed to finance. It is 
inevitable that the performance targets first chosen are those that are 
relatively easy to measure. Going forward, countries need help to 
develop better data to measure desired outcomes. This will require not 
just technical support but also financing, and backing from the U.S. 
and other key bilateral donors in their own programs.
                               conclusion
    I respectfully submit that I believe that full funding of the 
replenishments of IDA, AsDF and AfDF, as requested by the 
Administration, would be in the best interests of the United States. It 
would support the continued leadership role of the United States in 
these institutions and play a crucial role in alleviating poverty 
around the world. The new objectives laid out for IDA 13 largely 
reflect those that the U.S. has pushed for. Congressional support for 
this development assistance would continue the record established by 
the far-sighted bipartisan support for the debt relief program for 
Highly Indebted Poor Countries (HIPC) all of which are IDA recipients.

    Senator Sarbanes. Thank you very much. Reverend Beckmann.

  STATEMENT OF REV. DAVID BECKMANN, PRESIDENT, BREAD FOR THE 
                     WORLD, WASHINGTON, DC

    Reverend Beckmann. I am honored to testify. Senator 
Sarbanes, you have been helpful on poverty and hunger issues 
around the world for many years, and Senator Allen, I am a 
Virginian, and so I am especially glad for this opportunity to 
speak before you. I want to make four points.
    First, Bread for the World supports this authorization. 
Second, we are especially enthusiastic about debt relief, and 
think that some things could be done to make debt relief work 
better. Third, we have some ideas about the performance 
indicators, how to improve the performance of IDA and 
development assistance generally, and then fourth, it is 
important that Congress and the administration think about IDA 
and the Millennium Challenge Account, other development 
assistance, in a coordinated way.
    On the first point, we support this authorization. Bread 
for the World has not always supported IDA, but over the years 
we think that the institution has improved, and we do support 
it. As Senator Sarbanes mentioned, we are part of a coalition 
of NGOs that advance a lot of criticisms of IDA and the World 
Bank, and I have submitted my own written testimony and a 
report \1\ of that coalition to you for the record.
---------------------------------------------------------------------------
    \1\ The report referred to is maintained in the committee files.
---------------------------------------------------------------------------
    My own views about IDA reform have been shaped by working 
for 26 years on IDA. I worked in the bank for 15 years in 
various ways to try to make IDA more effective for poor people. 
Then I have been at Bread for the World for 11 years, where we 
have continued to work on IDA reform. I think there is a lot of 
scope for continued reform.
    At the same time, the basic thing I want to say is that I 
think IDA is a very good institution. It has always been a 
competent institution, and it has improved in terms of 
transparency and poverty focus over the last 10 to 15 years, 
partly because of the work of this subcommittee.
    I am less familiar with the Asian Development Fund and the 
African Development Fund, but the dealings I have had with 
them, and that we as an institution have had with them, has led 
us to be supportive. We are pleased that the management 
problems that the African Bank had seem to be being addressed.
    So our bottom line is, we support this authorization. We 
think it is important for feeding hungry people around the 
world.
    Second, we are especially enthusiastic about debt relief 
for the poorest countries. A lot of church people all over the 
country and other people of goodwill worked hard for debt 
relief. It is probably the most popular initiative in 
international development assistance ever, and we have tried to 
follow, now, whether it is really working for poor people. We 
have followed through the official reporting processes. We are 
also in touch with church groups in some of the poorest 
countries to see from their perspective whether it is working, 
and we are encouraged.
    It is very clear that in at least 10 countries there have 
been dramatic increases in the number of kids in school, and 
the availability of medicines in rural clinics. In a few 
countries at least, there have been improvements in democratic 
participation, reductions in corruption.
    Senator Sarbanes, I would encourage you to hold a hearing 
on debt relief, because it is important for a lot of Americans. 
It is important that Congress know that it is working pretty 
well, and also if you shine a spotlight on it you will make it 
work better, because there are some problems.
    One way to make it work better has to do with additional 
funding. The President agreed at the G-8 to some additional 
funding to meet the goals that were set a few years ago, 
because with the world economy in a slump, it is harder to get 
those countries to the level of debt sustainability.
    Another specific idea, which is pending in Congress, is the 
Biden-Santorum proposal to modify the way that the bank and the 
fund calculate debt sustainability. The proposal is to take 
into account the ratio between debt service and government 
revenues, and to give special consideration to countries that 
have unusual payment financing problems because of severe 
health and AIDS situations.
    The Biden-Santorum proposal passed the full Senate as a 
part of the AIDS bill, but I would also encourage you to put it 
in this authorization so that it has a better chance of 
actually becoming law.
    My third point has to do with the review of performance. We 
welcome the Bush administration's insistence on making sure 
that development assistance really results in a better life for 
poor people. We would put the emphasis on monitoring how well 
the bank is doing in continuing to move toward transparency, 
accountability, and fostering democracy, because we have seen 
over 15 years that people in rural Tanzania can monitor the 
effectiveness of IDA in ways that people at 15th and 
Pennsylvania are never going to be able to do.
    The issues that you raised, Senator Allen, regarding 
property rights and so forth, those issues are conditions in 
some IDA credits. If local people know that they are 
conditions, that the government has agreed to do some things in 
those areas, and then it does not do them, or does not live up 
to its agreements, those local people can insist on real 
progress.
    So this system of measurement really should not be so much 
a system of reporting up to the Treasury or to you, even, or to 
us, it should be better systems of letting everybody in the 
world, including people in those countries, know what is going 
on.
    Then the last point I would like to make is about the 
connections among IDA, the multilateral development banks, the 
Millennium Challenge Account, and the whole development system. 
I was really pleased that Secretary Taylor talked about the 
MCA.
    We are thrilled by the President's proposal for a major 
increase in funding for poverty reduction in the poorest 
countries linked to performance, and the administration is 
working hard to be able to bring to Congress detailed 
proposals. But I think their planning regarding on coordination 
with the rest of the system is probably the least well 
developed aspect of their thinking. If the MCA is going to make 
the maximum impact, it should be coordinated with IDA and with 
the other MDBs.
    Also, the Europeans have committed to an increase of $7 
billion a year in their development assistance, and to my 
knowledge there has been very little serious discussion about 
how that $7 billion and our proposed $5 billion are going to 
work together. If the MCA is planned as a part of the 
multilateral development system, and all these elements work 
together, we are more likely to get good results.
    [The prepared statement of Reverend Beckmann follows:]

  Prepared Statement of Rev. David Beckmann, President, Bread for the 
                                 World

    Mr. Chairman, I'm grateful for your leadership over the years on 
many issues of importance to hungry and poor people around the world. 
You are a good friend to Bread for the World. Since I am a Virginian, I 
also especially welcome the opportunity to testify before Senator 
Allen.
    Thank you for this opportunity to offer some comments about IDA, 
the Asian Development Fund and the African Development Fund. Basically, 
there are four points I would like to emphasize.
    First, while Bread for the World favors continuing efforts to 
improve the multilateral development banks, we wholeheartedly support 
the authorization of the replenishment of IDA and its counterparts in 
the regional development banks.
    Second, the shift to grants for a portion of IDA funding is a 
welcome modification of IDA and will help prevent already indebted 
countries from taking on new debt. However, much more needs to be done 
to reduce the debt countries already hold. Debt relief is working for 
poor and hungry people but it can be done better and needs to be 
deepened.
    Third, I support the administration's focus on results. Through 
participation, monitoring and evaluation, and improved data collection 
and analysis, much can be done to make IDA programs more effective.
    Finally, the administration is looking to the new Millennium 
Challenge Account, MCA, to address many concerns about traditional 
development assistance. But to be truly effective, it has to be 
coordinated with what other donors are doing. In reauthorizing IDA's 
replenishment, Congress ought to work with the administration to think 
about how the MCA relates to IDA and other development assistance 
programs.
                            support for ida
    I was on the staff of the World Bank for 15 years. I worked in 
various ways to make the Bank a more effective instrument in reducing 
poverty, I then moved to Bread for the World, where I've worked on 
World Bank reform from the outside for another 11 years. While I'm 
always pushing to improve the Bank, I want to affirm that the Bank is 
an excellent development institution. Moreover, the Bank has gradually 
become more focused on poverty and more responsive to democratic 
participation, partly because this subcommittee has pushed in these 
directions for two decades. In my judgment, IDA is one of the best 
international instruments in support of poverty reducing development.
    Although I am not as familiar with the regional development banks, 
I am impressed with what I know about the Asian Development Bank. Its 
expertise in Asia's specific development needs is important. In the 
past, I too shared concerns about the management of the African 
Development Bank but have been encouraged by the role Treasury has 
played in reforming the institution. While continuing to push for 
reform, I believe we should support the African Development Fund.
    Bread for the World is part of a coalition of non-governmental 
organizations that are critical of the World Bank in various aspects. I 
submit for your attention a report prepared by the U.S. Civil Society 
Coalition on ``Responsible Reform of the World Bank''. Bread for the 
World doesn't share all the views expressed in the report but you will 
want to be aware of the issues and the debate.
                              debt relief
    Bread for the World has been following the implementation of debt 
relief, and I urge the subcommittee to do its own monitoring of debt 
relief implementation and the effectiveness of the Enhanced Highly 
Indebted Poor Country (HIPC) Initiative in reaching poor people. Based 
on what Bread for the World has gathered through both church and 
governmental channels, we believe that debt relief is indeed helping to 
reduce poverty and, at least in a few countries, empowering citizens to 
make their governments less corrupt and more responsive.
    The Jubilee campaign to reduce the debt burden of the world's 
poorest countries mobilized more public support in the United States 
than any other international development initiative in U.S. history--
certainly more public support than anything else related to the World 
Bank or IDA. So it is really important that this subcommittee help to 
inform Congress and the U.S. public that debt relief is working--and 
that, in the process, you push to make this popular program work even 
better.
              the poverty reduction strategy paper process
    One of the great things that came out of the debt relief movement 
was the Poverty Reduction Strategy Paper (PRSP) process. In principle, 
the PRSP gives countries ownership of their own development process, 
and it focuses policies and resources on the goal of poverty reduction. 
Indeed, the PRSP process has directed new investment to basic health, 
education, and poverty reduction in many countries, and it has opened 
new opportunities for democratic participation in some countries. 
Because of this, in a few countries, it has helped reduce corruption 
and improve governance and could have this effect in other countries as 
well.
    But much has been learned in the few years since the PRSP was 
introduced about how to improve the process. The PRSP is supposed to 
come out of a consultative process that allows for full participation 
of the country's civil society. But this is not easy where democratic 
institutions are weak. In any case, public consultation takes time and 
entails financial costs, and it is hard to reach people in remote 
areas. Finally, civil society has often been excluded from the 
discussion of major issues of national economic policy. All these 
factors often result in PRSPs that are not based on full participation 
and therefore full ownership, and that have taken longer to complete 
than originally anticipated, slowing down debt relief
    One of the criticisms of the PRSP process is that it sometimes 
seems that World Bank and IMF staff have written the PRSPs in 
Washington. It's important that the Bank be respectful of the 
governments with which it deals. But it's not enough that the 
government really ``owns'' Bank-supported policies and projects. The 
wishes of people outside government are also important. Social and 
environmental conditions that could seem onerous to an official might 
be important in securing broader popular ownership.
    Additional technical and financial assistance would help to enable 
broad, informed and timely participation by civil society in all 
aspects of the design, implementation, monitoring and evaluation of the 
PRSP. Donors could also do more to monitor PRSP processes and 
coordinate their funding activities. As the PRSP has been widely 
embraced by donors and will be the basis for IDA lending in the future, 
it is important that we get it right.
                            grants vs. loans
    Last year the United States made an important intervention in the 
history of IDA when President Bush proposed to shift 50% of IDA lending 
to grants. Bread for the World supports the agreement that IDA will 
provide grants for some types of projects. The grants proposal is a 
step forward in addressing some of the concerns that were raised by 
Bread for the World members and other grassroots groups around the 
country during the Jubilee movement. A shift toward grants for the 
social sectors will help to improve living conditions and prospects for 
poor people without further increasing the indebtedness of low-income 
countries. This proposal makes a lot of moral and practical sense.
    In one of my early jobs at the Bank, I worked on slum improvement 
projects in East Africa. These projects reduced poverty and usually 
achieved high economic returns. But slam improvement doesn't generate 
the foreign exchange needed to pay back an international credit, so in 
retrospect we were contributing to Africa's accumulation of unpayable 
debt.
    Bread for the World also applauds the administration's proposed 18% 
increase in funding for IDA. We hope the United States will continue to 
increase its contribution to shore up IDA in light of the agreed shift 
of between 18-21% of IDA funding to grants.
                           deeper debt relief
    There is clearly an urgent need to deepen debt relief. The global 
economic downturn and falling commodity prices have hit sub-Saharan 
African countries hard. A World Bank study on the economic impact of 
September 11 estimated that a one percent decline in the global rate of 
economic growth would push an additional 2-3 million Africans into 
poverty. African economies are heavily dependent on commodity exports, 
so the debt-to-export ratio has risen for many HIPC countries. These 
countries have demonstrated good economic management and a commitment 
to investing in their people, but the debt relief they are receiving is 
no longer enough. Deeper debt relief is needed for them to achieve some 
financial stability, confront the HIV/AIDS epidemic, and invest in the 
human and institutional capacity needed to lift themselves out of 
poverty.
    The G8 Summit in June agreed to ``top up'' the Enhanced HIPC 
Initiative by $1 billion to compensate for the impact of the decline in 
commodity prices and to cover the shortfall in HIPC funding. This is an 
important step and we urge Congress to approve the additional funding 
needed to implement current debt relief policies.
    Further, the debt-to-export ratio is not an adequate measure of 
debt sustainability. There are companion bills in the House and the 
Senate--Smith-LaFalce in the House and Biden-Santorum in the Senate--
that would amend the HIPC framework to lower debt service of HIPC 
countries to no more than 10% of government revenues, 5% for countries 
suffering a severe health crisis. This modification in the HIPC 
initiative would yield an additional $1 billion in debt relief, with a 
relatively small cost to the U.S. The Senate passed an AIDS bill that 
includes the Biden-Santorum language. I urge you to also include that 
language in the reauthorization of IDA.
                           performance goals
    The Bush administration has put a lot of emphasis on performance 
goals and preconditions. Both the grants proposal and the recent 
Millennium Challenge Account (MCA) proposal share the goal of measuring 
results and setting performance indicators. The World Bank has insisted 
on goals and preconditions for many years (sometimes too much so), and 
the Bank already does a relatively good job of reporting to its member 
governments on its own performance. But we welcome the administration's 
determination to make sure development assistance really makes a 
difference in the lives of struggling families.
    The U.S. Treasury has not yet announced what performance indicators 
it will use to decide on whether to propose increased funding for IDA 
in the second and third year of this replenishment. We have three 
suggestions.
    First, Treasury could do an annual assessment of the Bank's 
progress on issues of transparency and participation, because the best 
way to strengthen the performance of Bank-supported policies and 
projects is to make it easier for local people, especially poor people, 
to have some influence. Far-off officials will never be able to monitor 
development activities as effectively as local people can.
    Second, we would like to see the World Bank and IMF undertake ex-
ante social, economic and environmental impact assessments for all 
their lending to ensure that policies and projects they support are not 
harmful to poor people, both in the short and long term.
    Third, Treasury could assess how well the Bank is working with 
other institutions to upgrade the international systems that monitor 
trends in poverty, hunger, and others aspects of basic well-being in 
poor countries. More accurate and current data would help everybody--
beginning with citizens in poor countries--to evaluate development 
efforts.
                ida and the millennium challenge account
    Finally, I urge the subcommittee to think about the next 
replenishment of IDA in the context of the major increases in 
development assistance that President Bush and European authorities 
have recently proposed. I am tremendously enthusiastic about President 
Bush's proposal for a Millennium Challenge Account. The MCA can have a 
meaningful impact on global poverty reduction and can be a significant 
step toward the Millennium Development Goals. But the MCA should be 
limited to IDA-eligible countries, and it should be coordinated with 
IDA and with what other donors are doing. One of the lessons on 
development effectiveness is the importance of donor coordination. The 
PRSP process is an attempt at improving donor coordination, and 
Congress should counsel the administration to use countries' national 
development strategies or PRSPs as a basis for allocating all 
development assistance funds, starting with the MCA.
    The MCA will put more emphasis on democracy and human rights than 
the Bank and Fund can do (in keeping with their charters). This 
emphasis on democracy and some MCA funding to strengthen democratic 
institutions could very much improve the Poverty Reduction Strategies. 
That would enhance the impact of IDA and many other development efforts 
that are guided by the Poverty Reduction Strategies.

                                 ______
                                 

                             David Beckmann

    The Rev. David Beckmann is president of Bread for the World, a 
nationwide Christian citizens' movement against hunger. Bread for the 
World mobilizes about a quarter of a million letters to Congress each 
year on issues that are important to hungry people in the United States 
and worldwide. In recent years, Bread for the World has worked for debt 
relief, increased development assistance, and other changes to 
strengthen food security in Africa. Bread for the World has also 
lobbied to strengthen the Food Stamp Program and make Temporary 
Assistance for Needy Families more effective in reducing hunger and 
poverty in the United States.
    Beckmann is a Lutheran pastor as well as an economist. After a term 
with Lutheran World Relief in Bangladesh, he worked at the World Bank--
on urban poverty projects, then as a speech writer for the president of 
the Bank, and then as senior advisor on nongovernmental organizations. 
He led the Bank's early thinking about popular participation in 
development.
    Beckmann became president of Bread for the World and Bread for the 
World Institute (a related educational organization) in 1991. Bread for 
the World Institute does research and education on World Bank and 
International Monetary Fund reform issues.

    Senator Sarbanes. Very good. Right on the button. Thank you 
very much.
    Reverend Beckmann. I am a preacher. I am used to it.
    Senator Sarbanes. Dr. Meltzer.

   STATEMENT OF DR. ALLAN H. MELTZER, PROFESSOR OF POLITICAL 
      ECONOMY, CARNEGIE MELLON UNIVERSITY, PITTSBURGH, PA

    Dr. Meltzer. Thank you, Senator Sarbanes, Senator Allen. I 
am pleased to have an opportunity to testify on the 
replenishment of appropriations for the World Bank's 
International Development Association, IDA, and the African and 
Asian Development Banks.
    The United States has taken leadership since World War II 
in developing and fostering economic growth, political freedom, 
and social progress. The development banks have at times had 
prominent roles in assisting development in the newly 
developing countries, in emerging market economies, and IDA has 
worked at times to improve the quality of life for the poorest 
on the planet.
    The United States has continued its leadership role. This 
year, the administration, led by Treasury Secretary O'Neill and 
Under Secretary Taylor, worked very hard to change some of 
IDA's concessional role to performance-monitored grants. This 
proposal, initiated by a bipartisan congressionally appointed 
commission that I chaired, can be of major importance if 
performance monitoring succeeds in increasing the effectiveness 
of foreign aid and improving the quality of life in poor 
countries. I believe it will.
    I support the appropriation under consideration today, 
subject to two provisions that I urge the Congress to adopt as 
part of the appropriation bill. First, a portion of the 
appropriation should be set aside for an independent 
performance evaluation of past loans by IDA and the development 
banks.
    Second, IDA and the two development banks should agree to 
have an independent performance evaluation of their record of 
accomplishments and failures for the past 10 years as a 
condition of receiving the appropriation. The GAO, the Swiss 
SGS or a private consulting firm could perform the evaluation. 
I think it is well known that the African Bank under its new 
leadership has made progress, but problems remain.
    Time is limited, so I will restrict my comments to IDA, 
although some will apply to all three institutions. I will 
answer any questions I can about the Asian and African 
Development Banks. I urge the subcommittee, however, to ask and 
get answers to questions about these banks.
    Why do we continue to have so much duplication between the 
World Bank group, including IDA, and the regional development 
banks? Why is the International Monetary Fund expanding its 
poverty program, adding to overlap and duplication? I believe 
the Congress should require the administration to submit a 
coherent plan for rationalizing the current structure to reduce 
overlap and make better use of scare resources.
    In the year 2001, IDA made $6.8 billion of new loans and, 
based on World Bank data, allocated $550 million for 
administrative expenses charged to IDA. This 8 percent cost of 
lending is typical of IDA's cost in recent years. It includes 
travel, lending, and hiring consultants. This is large, but it 
might be justified by the difficulty of lending or granting to 
poor countries with inadequate infrastructure and information, 
if we had reason to believe that generally the lending programs 
were effective and the objectives realized. We do not have such 
information, and we cannot get it from IDA or the World Bank. 
The information the World Bank supplies shows that program 
failure rates are highest in the poorest countries, perhaps as 
high as 70 percent in Africa, in the recent past.
    Discouraging as these data are, they are suspect for at 
least two reasons. First, they are provided by the bank's 
operations evaluation department, OED. The head of this 
department reports directly to the bank's directors, but his 
staff consists of bank employees on loan to OED. Second, and 
more important, OED does most of its evaluations 6 months to 3 
years after the disbursement of the last payment on the loan or 
grant.
    On the public record, I asked President Wolfensohn of the 
World Bank why the bank audits and reports soon after lending 
has been completed. Why does it not routinely audit performance 
to learn whether the project succeeded in raising living 
standards or improving the quality of life several years after 
funding stops?
    He agreed that this was desirable, and said that he had 
asked the same question, but nothing has been done in his 7 
years at the bank. The Congress and the public ought to know 
what works well, what can be improved, and what should the bank 
and IDA stop doing because it is ineffective or wasteful of 
scare resources. That is why the Congress should insist on 
independent performance evaluation.
    Chairman Sarbanes, you led the Congress and the country 
toward improved accounting standards and transparency in the 
private sector. Should you not expect and require the same 
degree of transparency when we allocate the public's money to 
foreign assistance? Are not the poorest entitled to the 
protection that greater transparency would provide? Can we not 
shift emphasis to performance, not lending?
    There is evidence that the World Bank and IDA are 
ineffective. President Wolfensohn often shows a card listing 
the number of people living on less than $1 a day. This is the 
bank's measure of extreme poverty. Between 1987 and 1998, the 
number of people living on less than $1 a day remained the 
same. Their proportion of the world population declined 
modestly from 28 percent to 24 percent. This is not much of an 
accomplishment for an expenditure of about $200 billion in 
current dollars.
    Last year, the press reported on a memo written by the 
staff of one of the bank's major divisions in response to a 
request from President Wolfensohn for a discussion by all 
divisions of the bank's problems. A staff member sent me the 
memo. The memo was unsigned, but it states that it represents, 
``consensus views that emerged from discussions among the 
managers and staffs of the divisions.''
    A reader of the internal memo gets a picture of an 
ineffective organization with low morale and uncertain 
direction. The memo lists five major problems at the bank, the 
president's management and leadership style, an overload of 
institutional mandates and a lack of clear direction, problems 
at senior management levels, inadequate resources for the work, 
and the high degree of negativity among the staff.
    To amplify these charges, the memo says that the 
president's proposals, ``while perhaps individually worthwhile, 
have tended to diffuse the bank's focus. Their importance in 
individual countries is often unclear. The ideas have not been 
accompanied by adequate resources for implementation.''
    In other words, the bank is not organized to assist 
countries to develop their economies and improve the quality of 
life for their citizens.
    Further, the internal memo charges, ``The bank today has no 
focus and is driven by an ever-growing list of mandates imposed 
on it through a variety of means, the president's favorite 
subjects, board sentiments, public pressures, ideas generated 
by internal constituencies, and even fads. No initiative that 
starts as a pilot is ever considered a failure, because of a 
lack of any honest evaluation.''
    I do not underestimate the difficulties in project 
evaluation. Money is fungible. Countries can offer the most 
attractive programs to IDA and the development banks but use 
the money to finance a marginal project that is difficult to 
identify. Evaluation can establish that children can read and 
do arithmetic, that water is potable, and that inoculations for 
disease are carried out, and that sanitary sewers are 
available. It cannot always show a direct link to IDA funding.
    No less important, project evaluation can both create 
incentives for improved performance, and show that some 
projects fail repeatedly and should be abandoned. How can we 
expect to improve the living standards and quality of life of 
the poorest on the planet if we do not learn what works and 
what fails? What lessons do we teach if we provide money to 
corrupt governments and do not ask whether the projects they 
proposed were completed, function, and contributed to a better 
quality of life?
    When traveling to countries that received IDA and bank 
assistance, I have heard many stories of money wasted, money 
taken, projects never completed, schools without books, 
consultants paid handsomely, but no apparent outcome. These are 
anecdotes, disturbing, if true, but at best, suggestive. The 
Congress should want more, and should demand more. It should 
require performance evaluation to raise the standards of 
international aid and the living standards of the poor.
    With this proviso, I strongly support funding for IDA and 
the development banks. The United States should give generously 
when there is greater assurance that its contributions support 
effective programs, programs that improve living standards, 
increase productivity, and improve the quality of life for the 
unfortunate, many for whom life remains nasty, brutish, and 
short.
    Thank you, Senator.
    [The prepared statement of Dr. Meltzer follows:]

Prepared Statement of Dr. Allan H. Meltzer, Carnegie Mellon University 
                 and the American Enterprise Institute

                replenishment of the multilateral banks
    Senator Sarbanes and Members of the Foreign Relations Committee:
    I am pleased to have an opportunity to testify on the replenishment 
of appropriations for the World Bank's International Development 
Association (IDA) and the African and Asian Development Banks. The 
United States has taken leadership since World War II in developing and 
fostering economic growth, political freedom, and social progress. The 
development banks have, at times, had prominent roles in assisting 
development in the newly developing countries and emerging market 
economies, and IDA has worked at times to improve the quality of life 
for the poorest on the planet.
    The United States has continued its leadership role. This year the 
administration, led by Secretary O'Neill and Undersecretary Taylor, 
worked very hard to change some of IDA's concessional loans to 
performance monitored grants. This proposal, initiated by a bipartisan, 
Congressionally appointed commission that I chaired, can be of major 
importance if performance monitoring succeeds in increasing the 
effectiveness of foreign aid and improving the quality of life in poor 
countries. I believe it will.
    I support the appropriations under consideration today subject to 
two provisions that I urge the Congress to adopt as part of the 
appropriation bill. First, a portion of the appropriation should be set 
aside for an independent performance evaluation of past loans by IDA 
and the development banks. Second, IDA and the two development banks 
should agree to have an independent performance evaluation of their 
record of accomplishments and failures for the past ten years as a 
condition for receiving the appropriation.
    The GAO, the Swiss SOS, or a private consulting firm could perform 
the evaluation. I think it is well known that the African bank, under 
its new leadership, has made progress, but problems remain. Time is 
limited so I will restrict my comments to IDA, although some will apply 
to all three institutions. I will answer any questions that I can about 
the Asian and African Development Banks. I urge the committee, however, 
to ask and get answers to questions about these banks: Why do we 
continue to have so much duplication between the World Bank Group 
(including IDA) and the regional development banks? Why is the 
International Monetary Fund expanding its poverty programs, adding to 
overlap and duplication? I believe the Congress should require the 
administration to submit a coherent plan for rationalizing the current 
structure to reduce overlap and make better use of scarce resources.
    In the year 2001, IDA made $6.8 billion new loans and, based on 
World Bank data, allocated $550 million for administrative expenses 
charged to IDA. This 8 percent cost of lending is typical of IDA's 
costs in recent years. It includes travel, lending, and hiring 
consultants. This is large, but it might be justified by the difficulty 
of lending (or granting) to poor countries with inadequate 
infrastructure and information, if we had reason to believe that 
generally the lending programs were effective and the objectives 
realized.
    We do not have such information, and we can not get it from IDA or 
the World Bank. The information the World Bank supplies shows that 
program failure rates are highest in the poorest countries, perhaps as 
high as 70% in Africa in the recent past. Discouraging as these data 
are, they are suspect for at least two reasons. First, they are 
provided by the Bank's Operations Evaluations Department (OED). The 
head of this department reports directly to the Bank's directors, but 
his staff consists of Bank employees on loan to OED. Second, and more 
important, OED does most of its evaluations 6 months to three years 
after disbursement of the last payment on the loan or grant.
    On the public record, I asked President Wolfensohn of the World 
Bank why the Bank audits and reports soon after lending has been 
completed. Why does it not routinely audit performance to learn whether 
the project succeeded in raising living standards or improving the 
quality of life several years after funding stopped? He agreed that 
this was desirable and said that he had asked the same question. But 
nothing has been done in his seven years at the Bank. The Congress and 
the public ought to know what works well, what can be improved, and 
what should the Bank and IDA stop doing because it is ineffective or 
wasteful of scarce resources. That's why Congress should insist on 
independent, performance evaluation.
    Chairman Sarbanes, you led the Congress and the country toward 
improved accounting standards and transparency in the private sector. 
Should you not expect and require the same degree of transparency when 
we allocate the public's money for foreign assistance? Are not the 
poorest entitled to the protection that greater transparency would 
provide? Can we not shift emphasis to performance, not lending?
    There is evidence that the World Bank and IDA are ineffective. 
President Wolfensohn often shows a card listing the number of people 
living on less than a dollar a day. This is the Bank's measure of 
extreme poverty. Between 1987 and 1998, the number of people living on 
less than a dollar a day remained the same. The proportion of the 
population declined modestly, from 28 percent to 24 percent. This is 
not much of an accomplishment for an expenditure of about 200 billion 
current dollars.
    Last year the press reported on a memo written by the staff of one 
of the Bank's major divisions in response to a request from President 
Wolfensohn for a discussion by all divisions of the Bank's problems. A 
staff member sent me the memo. The memo is unsigned, but it states that 
it represents ``consensus views that emerged from discussions among the 
managers and staffs of the divisions.''
    A reader of the internal Bank memo gets a picture of an ineffective 
organization with low morale and uncertain direction.
    The memo lists five major problems at the Bank: the President's 
management and leadership style; an overload of institutional mandates 
and a lack of clear direction, problems at senior management levels; 
inadequate resources for the work; and the high degree of negativity 
among the staff.
    To amplify these charges, the memo says that the President's 
proposals ``while perhaps individually worthwhile, have tended to 
diffuse the Bank's focus. Their importance in individual countries is 
often unclear. The ideas have not been accompanied by adequate 
resources for implementation.''
    In other words, the Bank is not organized to assist countries to 
develop their economies and improve the quality of life for their 
citizens.
    Further, the internal memo charges, ``the Bank today has no focus 
and is driven by an evergrowing list of mandates imposed on it through 
a variety of means: President's favored subjects, board sentiments, 
public pressures, ideas generated by internal constituencies, and even 
fads. No initiative that starts as a pilot is ever considered a failure 
because of a lack of any honest evaluation.'' (Emphasis added.)
    I do not underestimate the difficulties in project evaluation. 
Money is fungible. Countries can offer their most attractive programs 
to IDA and the development banks but use the money to finance some 
marginal project that is difficult to identify. Evaluation can 
establish that children can read and do arithmetic, that water is 
potables, that inoculations for disease are carried out, and that 
sanitary sewers are available. It can not always show a direct link to 
IDA funding.
    No less important, project evaluation can both create incentives 
for improved performance and show that some programs fail repeatedly 
and should be abandoned. How can we expect to improve the living 
standards and quality of life of the poorest on the planet, if we do 
not learn what works and what fails? What lessons do we teach if we 
provide money to corrupt governments and do not ask whether the 
projects they proposed were completed, functioned, and contributed to a 
better quality of life.
    When traveling to countries that received IDA and Bank assistance, 
I have heard many stories of money wasted, money taken, projects never 
completed, schools without books, consultants paid handsomely but no 
apparent outcome. These are anecdotes, disturbing if true, but at best 
suggestive. The Congress should want more and should demand more. It 
should require performance evaluation to raise the standards of 
international aid and the living standards of the poor. With this 
proviso, I strongly support funding for IDA and the development banks.
    The United States should give generously when there is greater 
assurance that its contributions support effective programs, programs 
that raise living standards, increase productivity, and improve the 
quality of life for the unfortunate many for whom life remains ``nasty, 
brutish, and short.''

    Senator Sarbanes. Dr. Ayittey, we would be happy to hear 
from you.

 STATEMENT OF DR. GEORGE B.N. AYITTEY, DISTINGUISHED ECONOMIST 
       IN RESIDENCE, AMERICAN UNIVERSITY, WASHINGTON, DC

    Dr. Ayittey. Mr. Chairman and Senator Allen, first of all I 
would like to thank you for giving me this opportunity to 
testify before your subcommittee. I would like to make some 
short remarks, and then I would later on submit a much longer 
version for the record.
    I would like to make three points, the three points being, 
speaking specifically in reference to African World Bank 
policies, IDA policies in Africa, first of all I think you 
should know the Continent of Africa is in a mess. It is a 
tragedy. It is a sad story, and a tragedy in more ways than 
one.
    We are talking about a continent that had vast development 
potential. Its mineral wealth is immense, but the mineral 
wealth of Africa is not being utilized to lift its people out 
of poverty. This past February, Prime Minister Tony Blair 
warned that unless poverty in Africa is tackled vigorously, the 
continent will become a new source of international terrorism.
    Now, the second point which I would like to make, and I was 
somewhat touched by the testimony of the Under Secretary, James 
Taylor, and also some of the witnesses on the panel who want to 
help Africa, and I am sure that there are Senators who 
sincerely do want to help Africa, but past programs in Africa 
simply have not worked.
    I would like to give you some kind of an idea of the 
involvement of Western governments, donor governments, IDA, and 
international development banks. Since 1960, they have pumped 
in more than $400 billion into Africa; and the standard of 
living in Africa continues to deteriorate. Even the World Bank 
itself, 2 years ago, the World Bank came up with a report, and 
the report, the title of the report is, ``Can Africa Claim the 
21st Century,'' and I would like to quote a section of that 
particular report that says: ``Sub-Saharan Africa enters the 
new century with many of the world's poorest countries.''
    Now, it is a fact that many Africans, the vast majority of 
them are now poorer than they were in 1960. The irony is that 
the World Bank has been involved in Africa's development for 
the past three decades. Now, instead of admitting the 
ineffectiveness of its policies, the World Bank chooses to 
focus on phantom economic success stories. The reason why I am 
saying phantom economic success stories is because this list 
continuously shrinks, and some of the countries on this list 
simply vanish.
    In 1994, the World Bank came up with a report about 
adjustment lending in Africa. It evaluated the performance of 
29 African countries, 29, after spending $20 billion to support 
structural programs in Africa. And out of the 29, the World 
Bank said only 6 of them were successful. Now, 6 out of 29 
gives you a failure rate of more than 80 percent.
    Now, since 1994, the World Bank has added some other 
countries like Uganda. It has also added Guinea, Lesotho, 
Ethiopia, Eritrea, but even then within a very short period of 
time, Ethiopia and Eritrea were taken off the list because of 
the senseless civil war between those two countries. Now, 
Uganda is also reeling under huge bureaucratic red tape, and 
also the Danish Government has even suspended aid to Uganda.
    Now, of the success stories that the World Bank listed in 
1994, Ghana was one of them, Zimbabwe was one of them, and I am 
sure we are all aware of what is going on in Zimbabwe right 
now. Now, in the case of Ghana, the World Bank's director who 
is now leaving the country says that it was a mistake to list 
Ghana as a success story.
    Now, there is more. This success story 2 years ago was 
placed on HIPC, that is, the Highly Indebted Poor Country, so 
how can the success story in 1994 all of a sudden go into the 
intensive care unit on HIPC in the year 2000?
    There is also more. Two years ago, the IMF demanded a 
refund of $38.5 million. The IMF claimed that the Government of 
Ghana fraudulently obtained as a loan by providing the IMF with 
false information, which means that many of the recipients of 
IDA loans simply cooked their books in order to receive their 
loans.
    Now, the problem which disturbs many of the African people 
is that they have loans which have been taken by governments 
which do not represent the people. These governments do not 
represent the interests of their people, the welfare of their 
people, and do not respond to the needs of their people, and 
they are not accountable to their people.
    Now, in the case of Ghana, for example, the World Bank IDA 
loans exceeded $5 billion within that period from 1983 to 1992. 
Nobody knows what the money was used for. Now, I have heard 
that some of these loans are to be converted into grants. Maybe 
that might help, but if the loans are squandered, do we have 
any guarantee that the grants will not be squandered? And who 
will be held accountable?
    In the case of Ghana, finally we have had some 
accountability. The Deputy Finance Minister of the previous 
government was prosecuted and jailed for 8 years for 
squandering $1.2 million of World Bank loans.
    Mr. Chairman, there are many, many horror stories, and the 
African people are in pain. A lot of money has been borrowed on 
their behalf without them knowing what the money or the loans 
were used for. Now, I would recommend replenishing or 
reauthorization of IDA funding, provided certain conditions are 
met. One of those conditions, and this is a strong 
recommendation, is that the World Bank operates on the false 
premise that in many African countries there is something 
called a government which cares about its people, represents 
the interests of the people, and also responds to the needs of 
the people. This simply confutes reality.
    Now, what we have in many African countries is a pirate 
state, governments which are corrupt and squander money. We 
cannot hold them accountable. The African people cannot hold 
them accountable.
    Now, second, and I would like to make two brief comments in 
order to wrap up. Second, the loan agreements are often 
shrouded in secrecy. There needs to be some sunshine on this 
particular process so that at least the people would know what 
is being conducted behind closed doors on their behalf. And 
finally, there is a complete lack of accountability in country 
after country. What we find is no accountability in the 
disbursement and also in the use of these loans.
    Now, Mr. Chairman, I would like to remind you that there is 
a certain doctrine which was applied by the United States; it 
is called the Doctrine of Odious Debt. The United States itself 
in 1898 applied this doctrine to the Spanish Government, 
refusing to pay the debts owed by Cuba to Spain, arguing that 
the debt was contracted by the Spanish Government without the 
consent of the Cuban people.
    Now, there are angry African groups and organizations, 
especially in South Africa, who are arguing that many of the 
loans which are taken from the World Bank were done so without 
the consent of their people, and if so, if these loans are 
illegitimate, then the people should not be held accountable to 
repay those loans.
    Mr. Chairman, there is much that can be done to help 
Africa, but the old way simply will not work.
    Thank you.
    [The prepared statement of Dr. Ayittey follows:]

  Prepared Statement of George B.N. Ayittey, Ph.D.,\1\ Distinguished 
              Economist in Residence, American University
---------------------------------------------------------------------------

    \1\ The author, a native of Ghana, is an Associate Professor of 
Economics at the American University and president of The Free Africa 
Foundation, both in Washington. He is the author of Indigenous African 
Institutions (1991), Africa Betrayed, which won the 1993 H. L. Mencken 
Award for ``Best Book,'' and Africa in Chaos, which was published this 
year.
---------------------------------------------------------------------------
              the failure of world bank policies in africa
    Mr. Chairman, Ladies and Gentlemen. Thank you for the opportunity 
to testify before the Economic Affairs Subcommittee. As I understand 
it, the purpose of this hearing is to determine replenishing and 
reauthorizing Development Assistance funds to the World Bank, as well 
as U.S. contributions to the Asian Development Bank and the African 
Development Bank over the next three years. I would like to speak 
specifically in regard to World Bank programs and Africa's development.
                        africa's bleak prospects
    Africa is a sad story--a tragedy in more ways than one. The 
continent's development potential is vast. Its untapped mineral wealth 
is immense. As an old continent, it is the source of strategic 
minerals, such as tantalite, vanadium, palladium, uranium and chromium. 
It has the bulk of the world's gold, cobalt, diamonds, and manganese. 
Africa could well be the next and final frontier for roaring market-
based capitalism. Yet, paradoxically, a continent with such abundance 
and potential is inexorably mired in steaming squalor, misery, 
deprivation, and chaos. At the Organization of African Unity Summit in 
Lome, Togo, on July 10, 2000, U.N. Secretary-General, Kofi Annan, was 
blunt: ``Instead of being exploited for the benefit of the people, 
Africa's mineral resources have been so mismanaged and plundered that 
they are now the source of our misery.'' (Daily Graphic, July 12, 2000; 
page 5).
    On February 5, 2002, British Prime Minister, Tony Blair, warned 
that unless poverty in Africa is tackled vigorously, the continent 
could become the new source of international terrorism. ``More states 
would collapse into anarchy and mayhem,'' he added (BBC World Service, 
Feb. 6, 2002).
    There are many country horror stories, which, I am sure you know 
of. The Congo Basin is extremely rich in minerals but its people are 
yet to derive any substantial benefit from that wealth. Instead, they 
have slipped with indecent haste back to near stone-age existence. 
Provision of basic social services--such as education, health care, 
sanitation, clean water and roads--is non-existent. In the eastern part 
of the DRC, particularly in Goma, there is no government. Free-lance 
banditry and pillage are the order of the day.
    Equally mired in such Neanderthal existence are the people of 
Angola, Sierra Leone and vast stretches of the Niger Delta in Nigeria. 
Today, one of every five Africans lives in a country severely disrupted 
by conflict. And the wealth that once enriched Europe's colonial powers 
now fuels many of those wars.
    Independence and freedom did not bring the prosperity promised by 
the nationalist leaders. Poverty levels instead increased sharply in 
the post-colonial period. By the early 1990s, many Africans were 
economically worse off than they were at independence and prospects for 
the new millennium are bleak. Sub-Saharan Africa, consisting of 48 
countries, is the least developed region of the Third World despite its 
immense wealth in mineral and natural resources. Indices of human 
development have performed abysmally.
    Two years ago, the World Bank released a book with the title, Can 
Africa Claim the 21st Century. I would like to quote a section of that 
book:

          Sub-Saharan Africa enters the new century with many of the 
        world's poorest countries. Average income per capita is lower 
        than at the end of the 1960s. Incomes, assets, and access to 
        essential services are unequally distributed. And the region 
        contains a growing share of the world's absolute poor, who have 
        little power to influence the allocation of resources. 
        Moreover, many of the development problems have become largely 
        confined to Africa. They include lagging primary school 
        enrollments, high child mortality, and endemic diseases--
        including malaria and HIV/AIDS--that impose costs on Africa at 
        least twice those in any other developing region. One African 
        in five lives in countries severely disrupted by conflict. 
        Making matters worse, Africa's place in the global economy has 
        been eroded, with declining export shares in traditional 
        primary products, little diversification into new lines of 
        business, and massive capital flight and loss of skills to 
        other regions. Now the region stands in danger of being 
        excluded from the information revolution. (World Bank, 2000; 
        p.1).
                the world bank and africa's development
    The irony is that various Western governments, development 
agencies, and multi-lateral development banks (MDBs) have been involved 
in Africa's postcolonial development and have provided generous 
assistance, pouring in more than $400 billion since 1960 support 
Africa's development efforts. For its part, the World Bank has provided 
more than $50 billion to fund various projects and programs--in 
particular, Structural Adjustment Programs--over the past 30 years. 
However, the consensus everywhere is that World Bank programs in Africa 
have failed miserably in alleviating poverty in Africa. Adjustment 
lending has been a miserable fiasco in Africa. According to UNCTAD 
(1998), ``Despite many years of policy reform, barely any country in 
the region has successfully completed its adjustment program with a 
return to sustained growth. Indeed, the path from adjustment to 
improved performance is, at best, a rough one and, at worst, 
disappointing dead-end. Of the 15 countries identified as `core 
adjusters' by the World Bank in 1993, only three (Lesotho, Nigeria and 
Uganda) are now classified by the IMF as `strong performers' '' 
(p.xii). This year (2002), Nigeria decided to leave the World Bank 
program, although there is strong political pressure to return and 
Denmark suspended aid to Uganda, citing massive corruption, Uganda's 
involvement in the plunder of Congo's riches and a festering civil war 
in northern Uganda.
    To deflect attention from the ineffectiveness of its own programs, 
the Bank persists in focusing on phantom economic success stories in 
Africa. The Bank itself evaluated the performance of 29 African 
countries it had provided more than $20 billion in funding to sponsor 
Structural Adjustment Programs (SAPs) over a ten-year period, 1981-
1991. Its Report, Adjustment Lending in Africa, released in March 1994, 
concluded that only six African countries had performed well: The 
Gambia, Burkina Faso, Ghana, Nigeria, Tanzania, and Zimbabwe. Six out 
of 29 gives a failure rate in excess of 80 percent. More distressing, 
however, the World Bank concluded, ``no African country has achieved a 
sound macroeconomic policy stance.'' A year later, however, this number 
had shrunk. In The Gambia, a military coup toppled Sir Dawda Jawara on 
24 July 1994, quashing any hopes of economic recovery. Continuing 
political turmoil in Nigeria throttled economic reform. In the 
remaining four ``success stories,'' reform was on the verge of 
collapse--Ghana in 1995 and Zimbabwe in 1999 with President Robert 
Mugabe's ill conceived involvement in Congo's war for mercenary motives 
and violent seizures of white farmlands. On Ghana, the World Bank's own 
Operations Evaluation Department noted in its December 1995 Report 
that, ``although Ghana has been projected as a success story, prospects 
for satisfactory growth rates and poverty reduction are uncertain.''
    In 1998, four new countries were added (Guinea, Lesotho, Eritrea 
and Uganda) were identified as the new ``success stories.'' However, 
the senseless Ethiopian-Eritrean war, the eruption of civil strife 
following an army take-over in 1998, and the eruption of civil wars in 
western and northern Uganda have knocked off most of the new ``success 
stories.'' The following table provides the list of the African 
``success stories,'' whose economic performance can at best be 
characterized as ``mediocre'' to ``abysmal.''

                                  Table 2: The Success Stories--GNP Per Capita
                                                [In U.S. dollars]
----------------------------------------------------------------------------------------------------------------
                                           1980    1990    1991    1992    1993    1994    1995    1996    1997
----------------------------------------------------------------------------------------------------------------
Burkina Faso............................     260     290     310     280     230     200     210     230     240
Gambia..................................     430     320     330     350     350     340     340     340     350
Ghana...................................     430     390     410     430     410     360     350     360     370
Guinea..................................      --     460     470     480     500     520     540     560     570
Lesotho.................................     440     540     530     590     590     620     660     690     670
Nigeria.................................     710     270     270     280     250     230     220     260     260
Tanzania................................      --     190     180     160     170     160     170     180     210
Uganda..................................      --     340     260     200     190     190     250     300     330
Zimbabwe................................     950     920     910     740     670     650     650     710     750
 
----------------------------------------------------------------------------------------------------------------
Source: African Development Indicators, 1998-99; p.35.


    Of the 9 African ``success stories'' listed above, 6 of them had 
income per capita in 1997 that was less than in 1980. Declining income 
per capita, used as an indicator of standard of living, can hardly be 
considered a ``success.'' Prospects for the new millennium remain bleak 
(Schwab, 2001; p. 5).
    To be fair, the World Bank has periodically admitted that its 
projects and programs have performed poorly. In 1989, for example, it 
conceded that: ``There are countless examples of badly chosen and 
poorly designed public investments, including some in which the World 
Bank has participated. A 1987 evaluation revealed that half of the 
completed rural development projects financed by the World Bank in 
Africa had failed. A cement plant serving Cote d'Ivoire, Ghana, and 
Togo was closed in 1984 after only 4 years in operation. A state-run 
shoe factory in Tanzania, the Morongo Shoe Factory, has been operating 
at no more than 25 percent capacity and has remained open only thanks 
to a large government subsidy'' (p. 27).
    By the mid-1990s, the World Bank has undertaken more than 2,200 
projects in Africa with nearly all of them seriously undermined by poor 
Bank supervision, lack of domestic maintenance or neglect. Mr. E.A. 
Sai, member-Secretary of Ghana's Committee of Secretaries, echoed these 
observations: ``Apart from a few success stories in the management of 
public enterprises in Africa, such as in the Kenya Tea Development 
Authority, Botswana's Meat Commission, Tanzania's Electricity Company, 
The Guma Valley Water Company of Sierra Leone and Ghana's Volta River 
Authority, the record of state enterprises has been poor'' (West 
Africa, 16 May, 1988; p. 897).
    In September 2000, the World Bank again admitted that its policies 
have not worked. Acknowledging that its traditional prescriptions of 
balanced budgets, sound currency and free trade have failed to 
significantly reduce poverty around the world, the World Bank recently 
called for a fresh approach that puts equal emphasis on giving the poor 
more power and more income security in times of crisis (The Washington 
Post, Sept 13, 2000; p. E1).
                  world bank economic success stories
1. Ghana: A Fallen Star
    Ghana adopted the World Bank's Structural Adjustment program in 
1983, after inane economic policies of the regime of Fte.Lte Jerry 
Rawlings sent the economy reeling. Seduced by the charisma and rhetoric 
of Rawlings and the chance to snatch Ghana from the Soviet orbit, the 
West poured in billions. The World Bank, in particular, pumped more 
than $4 billion into Ghana, declaring the country an ``African economic 
star'' in 1993. Ghana was also the first country on President Clinton's 
itinerary, during his historic visit to Africa in 1998. By the year 
2000, Ghana's economy was in crisis.
    Ghana's income per capita in 1981, which economists take as an 
index of the average standard of living, was $410 when Rawlings seized 
power in 1981. In 2001, it was $360. Ghana's economy was in a coma and 
the World Bank-sponsored Economic Recovery Program (ERP) or structural 
adjustment a miserable failure. Inflation raged at 60 percent; 
unemployment hovered around 30 percent; interest rates had reached 50 
percent and the currency, the cedi had virtually collapsed. In 1981, 
the exchange rate was 2.85 cedis to the dollar; in 2001, it was 7,200 
cedis to the dollar.
    Fed by huge expenditures on security, corruption and wanton wastes, 
government expenditures had careened out of control. The distinction 
between government and Rawlings' ruling party (National Democratic 
Congress, NDC) funds had vanished and looting was open and brazen. Mr. 
Vincent Assisseh, the press secretary of the ruling party, built a 
multi-million dollar empire, acquired several mansions and a fleet of 
expensive automobiles. Even Rawlings himself, the Marxist 
revolutionary, cruised around in a Jaguar convertible.
    The regime, which preached World Bank gospel of ``accountability'' 
and ``transparency,'' never accepted responsibility for its failures, 
choosing to blame foreigners and ``external factors'' for the country's 
worsening economic crisis and even corruption. At the United Nations 
General Session in New York on September 8, President Jerry Rawlings 
blamed Western countries for much of the monumental corruption in 
Africa, saying they have a responsibility to curb the menace so as to 
promote good governance on the continent (Panafrican News Agency, 
September 8, 2000).
    At least 40 percent of World Bank loans and Western aid were 
squandered. According to Goosie Tanoh, who broke with the ruling regime 
to form his own National Reform Party, ``many grants from Japan, 
Canada, USA and Britain, given to NDC party functionaries, were 
misapplied or misappropriated'' (The Ghanaian Chronicle, August 14, 
2000). There were cases upon cases. I have provided details in my 
lengthy report but one stands out.

   Court Computerization Program: The World Bank granted a loan 
        of $1,297,500 to help disseminate all legal information and 
        court cases through computerization of Ghana's court system. 
        The project could not be implemented and therefore the 
        coordinators could issue an impact report.

          The new Ghanaian government successfully prosecuted the 
        former Deputy Minister of Finance, Mr. Victor Selormey, and 
        jailed him for 8 years for misappropriating the money. The 
        money was said to have been transferred to Dr. Frederick Boadu, 
        a Consultant in the United States, and there was no record to 
        show that the consultant had been contracted to work on this 
        project for either the Ghana government or the World Bank. 
        (Source. Serious Fraud Office Report, Ghanaian Times, and Daily 
        Graphic)

    In March 2001, the incoming Kufuor administration place Ghana on 
the Heavily Indebted Poor Country (HIPC) list. In the same month, the 
IMF demanded a refund of all loans and grants, totaling $38.5 million, 
given to the Ghana government between August and September 2000. The 
refund is a penalty the country has to pay for providing false 
information.
    On July 5, 2002, the outgoing World Bank Resident Director in Ghana 
admitted that the bank probably made a mistake in tagging Ghana a 
``Star Pupil'' at a time when the country was just beginning to 
restructure its economy. ``One of the mistakes our institution made is 
building these tags. Ghana was reported as a Star Pupil between 1985 
and 1991. It is because Ghana chose to adopt the same policies that the 
bank and the IMF were advocating all the time. There was a period in 
1992 to 1996 when that status changed a lot. Ghana abandoned some of 
the medicines. Classic structural adjustments were abandoned,'' 
according to the Director (Public Agenda, July 5, 2002).
2. Uganda: Teetering
    Relations with the World Bank under the Museveni regime were 
relatively satisfactory. Uganda's macroeconomic performance showed an 
average real growth rate close to 7 percent per year. The Bank of 
Uganda reported that the rate of inflation dropped to 2.4 percent per 
annum by June 1993, but rose suddenly to 4.1 percent in December of the 
same year. Substantial progress was however made in adjusting the 
economy.
    Recent information is that a bloated government with a huge 
expenditure characterizes Uganda. Contrary to efforts to implement 
measures for improving the efficiency and transparency of the 
privatization process, progress in this area was significantly slow, 
including measures for reforming the ministries and the civil service. 
Revenue receipts have been inadequate to meet rising expenditures. 
Indeed, tax collection was characterized by highly corrupt and 
inefficient tax administration. The budget recorded deficits largely 
reflecting ad hoc expenditures stemming from defense spending. The 
banking system also came under severe pressure due to weak prudential 
regulations and supervision. Those insolvent ones were ultimately 
closed. In an uncertain economic environment reflecting poverty, modest 
gains in human and social development, Uganda is now ravaged by the 
HIV/AIDS epidemic. This has led to a reduction in life expectancy that 
has adversely affected the working population, and created a large 
number of orphans, as well as great pressure on the government's health 
budget.
    Corruption is rampant in Uganda, not to mention the involvement of 
Ugandan soldiers in the plunder of the Congo. In early September 1999, 
a senior Ugandan police officer appeared before a commission of inquiry 
into police corruption in Uganda. He explained that he could not 
account for a large chunk of the money allocated to the police because 
such payments were regularly passed on to the Ministry of Defense. 
``The commission summoned the head civil servant at the defense 
ministry, who promptly corroborated the story, saying the defense 
ministry disperses its expenditure among other ministries, because the 
government does not want trouble from aid donors who insist on limits 
to military spending'' (The Economist, Oct. 9, 1999; p. 52).
                            recommendations
    Mr. Chairman, Ladies and Gentlemen. Let me reiterate that we cannot 
pin the blame for Africa's current economic mess on the World Bank and 
the IMF. Much of the blame resides with African leaders and 
governments, who pursued wrong-headed policies in the post-colonial 
period. Specifically, the vast majority established statist economic 
systems and one-party state political systems under the guise of 
socialism. The statist economic systems entailed state-ownership of 
business enterprises, massive government intervention in the economy 
and the institution of a plethora of government regulations and edits. 
The political systems admittance of no democratic pluralism, the 
banishment of opposition parties, intolerance of dissent and the 
ultimate degeneration into dictatorships. These defective systems were 
in a large part, responsible for the economic crisis that emerged in 
the early 1980s. However, in helping Africa to manage or resolve this 
crisis, the World Bank and the IMF have made matters worse.
    I am not suggesting that the World Bank and the IMF should pack up 
their bags and leave Africa. Given their record in Africa, this would 
probably not be a bad idea. However, if they are to continue to operate 
in Africa, then their own approach to Africa needs a major ``structural 
adjustment'' or reform. This is needed in three key areas.
1. Flawed Presumptions
    Somewhat the World Bank persists in a rather naive presumption--in 
the teeth of all evidence to the contrary--that there exists in a loan-
recipient African country a ``government'' that represents the people, 
cares for the people, responds to their needs, and is accountable to 
them. This confutes reality. What exist are ``pirate states''--a 
government hijacked by a phalanx of kleptocrats and megalomaniacs who 
employ the institutions of the state to enrich themselves, their 
cronies and kinsmen, excluding everyone else. The richest persons in 
Africa are often the heads-of-state and their ministers. The chief 
bandit is often the head of state himself. Congo's Mobutu Sese Seko was 
a leading example when he appropriated to himself billions of dollars 
of World Bank and foreign aid funds. The Bank ought to be aware of 
this.
    Most African governments were simply not interested in economic 
reforms when these became urgent because their efficient implementation 
would strip them of their power to allocate foreign financial resources 
to themselves, their cronies, and relatives. For Western donors and 
MDBs to continue to believe, that dishonest African governments are 
capable of reform is only to set themselves up to be duped. African 
governments restructure not to save their economies but their regimes. 
Further, restructuring proceeds in cycles, aborted when the crisis 
abates and reinstated upon reemergence (Sudan, Equatorial Guinea, 
Zaire, and Liberia). Even during restructuring, measures are often 
implemented perfunctorily without the conviction and the dedication 
needed to carry them through.
2. Loan Agreements Shrouded in Secrecy
    The most infuriating aspect of World Bank loan agreements with 
corrupt and despotic African governments is that the loan agreements 
are often conducted in secret. World Bank directors meet with high-
ranking African government officials to conduct negotiations behind 
closed doors. The media is not invited; nor is the public--or the 
people on whose behalf billions of dollars are being borrowed and who, 
ultimately, are liable to repay the loans. This must change.
    The loan grant process needs to be opened up and information 
provided to the public to learn more about Bank policies and the 
projects that it funds and how these impact their lives. Further, it is 
recommended that, in non-democratic African countries, the Bank should 
hold a public hearing before approving loans for specific projects.
3. Lack of Accountability
    In country after country in Africa, there has been no 
accountability in the use of World Bank loans. No single government in 
any African country--not even star pupil Ghana--has been called upon to 
account for the loans it took from the World Bank. Billions in World 
Bank loans have been squandered in Africa and rarely anyone is held 
accountable and prosecuted. (Victor Selormey's case in Ghana appears to 
be the first.) This is an outrage. Yet, the African people must 
shoulder the responsibility of paying back these loans.
    Sir, some African groups and organizations are demanding that much 
of Africa's debt to the World Bank be canceled. Some groups are even 
more irate, demanding a repudiation of Africa's debt. They claim that 
it is immoral to demand repayment of loans that did not benefit the 
African people--loans that the World Bank knew were being 
misappropriated. Take the case of Zaire--now the Democratic Republic of 
the Congo. These civil organizations argue that Zaire's $14 billion 
national debt should be treated as Mobutu's personal debt. Foreign 
creditors should hold Mobutu personally liable and go after his assets. 
The Congolese did not benefit from those foreign loans. Neither did 
they give Mobutu any authorization to contract any foreign loan on 
their behalf. The late Julius Nyerere, ex-head of state of Tanzania, 
had this to say on Zaire's debt in an October 9, 1997 speech at the 
University of Edinburgh:

          The new Government of the Democratic Republic of the Congo, 
        formerly ZAIRE, has inherited an external Debt of $14 billion. 
        That country is totally dilapidated. That money did almost 
        nothing for the people of the Congo. It was stolen by Mobutu 
        and his close friends with the assistance or connivance of his 
        American and European Allies. We all know where that money is; 
        not in the Congo, but in Europe, in the form of cash or 
        property. It is being used in Europe, to make money in Europe. 
        Is it not IMMORAL to ask the poor people of the Congo to pay 
        that Debt?

    What is being applied here is an international legal instrument 
known as the ``doctrine of odious debts.'' Odious Debts is about a tax 
revolt. ``Third World's debts were accumulated without public knowledge 
and consent, with most people benefiting not one whit. Having paid once 
with their environment as the loans financed destructive development 
projects--among them hydro dams flooding rainforests and irrigation 
schemes destroying farmland--the Third World populace finds odious the 
proposition that it pays one more'' (Adams, 1991, inside flap). As 
Patricia Adams of Probe International, a Toronto-based environmental 
group, charged: ``In most cases, Western governments knew that 
substantial portions of their loans--up to 30 percent, says the World 
Bank--went directly into the pockets of corrupt officials, for their 
personal use'' (Financial Post, May 10, 1999).
    This doctrine originated in 1898 when the Americans captured Cuba 
from Spain in 1898, the Spanish demanded that the U.S. repay Cuba's 
debts. The U.S. refused, arguing that the debt had been ``imposed upon 
the people of Cuba without their consent and by force of arms . . . The 
creditors, from the beginning, took the chance of the investment'' (New 
Internationalist, May 1999; p. 23). The proceeds of the debt prevented 
the Cuban people from revolting against Spanish domination. ``They are 
debts created by the Government of Spain, for its own purposes and 
through its own agents, in whose creation Cubans had no voice,'' the 
U.S. said (Financial Post, May 10, 1999).
    The doctrine was first applied in 1923 when the Royal Bank of 
Canada sought to recover debt from a new government in Costa Rica in a 
landmark case, Great Britain v. Costa Rica. The new Costa Rica 
government successfully argued that the debt had been incurred by the 
former dictator, Frederico Tinoco, and not by the country's people. 
Chief Justice Taft of the U.S. Supreme Court, sitting as an arbitrator, 
agreed that the debt was not legitimate because ``the Royal Bank of 
Canada knew that this money was to be used by the retiring president, 
F. Tinoco, for his personal support after he had taken refuge in a 
foreign country'' (Financial Post, May 10, 1999). Thus, ``If a despotic 
power incurs a debt not for the needs or interest of the state, but to 
strengthen its despotic regime, to repress the population that fights 
against it . . . this debt is odious to the population of the state,'' 
said the doctrine. ``The creditors have committed a hostile act with 
regard to the people, they can't therefore expect that a nation freed 
from a despotic power assume the odious debts, which are the personal 
debts of that power,'' it added.
    This principle is being resurrected in South Africa, which is 
laboring under a debt of $71 billion which is expected to reach $110 
billion by the turn of the century. Millions of South Africans lacking 
basic services such as housing, decent schools and hospitals toil daily 
to pay back the billions of dollars borrowed by former apartheid 
regimes to oppress them. When apartheid fell in 1994, it left behind a 
debt which is now the second largest component of South African annual 
expenditure after education. In the 1997/98 budget, debt service 
payments were projected at $8.8 billion. But the Alternative 
Information and Development Center (AIDC), a non-governmental 
organization based in Cape Town said South Africans should not shoulder 
the burden and be penalized for the debts of a system that oppressed 
them. In June 1997, AIDC launched a campaign against this odious debt. 
``Our targets will include international financiers such as the World 
Bank and the IMF,'' says Brian Ashley of AIDC, who plans to make a 
submission on South Africa's ``odious debts'' to the Truth and 
Reconciliation Commission. The TRC's Christelle TerreBlanche says the 
Commission is willing to listen to the AIDC submission'' (The African 
Observer, 15-21 May 1997, 7).
    In South Africa, apartheid was defined by the U.N. as ``a crime 
against humanity.'' By 1982, as the campaign for international 
sanctions grew, lawyers for U.S. banks publicly warned that a majority 
government might not repay apartheid debts: ``If the debt of the 
predecessor is deemed to be `odious' and the debt proceeds are used 
against the interests of the local populace, then the debt may not be 
chargeable to the successor.'' (New Internationalist, May 1999; p. 21).
    Archbishop Njongonkulu Ndungale, who took over the TRC after Bishop 
Desmond Tutu, argued that: ``South Africa's foreign debts were largely 
incurred under the apartheid regime to suppress the majority 
population. Thus, they should be declared odious and written off'' 
(Financial Post, May 10, 1999). Indeed, South Africa itself set an 
example when its first black government took office. It canceled 
Namibia's debt to South Africa. ``We did not ask whether the debt was 
payable or unpayable. Nor did we impose any condition on our neighbor. 
We merely declared those debts as immoral, odious debts incurred while 
Namibia was occupied by the apartheid regime,'' said Archbishop 
Ndungane (Fianancial Post, May 10, 1999).
    Earlier in 1999, the Latin American and Caribbean Jubilee 2000 
Coalition described the foreign debt of member nations as 
``illegitimate because in large measure, it was contracted by 
dictatorships, governments not elected by the people, as well as by 
governments which were formally democratic but corrupt. Most of the 
money was not used to benefit the people who are now being required to 
pay it back'' (Financial Post, May 10, 1999). activist want legitimate 
debts to be repaid, illegitimate debts ones repudiated.
    Loans should not be granted to just ``any'' government. If the 
World Bank is not willing to uphold accountability, then the African 
people themselves would do so by repudiating loans taken on their 
behalf without their consent or approval.
    Thank you.

    Senator Sarbanes. Thank you. Senator Allen has another 
engagement. I am going to yield to him first so he has an 
opportunity to ask his questions.
    Senator Allen. Thank you so much, Mr. Chairman, and thank 
you all, each one of you, for your testimony and your insight. 
It is very beneficial to us.
    I liked what you said, Mr. Orr. The bottom line is, the key 
is private sector development. If you do have private sector 
development, property rights, contractual rights, and so forth, 
every one looks at those as economic rights, but they also are 
political rights.
    And Ms. Atkinson, thank you for your testimony. The point 
of all this that I gleaned from it is, while there are varying 
degrees of commentary and views here, they are all supportive 
of this proposal, and that is very, very important, regardless 
of the past, regardless of some allegations and assertions that 
money has been misspent in the past, and so forth. All of your 
testimony was very helpful to us.
    I would like, I guess, to ask you, Reverend Beckmann, in 
your four points, you were mentioning all of your support, and 
it kind of fits in with what Dr. Ayittey was mentioning, and 
you are working on hunger as a primary focus. Here you have a 
country in Africa that has people starving in it. We are trying 
to provide American grain to them, and they deny it to their 
people because it is a hybrid grain that they do not like. Can 
you explain the logic of such a regime?
    Mr. Beckmann. Well, that has been an issue recently. I 
think it is a little bit more complicated. There is a big 
disagreement between the United States and Europe on the issue 
of agricultural biotechnology, and some of these countries 
export to European markets. Their agriculture goes much more to 
European markets than to U.S. markets, and they have a 
commercial interest in being genetically modified [GM] GM-free, 
because a lot of European governments and European consumers 
will buy their stuff if they are a GM-free country.
    Senator Allen. Was this grain going to be used for seed, or 
was it going to feed starving people?
    Reverend Beckmann. It can be used for seed, so one reason 
for their concern about the GM corn in the U.S. shipments was 
that it then makes it difficult for them to say to their 
European markets that they are GM-free. Another part of the 
debate is that, Europeans see this as a U.S. move to spread the 
use of agricultural biotechnology, so there was some of their 
voice in the criticism of the U.S. grain.
    Just to complicate the issue a bit more, one State 
Department staff person told my staff that they saw this as a 
good opportunity--to mix some GM grain into those shipments to 
demonstrate to the Africans that it is not dangerous. Well, 
when they are flat on their back, when they have got hungry 
people, is that the time to carry on that debate? So there are 
two sides to the story.
    On the other hand, Bread for the World has done a lot of 
work to think about agricultural biotechnology and hunger in 
Africa, and our considered view is that biotechnology holds 
real promise for a lot of African farmers. It is important not 
just that they take it in a grain shipment, but that they have 
the capacity to do the research, to do the extension, and to 
make their own safety judgments.
    We are broadly supportive of the dispersion of this new 
technology. We think it can help to reduce hunger in Africa. 
But the current controversy is a little bit more complicated 
than thinking they are obtuse, or wondering how they could 
possibly not take our corn. There is more to it than that.
    Senator Allen. I knew there was, and I knew the Europeans 
were a concern. I just wanted you to say it, since you provide 
bread to the world, and in your testimony you apparently find 
genetically modified, which is a new term for hybrid corn, 
which in many cases would require less insecticides, or 
pesticides, and other aspects of some drought-resistant crops, 
that as far as you are concerned it is safe and nutritious.
    Reverend Beckmann. Obviously, there are concerns about 
environment and health, and different countries will handle 
those differently. But we think that there is a lot of 
potential for biotechnology in African agriculture, so it is 
important to give them the capacity to do the research, 
extension, and also to have systems so that they can say to 
their own people, ``We have looked at this, and we think it is 
safe for Uganda to use biotechnology in bananas'' or whatever.
    Senator Sarbanes. Have the Europeans been better about 
taking African agricultural products than we have?
    Reverend Beckmann. I do not think so. It is just proximity. 
They are closer. Much more of Africa's agricultural products go 
to Europe. Well, there are, of course, trade restrictions in 
agriculture. I am not sure how much of the difference is due to 
that. I will check and get back to you, Senator.
    Senator Allen. Dr. Ayittey, following up on what Reverend 
Beckmann was talking about, I think it is great, and it follows 
in with what you did, Mr. Chairman, as far as the transparency 
of the financial conditions of companies, that we ought to not 
just have us all theoretically talking about the reforms and 
private property and the rule of law and so forth. Let the 
people of those countries know what is going on to hold their 
so-called leaders accountable for their actions. That is a 
great comment that follows in what Dr. Meltzer mentioned as 
well in his compliments of you.
    I would ask Dr. Ayittey, you were talking about some of, in 
your view, the failures of various countries in Africa, and 
really while you were critical of some of the past evaluations, 
it seemed to me you are supportive of these ideas of 
performance and results and measurement to make sure that 
countries are actually making progress. Could you share with us 
any countries that you think in Africa that could benefit from 
performance-based lending, and the Bush administration's soon 
to be released Millennium Challenge Account? Give us some hope, 
hopefully.
    Dr. Ayittey. Please do not misinterpret my comments as 
being pessimistic. The thing is, many Africans will realize 
things have gone wrong and we are not trying to pin the blame 
on the World Bank. Our governments pursued misguided policies. 
We set up defective economic and political systems in the post 
colonial period, so these governments and leaders are likely 
responsible for the mess in Africa.
    Now, the positive, and the hope here is that when Africans 
themselves realize that their leaders and governments have made 
mistakes, then the people themselves will demand 
accountability, and all put in place measures by which they can 
hold these governments accountable and also bring about the 
solutions. The solutions have to come within Africa itself, not 
imposed from the outside.
    So it is nice to hear all this talk about performance-based 
results, that is fine, but the other half of the story is in 
Africa, and the other half of the story is that people cannot 
hold their leaders or governments accountable. Nobody knows who 
borrowed what or what the money is used for, and this is why 
several organizations now, some of them are demanding that the 
debt be canceled, or the debt be repudiated, because there are 
many people in Africa who are angry, angry. Look, Africa's 
total foreign debt right now is $350 billion.
    Take the case of Congo, or Zaire, for example. When Mobutu 
was there, this man had a personal fortune of $10 billion. His 
country's foreign debt was $7 billion. That man alone could 
have written a personal check to pay off his country's entire 
foreign debt. Now, look at Zaire or Congo right now. The 
country has degenerated into Stone Age existence. Must the 
Congolese people be held responsible to repay the debt of 
Mobutu, for example?
    So while it is nice to hear that the U.S administration and 
Treasury is talking about ways in which they can reform and, of 
course, ensure that performance-based results are actually 
implemented, the other part in my view also lies in Africa, and 
I think this is why we have to find a way by which we can 
either empower the African people so they can demand 
accountability from their own governments, or also put in place 
in Africa measures by which we can ensure that the grants are 
utilized effectively.
    Senator Allen. Thank you. Thank you, Mr. Chairman. If I may 
be excused, I have a meeting at noon, although for your 
testimony and for your concern I want to thank you. I think 
there may be slight variations, but I think we are all going 
toward the same goal, and I think this is a positive step 
forward.
    Thank you, Mr. Chairman. Thank you all.
    Senator Sarbanes. Thank you very much, Senator Allen.
    To what extent do the World Bank and these other 
multilateral institutions work through the NGOs in carrying out 
their programs? Does anyone on the panel know the answer to 
that?
    Reverend Beckmann. When I was in the bank, my last job at 
the bank was to lead the bank's NGO unit. In fact, when I 
started working on NGOs in the bank there was virtually no 
relationship between the bank and the NGOs, and in retrospect 
it is just incredible how little bank staff knew about civil 
society. But there has been a lot of change. The efforts we 
were making in the bank at that time worked like gangbusters, 
partly because--we did not know it--we were getting up on a 
surfboard just before the wave came in. The wave was the 
democratization of developing countries.
    All over the world--also in some African countries--a lot 
of people worked really hard to get more democratic 
governments. If the World Bank was working in Mobutu's Zaire, 
the notion that a World Bank official was going to go talk to a 
church leader was crazy, because the church leader was probably 
considered subversive in Mobutu's Zaire, or in other 
dictatorships at the time.
    But as developing countries have become more democratic, 
many governments want to involve their people and organizations 
of civil society. So they have welcomed help from the World 
Bank and other aid assistance agencies in engaging 
organizations of civil society--NGOs and just ordinary people--
in projects--in implementation and, maybe more importantly, in 
design and monitoring. That is, helping to think about what 
kind of government program is really going to work, and then 
monitoring that it gets carried out in a good way.
    Since about 1980 the bank has moved light years in its 
engagement with NGOs, most importantly nongovernmental 
organizations in the developing countries. There is still a 
long way to go. I was on a telephone conversation recently with 
a number of U.S. PVOs, and they are still talking about all 
kinds of frustrations. The bank is bureaucratic. They find it 
hard to work with the bank.
    I was struck--these are big institutions like World Vision 
and Save the Children, and they still have trouble working with 
the bank. But I do not think it is for lack of trying on either 
side. The bank's response to the recent complaints of U.S. PVOs 
was right away, ``Let's set up a joint task force and look at 
specific problems.'' Why do these organizations have trouble 
working with the bank?
    I am pretty optimistic that the bank will continue to move 
in this direction of opening the doors to public participation 
in thinking and monitoring and carrying out programs. This is 
the direction of change that I think will do the most to 
improve the quality of the bank's development results.
    Senator Sarbanes. Did you want to add something?
    Ms. Atkinson. I agree with much of what Reverend Beckmann 
has said. I thought your question was also aimed a little bit 
at, to whom does the World Bank lend its money, I mean, who 
actually gets the money? And generally that is still to 
governments, or they may be governments that are lower than 
Federal level in some cases, to states and so on.
    And so I agree with Reverend Beckmann that the critical 
role of the NGO relationship is to help in the monitoring, and 
the kind of pressures toward better governance that we all 
spoke about before, when the people know what money is being 
borrowed, what it is supposed to go toward, and has some 
involvement in seeing whether it has been well spent, and the 
results. And I think I agree, there has been a transformation 
in the role of the NGOs working with the bank, as with the 
donor countries.
    Dr. Meltzer. Can I add a note of caution here? There are 
two down sides to this. Much as one can recognize that the NGOs 
play a very useful role in many areas, they are not the local 
people, and they often have their own objectives that may 
differ very much from what a democratic society might choose to 
do, and they tend to emphasize single issues that they are most 
concerned with that may not be the most important issue to the 
people who live in the country. That is one.
    The second is, there is not any substantial evidence of 
increased improvement in the effectiveness of the programs over 
these years. There are some numbers that have improved, but it 
is not clear that those number improvements that the World Bank 
reports actually represent real, on the ground improvement in 
the quality of programs or their effectiveness.
    Senator Sarbanes. Do you all address the same criticisms 
toward the Asian Development Bank and the African Development 
Bank that you addressed toward the World Bank here this 
morning?
    Ms. Atkinson. Well, we may know less about those. I think 
each of us probably for various reasons may know less about 
those institutions. I think that the World Bank's IDA is the 
longest running, has had probably the best record, mixed as 
that might be, and I think sometimes there are joint programs, 
so Professor Meltzer referred to some of the difficulties that 
there have been in the African Development Bank, in the African 
Development Fund in the past, and there are now steps being 
taken to address that. So I would think the record of IDA is 
probably somewhat better than those of the others, but they are 
all operating in a fairly similar way.
    Dr. Meltzer. I agree with Caroline to a degree. The African 
Development Bank had a very serious problem about the 
effectiveness, the corruption issue. Mr. Kabajj, who has taken 
leadership of the African Development Bank in the last few 
years, has really done a lot, I think, quite a superhuman 
effort to clean up some of those problems. They still have a 
long way to go, but they certainly understand their problem and 
are headed in a better direction.
    I think, probably on a pure efficiency basis, it was the 
conclusion of my commission that the Asian Development Bank on 
a pure efficiency basis, that is, making sure that the money 
goes where it is supposed to go and all that, is probably the 
best of the group. It has other defects that one might comment 
on, but probably in terms of making sure that the dollars or 
yen end up where they are supposed to end, they probably do the 
best job of that, and do the most extensive monitoring of their 
programs.
    Dr. Ayittey. The African Development Bank, it is nice to 
get some reforms under Kabajj. Before, it was just a hopeless 
organization. It was financing specific projects, but it had no 
eligibility criteria. If you were an African country, they 
would loan money to you, and much of the loans that were loaned 
out were not paid back.
    Nigeria, for example, owes a huge amount to the African 
Development Bank, and a lot of their projects were also sort of 
placed in countries which were subsequently engulfed, like 
Liberia and Sierra Leone, engulfed in civil war, so the 
projects never showed a return, or did not even become 
sustainable, so there were a lot of problems there.
    Senator Sarbanes. Did you want to add something?
    Mr. Orr. Just to say, Mr. Chairman, that people I know who 
have been to the African Bank recently have come back 
expressing a new sense of optimism that is felt on the staff 
that the African Bank has turned the corner. They have adopted 
a new strategic plan which many people think will help them a 
great deal in the future. They are beginning the process of 
loan monitoring, and trying to increase their effectiveness in 
the way the other institutions are, so I think it is heading 
toward a brighter future.
    The Asian Fund and the Asian Bank are doing very well, as 
Dr. Meltzer said. It still has a reputation of being a project-
driven institution, and it is very good at projects. It lags 
behind some of the other institutions, however, in some of the 
newest priorities like transparency, focus on governance, some 
of the other current priorities in this area.
    Dr. Meltzer. You should know, Senator, we have the least 
influence over the Asian Development Bank because of our share 
of ownership, and it is very much driven by the Ministry of 
Finance in Tokyo.
    Mr. Orr. We probably have the least influence in that 
institution, too, because the Congress, the appropriators cut 
their funding as a matter of course almost every year to gain 
$50 or $100 million that they need for some other program.
    If there is one message--I know I am talking to the wrong 
committee here, but if there is one message I could leave with 
the Congress today, the best way to improve U.S. effectiveness 
at these institutions, or U.S. influence at these institutions, 
would be to clear up the arrears, as Secretary Taylor asked, 
and make sure that the United States approves authorization and 
appropriation measures on time.
    It is ironic, and the Europeans particularly are unhappy 
about this, that the country that makes the most demands on 
these institutions in terms of adopting new strategies is often 
the country that is the slowest and the latest to approve 
funding measures.
    Senator Sarbanes. Well, it just hands others a very 
effective weapon to use against us in these discussions that 
take place in these institutions, and it extends across the 
board. We have this extraordinarily severe problem at the 
United Nations, of course, and we have the French and the 
British actually sort of scoring off the United States because 
we were lagging so far behind.
    I agree with you completely, once we enter into the 
agreement, and undertake to do it, and we approve all of that, 
then we ought to deliver on the obligation that we assume. It 
is a different question from how much more of an obligation we 
ought to undertake the next time there is a replenishment and a 
negotiation. Those are two separate questions. But once we sign 
on and we are aboard along with the others, then we ought not 
to be the laggards. I think that puts us in an extraordinarily 
difficult and awkward position.
    Reverend Beckmann. Sir, referring back to your question to 
Secretary Taylor about the grants proposal, in my judgment the 
real issue was that some of our European allies see us as 
consistently stingy and laggard in paying up when we have made 
commitments. Our overall level of development assistance as a 
proportion of national income is so low compared to them that 
they get tired of the United States popping in with new ideas.
    The idea of IDA grants came up in a hurry. The President 
was going to the G-8 in 2001. The administration needed 
something for him to talk about that wouldn't really cost much 
money. They put the idea of IDA grants on the table, and the 
Europeans called them on it and said ``Look, this is going to 
cost money 10 and 20 years out. You are getting credit for 
being liberal or progressive, and 10 or 20 years out we are 
going to be the ones picking up the check.''
    I think that was the real issue. It was a proposal to be a 
little bit more generous now at the expense of later costs. The 
United States came back later and said, ``Look, we will agree 
to an 18-percent increase in this replenishment, and we have 
this idea for the Millennium Challenge Account.'' That changed 
the framework of the debate and helped us get to an agreement 
on IDA grants.
    Senator Sarbanes. Well, this has been a very helpful panel. 
We very much appreciate your testimony, and also the prepared 
statements. Thank you all very much. The committee stands 
adjourned.
    [Whereupon, at 12:30 p.m., the subcommittee adjourned, to 
reconvene subject to the call of the Chair.]

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