[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                       WORLD BANK LENDING TO IRAN

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 29, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-59


92-903              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director

 Subcommittee on Domestic and International Monetary Policy, Trade and 
                               Technology

                   PETER T. KING, New York, Chairman

                                     CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice         BERNARD SANDERS, Vermont
    Chairman                         MELVIN L. WATT, North Carolina
JAMES A. LEACH, Iowa                 MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware          BARBARA LEE, California
RON PAUL, Texas                      PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         BRAD SHERMAN, California
DOUG OSE, California                 DARLENE HOOLEY, Oregon
JOHN B. SHADEGG, Arizona             LUIS V. GUTIERREZ, Illinois
MARK R. KENNEDY, Minnesota           NYDIA M. VELAZQUEZ, New York
TOM FEENEY, Florida                  JOE BACA, California
JEB HENSARLING, Texas                RAHM EMANUEL, Illinois
TIM MURPHY, Pennsylvania
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 29, 2003.............................................     1
Appendix:
    October 29, 2003.............................................    29

                               WITNESSES
                      Wednesday, October 29, 2003

Clawson, Patrick, Department Director, The Washington Institute 
  for Near East Policy...........................................    18
Schuerch, Hon. William E., Deputy Assistant Secretary, Department 
  of the Treasury................................................     6
Takeyh, Ray, Professor of National Security Studies and Director 
  of Studies, Near East and South Asia Center, National Defense 
  University.....................................................    16

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    30
    Emanuel, Hon. Rahm...........................................    31
    Clawson, Patrick.............................................    33
    Schuerch, Hon. William E.....................................    37
    Takeyh, Ray..................................................    41

 
                       WORLD BANK LENDING TO IRAN

                              ----------                              


                      Wednesday, October 29, 2003

             U.S. House of Representatives,
                       Subcommittee on Domestic and
                             International Monetary Policy,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[chairwoman of the subcommittee] presiding.
    Present: Representatives Biggert, Maloney, Sherman, Hooley, 
Gutierrez, Frank (ex officio) and Emanuel.
    Chairwoman Biggert. [Presiding.] This hearing of the 
Subcommittee on Domestic and International Monetary Policy, 
Trade and Technology will come to order.
    Without objection, all Members' opening statements will be 
made a part of the record. The policy is that the subcommittee 
Chair and Ranking Minority Member are recognized for 5 minutes 
each. All of the Members are recognized for 3 minutes each and 
we will alternate between the majority and the minority.
    Mr. Frank. I ask unanimous consent to switch time 
allotments with the gentleman from California.
    Chairwoman Biggert. Without objection.
    Mrs. Maloney. Madam Chairman, also I would like to give my 
remaining time to the gentleman from California, since he 
worked so hard to secure this hearing. I will probably just be 
talking 3 minutes.
    Chairwoman Biggert. Without objection.
    Good morning. We meet here today to discuss the World 
Bank's lending to Iran. In particular, we will take a look at 
whether U.S. objectives and priorities are best served through 
the current policy of opposing World Bank loans to Iran. The 
issue is somewhat complicated by the fact that while the United 
States holds the largest voting bloc on the board of Directors 
of the World Bank, we do not hold the majority of the shares. 
So the first point to keep in mind is that we cannot alone 
direct or dictate the bank's lending decisions with respect to 
Iran or any nation.
    The second key point is that the World Bank's charter 
requires that lending decisions be based solely on economic 
considerations and not on political factors. Views also differ 
on whether the World Bank is the appropriate venue or effective 
mechanism for the conduct of U.S. foreign policy. This is 
especially questionable with respect to Iran, where the 
proportion of World Bank lending in relation to the country's 
economy is minimal; $42 million in funds disbursed to a country 
with a GDP of $115 billion.
    Beyond these complications are the more important issues 
related to our national security. There is no question that 
Iran is the leading state sponsor of terrorism in the world. 
Since 1996, the United States Executive Director to the World 
Bank has been required to vote against any lending to any 
terrorist states, including Iran. But despite our ``no'' votes, 
four loans have been approved for Iran since 2000. Some Members 
of Congress believe it would be useful to augment the political 
voting restriction with economic consequences whenever the U.S. 
loses a vote on lending to Iran. Mr. Sherman on our committee 
has proposed legislation that would in fact reduce funding to 
the World Bank by the amount of money that the World Bank 
provides to Iran. The funding would instead go to the U.S. 
Agency for International Development.
    We will this morning explore how the U.S. works within the 
World Bank to discourage lending to Iran pursuant to its 
statutory direction. We also will explore whether elimination 
of U.S. funding to the World Bank, tied to the World Bank's 
activities in Iran, would be successful in discouraging the 
World Bank to lend to Iran.
    We also will hear testimony from expert witnesses on 
whether it is wise to attempt to further ostracize Iran from 
the international community by restricting its access to World 
Bank funding and personnel.
    At this time, I would like to yield to Ranking Member 
Maloney for her opening statement.
    Mrs. Maloney. I thank the gentlelady for yielding.
    Today, U.S. forces are stationed in Afghanistan where they 
fight the war on terror. A few hundred miles away, our military 
is under daily attack working to establish a functioning 
democracy in Iraq. Geographically between these two nations 
lies Iran, a country of extreme strategic important with which 
the United States government has only the most remote 
diplomatic contacts.
    This morning, the subcommittee considers the question of 
whether the U.S. should support World Bank projects in Iran. 
This is a profoundly important period in Iran's history and 
many Iran watchers, especially in Europe, argue that the World 
Bank engagement in the country will yield positive long-term 
results. In fact, there is an article in the international 
section of the New York Times today, which I would like to 
place in the record, entitled ``A Change of Heart in Teheran.''
    Chairwoman Biggert. Without objection.
    Mrs. Maloney. Reform President Mohammad Khatami was 
reelected in 2001 with 77 percent of the vote. Despite the 
large margin of victory, Khatami has disappointed many of his 
supporters by failing to successfully enact major reforms and 
the hardline mullahs remain a powerful political force in the 
country.
    The country's energy-based economy also faces major 
challenges as the post-Islamic revolution baby-boomers reach 
employment age and require jobs. The World Bank activities with 
Iran are proposals aimed at alleviating poverty and building up 
the public infrastructure. The bank also offers much-needed 
technical assistance to the country, which must pursue ways to 
diversify its economy. These projects remain highly 
controversial because Iran continues to support some of the 
most evil terror organizations the world has ever known. Iran 
provides assistance to Hezbollah in Lebanon and to terror 
groups that oppose the Israeli-Palestinian peace process, 
including Hamas and Islamic Jihad.
    The country is also thought to harbor al Qaeda, and 
President Bush has included it in the so-called ``axis of 
evil.'' Iran remains subject to sanctions passed by Congress 
and support by past and present administrations because of its 
numerous human rights violations. Most frightening, Iran has 
actively worked to develop nuclear weapons and only signed an 
agreement backing away from additional development on October 
21 of this year.
    No matter how Members feel about individual projects in 
Iran, there is also the U.S. credibility at the World Bank and 
in multinational organizations in general. The U.S. is the only 
world superpower, but we do not hold a veto on the bank. 
Despite U.S. opposition, these programs are moving forward at 
the World Bank because of the overwhelming support of the 
Europeans.
    While I support the current U.S. position, I look forward 
to hearing the panelists today. Specifically, I look forward to 
a discussion of whether our resistance to projects that fund 
public works and poverty alleviation plays into the hands of 
Iranians hardliners who benefit by stoking anti-Americanism.
    I look very much forward to this hearing and I especially 
want to thank Representative Brad Sherman from California for 
all of his work on this issue, for his amendments and his 
projects and for suggesting the topic today.
    I yield my remaining time to Mr. Sherman.
    Chairwoman Biggert. Would you like to hold that until we 
hear from the Ranking Member and then include that?
    Mrs. Maloney. Yes.
    Chairwoman Biggert. Okay. The Ranking Member?
    Mr. Frank. Thank you, Madam Chair. I have another meeting 
that I have to go to, but I did want to take my 3 minutes and 
yield the rest of my time to the gentleman from California, who 
as the gentlelady from New York has mentioned is really the 
main reason we are here today. I appreciate the majority 
agreeing to this hearing, the chairman of both the full 
committee and the subcommittee, in response to concerns that 
the gentleman from California brought forward.
    We worked earlier this year in cooperation with Treasury to 
meet our obligations with regard to the International 
Development Association and related agencies, and I am very 
much for that. I have been a supporter of the work of the World 
Bank, although I have pushed for some changes in it. It is 
important for the bank to understand, and I would guess that 
there might be a person or two here who worked for the bank, 
that they are not allowed to testify before us, but they are 
perfectly free to sit in the room and listen to us, and I would 
think they are probably doing that.
    A continuation of this kind of lending to Iran jeopardizes 
American support for the bank. I regret that. I think the bank 
plays a useful role, and I think partly because of the work 
that has been done here in the House of Representatives in 
particular, we have improved that role, although it is still 
not perfect, but giving money to Iran from several standpoints 
seems unwise to many of us. First of all, a country that is 
able to pursue a nuclear weapons program hardly ought to be 
able to plead poverty when it comes to dealing with the needs 
of its people.
    Secondly, we have a regime that is violative of human 
rights internally and of the requirements of civility between 
nations externally. I understand that our votes in the bank 
have been against this, but I think we need to do a better job 
of lobbying and we need to convey to others that we are putting 
things at risk. We are not here talking about the alleviation 
of desperate poverty. I am prepared to make some concessions in 
that regard. We are talking about a country that has 
significant energy resources and I do not think that if we were 
to deny these loans we would be plunging Iran into any 
significantly worse economic situation.
    I believe that as people understand that the United 
States's participation in the World Bank is going to this 
extent to the benefit of Iran, resistance to that participation 
will go up. Let me say this as a supporter of the bank, I think 
the bank should consider itself lucky. Treasury should consider 
itself lucky that this was not a year that we were being asked 
to vote funds directly for the World Bank itself. I think that 
would be a very significant problem in the current context and 
should be.
    So I again want to express my appreciation to the gentleman 
from California. This is a very serious warning, not to the 
U.S. Treasury, although they could do more, I think, but mainly 
to other countries that have votes on the board of the World 
Bank. If they continue, they will make the job of American 
cooperation with the bank, which I regard as a very desirable 
thing, much harder than it is.
    Thank you, Madam Chair.
    Chairwoman Biggert. Thank you.
    The gentleman from California, Mr. Sherman, is recognized 
for I think a grand total of 7 minutes.
    Mr. Sherman. Thank you, Madam Chair, for having these 
hearings, and hopefully they will lead to a markup of the 
legislation that I have authored that you have described. I 
expected to be here for every minute of these hearings. As you 
may know, my new Governor is holding a meeting in light of the 
fire situation affecting my own district and our entire state. 
I will need to be at part of that meeting, but I will be here 
every minute I can be.
    Our policy toward Iran can best be described as continuing 
schizophrenia. That is to say, the Clinton administration, the 
Bush administration before September 11, and the Bush 
administration after September 11 have continued a 
schizophrenic policy. Part of that schizophrenia is illustrated 
by our difference in approach between Iran and Iraq. Iran is 
maybe 3 years from a nuclear weapon, and already has other 
weapons of mass destruction. Iraq might have been 30 years from 
a nuclear weapon, had the U.N. continued to do its job, maybe 
longer. Iran is harboring al Qaeda today, including those who 
did the bombings in Riyadh that killed Americans and Saudis so 
recently. It is the number one state sponsor of terrorism, 
Saddam never achieved that title, and as our Ranking Member 
indicated, a terrible human rights record as well.
    So we have a schizophrenic policy that is illustrated by 
our economic policy. On the one hand, we have the Iran-Libya 
Sanctions Act. Not only do we prohibit our oil companies from 
doing business with Iran, we punish the oil companies of our 
allies who choose to invest in Iran, or at least we threaten 
to. So we punish others who do business as usual, but we do 
business as usual. Clinton announced and Bush continues $150 
million of non-energy imports from Iran, for no reason other 
than to facilitate that regime's economy. It does nothing for 
ours. And even after September 11, this continues. I do not 
think that the need to import Iranian caviar is vital to our 
national security. Those imports continue.
    Then we have elements of the administration hinting that 
maybe Iran should be the next invasion target, while other 
elements of the administration have pretty much allowed money 
to go indirectly from the U.S. Treasury to the terrorists in 
Teheran. That has happened through the World Bank. American law 
requires us to at least go through the motion of voting no, but 
what really happens at the World Bank is with winks and nods 
and behind closed doors.
    What has the World Bank done? They have approved since May 
2000 some $432 million, but fortunately they have only 
disbursed $38 million. Immediate strong action from this 
administration could prevent further disbursements. In 
addition, they are considering projects of $150 million, 
another $240 million, $70 million and $84 million projects 
totaling $540 million. The administration could take strong 
action and prevent those. We have a $1 billion question between 
that which has been authorized or is likely to be authorized in 
the World Bank, and that which has been disbursed, at least a 
difference of roughly $950 million.
    Now, one thing that the apologists for the World Bank do is 
make what I call the ``separate fingers'' argument. They argue 
that IDA, one finger of the bank, is separate from IBRD, 
another finger of the bank. But what does the World Bank say on 
its Web site? IBRD, the entity that is giving the money to 
Teheran, and IDA, the entity that we give money to, what does 
it say? IBRD and IDA are run on the same lines. They share the 
same staff, the same headquarters, report to the same 
President, and use the same standards when evaluating projects. 
IDA simply takes its money from a different drawer. I think 
when they make the ``separate finger'' argument, they are 
giving us the finger.
    Now, money is fungible. The government in Teheran must make 
some domestic expenditures in order to obtain power. That 
regime spends the minimum necessary to show its people it is 
doing a little something for them, and takes every additional 
penny that they can get their hands on to kill as many 
Americans as possible. Every extra penny is an extra bullet 
aimed at us.
    This committee and this Congress contain many people who 
support foreign aid. When we give that foreign aid to 
bureaucrats who believe in helping those in Teheran meet their 
financial needs, we endanger American support for foreign aid. 
Money is fungible. The government in Teheran must make some 
domestic expenditures, and then they can spend our money 
instead of theirs. They can use their money for terrorism.
    Today, we hopefully will learn what the administration will 
do to stop these disbursements and how that fits into an 
overall policy to economically isolate this regime until such 
time as it changes its policies. I realize $1 billion is not 
the be-all and end-all, but what does it do when the World Bank 
sends subsidies to the terrorists in Teheran? It puts the stamp 
of approval of the most prestigious economic institution in the 
world on doing business as usual with that government. How 
could anybody doubt that you should do business as usual with 
that government? The World Bank subsidizes them.
    So hopefully we will learn that an administration that can 
invade one country can at least stop loans to a country that is 
a far greater threat to American security. I know it has been 
pointed out that the World Bank charter does not explicitly say 
that there should be political considerations, but I would note 
that if the World Bank had made loans to Hitler had it existed 
at that time, the United States would not have just rolled 
over. We would not continue to participate, and we certainly 
would not have given those same bureaucrats more funds. It is 
time for us to realize that the regime in Iran is developing 
nuclear weapons aimed at us, and the American people will pay 
for foreign aid only if it is treated carefully.
    I yield back.
    Chairwoman Biggert. The gentleman's time has expired.
    At this time, I would like to introduce our first panelist, 
beginning with the Honorable William Schuerch, Deputy Assistant 
Secretary for International Development of the U.S. Department 
of the Treasury. Welcome. Deputy Assistant Secretary Schuerch 
was named Deputy Assistant Secretary of the Treasury for 
International Development, Debt and Environment Policy on March 
15, 1998, after acting in that capacity since September 16, 
1996. He serves as policy adviser to both the Assistant and 
Under Secretaries of International Affairs. Mr. Schuerch has 
responsibility for formulation of international debt policy and 
of a wide range of economic, financial and environmental policy 
issues pertaining to U.S. participation in the MDBs.
    Welcome, Mr. Schuerch. Without objection, your written 
statement will be made part of the record, as will the other 
panelists on the second panel. You will be recognized for a 5-
minute summary of your testimony. After that, we will have 
questions and our Members will keep their questions to a limit 
of 5 minutes also. If you would care to begin? Thank you.

    STATEMENT OF HON. WILLIAM E. SCHUERCH, DEPUTY ASSISTANT 
             SECRETARY, DEPARTMENT OF THE TREASURY

    Mr. Schuerch. Thank you, Vice Chairman Biggert and Ranking 
Member Maloney, and distinguished Members of the subcommittee. 
We welcome the opportunity to testify today on the 
implementation of U.S. policy on multilateral bank lending to 
Iran.
    As you know, it is not a new policy and this administration 
agrees with the Congress that Iran should not have access to 
MDB lending. I want to assure you that the Treasury Department 
and the U.S. Executive Director at the World Bank, while not 
fully successful, have consistently and actively sought to 
block all proposals of assistance for Iran.
    I want to make points about the bank itself, however. The 
bank plays a critical role in helping the United States achieve 
its efforts to increase world economic growth, reduce poverty, 
build open-market economies, and encourage the growth of civil 
society through most of the world. Second, the bank is an 
important foreign policy tool for the United States and is a 
vehicle for leveraging our foreign assistance resources 
throughout the globe. The bank has played critical roles in 
responding to democratic and market openings in central and 
eastern Europe and in what we used to call the newly 
independent states of the former Soviet Union, in Bosnia and 
Afghanistan, and in combating terrorist financing. Concerning 
Iraq, it has completed a needs assessment. It will manage a 
trust fund for other donors, and it has recently pledged 
significant resources for rebuilding.
    Now, as concerned bank lending to Iran and U.S. policy, our 
efforts to block these resources is consistent with 
congressional intent for both terrorism and human rights. We 
share congressional concerns that have been clearly 
demonstrated this morning. We are deeply concerned about the 
weapons of mass destruction programs in Iran, particularly a 
nuclear program, and we have a quite active interaction at the 
moment with the International Atomic Energy Agency that is 
going on. We also believe Iran needs to make very substantial 
economic reforms.
    U.S. efforts to block World Bank assistance to Iran were 
fully successful for seven years, from July 1993 to May 2000. 
During this time, there was a consensus among G-7 nations 
blocking all lending to Iran. Unfortunately, in May 2000 the 
coalition split. Other Members began supporting re-engagement 
in Iran due to their expressed views that engaging with Iran's 
reformers would support their efforts against Iran's 
hardliners. This view is still evident as negotiations go on 
over Iran's nuclear program.
    In addition, commercial opportunities in Iran for U.S. 
companies which could not compete due to U.S. sanctions, have 
been enticing many partners. Thus, despite the U.S. no votes 
and abstentions from France and Canada, the rest of the World 
Bank's executive board approved two loans, a $145 million 
sewerage project and an $87 million primary health care and 
nutrition project. Later, in May 2001, the executive board 
discussed an interim strategy for Iran. It proposed low-income 
housing, sewerage, urban upgrading and community-based 
infrastructure and employment creation projects. We opposed 
that strategy and raised our concerns about the bank's 
engagement with Iran.
    Since then, despite ongoing efforts with other shareholders 
not to support lending, a $20 million loan for environmental 
management and an $180 million loan for earthquake recovery 
occurred in 2003. Additionally, the IFC approved in December 
2002 a $5 million investment on a joint venture with a private 
Iranian bank, a major French bank and the IFC. This was the 
IFC's first investment in 25 years. The U.S. voted no and 
lobbied against it with other shareholders.
    This is the full picture of MDB lending, but as others have 
said already, there is a pipeline that I will not describe in 
detail, I think it has been reasonably described, of additional 
projects. The numbers that line up are substantial in terms of 
totals of millions of dollars. It is a four-project long list. 
In summary, from July 1993 to May 2000, U.S. efforts to block 
World Bank and MDB assistance to Iran were completely 
successful. Colleagues shared our views that it was 
inappropriate for the bank to engage with Iran. Since that 
time, as colleagues have changed their views and decided that 
engagement had some benefits or potential benefits, the bank 
has ended up approving $432 million, primarily for basic human 
needs-type activities.
    I want to emphasize that the lending that has occurred from 
the World Bank is from its hard-loan window and from its 
private sector window. It is not from the International 
Development Agency. As such, lending to Iran is provided at 
market rates, not concessional rates and maturities. The IFC 
funding, while supporting investments in Iran, is not providing 
assistance to the government of Iran itself, but to private 
companies. The World Bank is an organization of 183 member 
countries. The U.S. is its largest shareholder. We have a 16.4 
percent interest. That share is not controlling, nor do we have 
rights to veto individual lending decisions. This is 
fundamentally a weighted democracy structure, weighted by 
contribution levels primarily.
    Blocking MDB support for a country is difficult. 
Occasionally, it has been possible when substantial 
international outrage exists over specific events. There are a 
few examples. In 1989 after the Tiananmen Square incidents in 
China, it was possible to block lending to China for 
approximately 1 3/4 years. After that point, the coalition 
would no longer support that action and the U.S. has been 
voting in opposition to China in the bank ever since, while 
others have been supporting. Nuclear testing by Pakistan and 
India in 1998 led to concerted efforts. Those efforts held the 
coalition together for 2 years and held up non-basic human 
needs lending. Beginning in 1987, in the case of Burma, there 
has been a much more successful effort due to the repression of 
opposition leaders by the military junta. That effort continues 
and has continued in its success.
    Basically, I think the facts indicate it is extremely 
difficult to hold together an international consensus in 
response to specific events and even to continuing events. 
These are the extreme exceptions in the history of the bank, 
and I would say even if one looks at bank projects and votes on 
the bank board, there are only one or two instances where they 
have been turned down once offered in the board. So there is 
much discussion behind the scenes before things are brought 
forward.
    Finally, Madam Chairman, I would like to emphasize this 
administration's consistent voting record against MDB 
assistance to Iran and our continued efforts to discourage 
World Bank engagement. The administration will continue to 
oppose bank lending until meaningful political, economic and 
human rights reforms have taken place. We will also continue 
our efforts to marshal support from other donor countries, bank 
management and other shareholders in order to stop lending to 
Iran.
    Thank you.
    [The prepared statement of Hon. William E. Schuerch can be 
found on page 37 in the appendix.]
    Chairwoman Biggert. Thank you, Mr. Schuerch.
    I will now recognize Members for 5 minutes each to ask 
questions, and would recognize myself first of all.
    Mr. Schuerch, could you give us more specifics? What is the 
Treasury Department doing really to convince other members of 
the World Bank to limit the amount of monies that they would 
give to Iran?
    Mr. Schuerch. The Treasury does a range of activities. It 
meets with other shareholders. The U.S. Executive Director has 
discussions with the Executive Directors of other 
constituencies in the institution; makes very clear the U.S. 
position in opposition to lending. The U.S. has been 
particularly strong on the matter. I know in the Congress it is 
less focused on the difference between being opposed and being 
against lending, but in fact U.S. law requires opposition. It 
does not require us to vote no in the World Bank on these 
loans, and yet we have chosen, because of how serious we take 
the issue, to vote no in every instance in the case of Iran.
    I also directly interface with senior officials in these 
institutions, managing Directors, vice Presidents, and also in 
the case of the IFC, with the head of the IFC, and directly 
express the U.S. position on membership issues and on votes 
issues when we think that is important enough, and that has 
certainly been done on Iran on a number of occasions. Sometimes 
we have meetings where the G-7 Executive Directors get together 
and usually that is the case when we have coalitions of this 
sort. They are very candid discussions and push as well. We 
also have relationships and use the State Department's contacts 
through diplomatic channels.
    Chairwoman Biggert. Thank you. What would happen for the 
U.S. Executive Directors of the World Bank to support 
development loans for Iran? What would have to happen that they 
would vote yes for those?
    Mr. Schuerch. To get other shareholders?
    Chairwoman Biggert. No, for the U.S. to vote for the funds.
    Mr. Schuerch. I do not think I am prepared to lay out a 
specific line of individual actions. There is a broad, complex 
relationship with Iran. There are very strong feelings. Mr. 
Sherman has been quite eloquent on concerns about terrorism, 
and others have also, weapons of mass destruction and nuclear 
issues, human rights issues, Middle East-related terrorism 
issues. I think we have enough flexibility that if one were 
looking at questions of responsiveness, there is flexibility to 
shift between an abstention and a no within the law. We have 
not chosen to do that.
    Chairwoman Biggert. If Mr. Sherman's language became law, 
would it affect the World Bank's commitments to countries other 
than Iran by lowering the overall amount of funds the bank 
could commit?
    Mr. Schuerch. Mr. Sherman's characterization of the non-
severability between IDA, the International Development 
Association, and funds going to the World Bank, I would like to 
respond to because these are very different institutions. They 
have different charters. He is accurate in saying they have the 
same staff and the same chairman of the board, but the fact is 
they have different corporate structures. They are legally 
different corporations and they have totally different 
financing mechanisms. The World Bank, we provide paid-in 
capital and callable capital. We go to markets to borrow 
private sector money and those loans go at market rates.
    If you look at IDA, it is a direct appropriation from the 
Congress. It is provided to countries with incomes a little 
over half the wealth of Iran. Consequently, any cut in IDA 
dollars in fact impacts a whole different set of countries, and 
in fact the poorest of the countries, the ones that have been 
receiving HIPC resources for example, and not the Iran-type 
countries.
    Chairwoman Biggert. Would H.R. 2466 restrict future 
emergency earthquake funds or other humanitarian aid from the 
World Bank to Iran?
    Mr. Schuerch. I should be clear that we are actively 
opposed to that piece of legislation. We do not believe it will 
have a direct affect on decisions in the bank of other 
shareholders on lending to Iran, or certainly not on loans that 
have already been approved by the board. It would reduce 
resources available for the poorest countries in the world.
    Chairwoman Biggert. Thank you. My time has expired. The 
gentlewoman from New York, and Ranking Member?
    Mrs. Maloney. I thank the Chairlady for yielding.
    I really would like to follow up on the eloquent statement 
of my colleague, Brad Sherman, when he mentioned in his opening 
statement that money is fungible. Critics of the World Bank 
projects in Iran have argued, as he did today in his opening 
statement, that funding going to these projects frees up 
funding for the country's government to possibly spend money on 
arms and potential weapons. Do you agree with this statement? 
Could you elaborate on what precautions are being taken to 
prevent the bank from inadvertently boosting Iran's ability to 
spend more money on odious items such as weapons and support of 
terrorist activities?
    Mr. Schuerch. The fungibility argument is one that I have 
been dealing with in foreign aid matters for over 20 years. It 
comes up repeatedly. It comes up related to our own bilateral 
aid programs with the USAID. It is an argument that says if we 
give a country a dollar, we can pick the most odious thing it 
is doing and claim our dollar is funding that, rather than the 
best thing a country is doing, and claim our dollar is funding 
that. So it is an interesting rhetorical exercise.
    But let me talk to the bank itself. The bank actually 
provides money for specific purposes. It audits the use of 
those resources and makes appropriate assurances that its 
resources are going for the purposes they have been approved 
for. There is an external evaluation. There is a group that 
looks at corruption issues and so forth. So it is also true the 
bank has different types of funding mechanisms. It can give 
balance of payments resources. It can give cash transfers for 
sector policy issues. It can give programmatic lending, which 
is direct support to budgets.
    I think it is worth noting that none of the loans that have 
come to the bank board propose any of that sort of activity or 
support for Iran. They are all project-specific loans, sewerage 
projects, health projects and so forth. The bank will take 
appropriate actions to ensure that the resources go for those 
purposes.
    Mrs. Maloney. In how many countries is the World Bank 
participating in which the United States is opposed to funding 
any projects? Is Iran by itself, or are there other countries 
in the same status?
    Mr. Schuerch. There are many countries that are caught in 
legislative provisions that have been put in. I think it is 
fair to tell you we have, and I do not know if the count is 
perfectly accurate, I suppose there are perceptions on that, 
but we have 38 different pieces of legislation that direct 
voice and vote of the United States in the World Bank and in 
the other institutions.
    I would say the most parallel ones in this particular case 
probably is the China vote. We have been voting no on all 
lending in China, except basic human needs lending in China, 
since 1989, since Tiananmen Square. As I said earlier, it was 
an effective approach in terms of other shareholders and 
holding coalitions together for approximately 2 years. We are 
alone voting no in those instances. Burma has been more 
successful, but the others are more complex. We vote against 
Iraq lending. It is on a terrorism list. There are others on 
the human rights list. So Iran is not alone in this 
circumstance and it is not alone in the circumstance that loans 
move forward over U.S. objections to these voice and vote 
principles.
    Mrs. Maloney. Currently, when the World Bank considers 
funding a project in Iran, does the U.S. participate in the 
discussions about the scope of the project, or do our 
representatives just simply assert a no vote? Are we part of 
the negotiations? Do we try to structure to make sure that it 
is not spent for an odious reason, or do we simply say no? How 
does it work?
    Mr. Schuerch. It is a sensitive question. It works 
differently on different matters at different times. I want to 
address the question of the charter of the bank, to give you a 
little perception, because there are sensitivities about public 
perceptions about what the U.S. does related to the World Bank 
or can do, and the sensitivities of those of other 
shareholders. In some respects, any activities that we 
undertake that the bank acknowledges and takes part in are 
activities that other shareholders also have the right to take 
part in.
    Mrs. Maloney. How much shareholding do we have in the bank?
    Mr. Schuerch. We have 16.4 percent of the World Bank.
    Mrs. Maloney. We have 16.4 percent. Are we the largest 
shareholder in the bank?
    Mr. Schuerch. We are the largest single shareholder. If you 
talk to many, they would honestly and accurately characterize 
the United States as running the World Bank. It is clearly not 
the case, and it is clearly not the case in this instance or in 
the China lending instance. But we do have influence and we do 
use that influence behind the scenes as much as we can. I think 
I am a little reluctant to describe it because I do not want 
to, frankly, encourage other countries to complain about this 
by putting it in the public record.
    I do want to say that the bank's charter is not only, as 
Mr. Sherman described, one that does not have politics 
explicitly in it. It is exactly the opposite. It explicitly has 
statements against politics in decisionmaking. I say this not 
to describe U.S. attitudes, but to describe the culture in 
which other shareholders, and frankly this charter passed the 
United States Senate. Article four, section 10 of the charter 
says the banks and its officers shall not interfere in the 
political affairs of any member, nor shall they be influenced 
in their directions by the political character of the member or 
members concerned. Only economic considerations shall be 
relevant to their decisions, and these considerations shall be 
weighed impartially in order to achieve the purposes stated in 
article one.
    So it is quite clear on this subject. We get this explained 
to us from other shareholders repeatedly. It is a situation 
which we live with because certainly the bank was created for 
economic purposes. It was also created broadly for political 
purposes.
    Chairwoman Biggert. The gentlewoman's time has expired.
    Mr. Sherman, you are recognized for 5 minutes.
    Mr. Sherman. I am flabbergasted that you say that we are 
not required by law to vote no against loans to Iran and that 
it is somehow a major concession from the administration to 
those of us who do not want to see Iran develop nuclear 
weapons, that you in fact vote no. I am told that the statute 
says that we are supposed to use our voice and our vote to 
oppose loans. If you are required by statute to oppose 
something, you kind of ought to vote no. I may have that wrong, 
but I do not think so.
    More importantly, I am quite concerned that much of your 
testimony could be viewed as a description of why these loans 
are okay. You talk about earthquake aid, but this earthquake 
aid, which is like emergency aid getting directly to the 
people, isn't this money going to Iran more than 2 years after 
the earthquake? Isn't it just kind of free cash to reimburse 
them for whatever they have already spent? Could you 
characterize this earthquake aid as emergency immediate money 
getting there in the weeks following the earthquake?
    Mr. Schuerch. Let me first address your comments on the 
word ``oppose'' in the legislation. I think we ought to be 
clear and we ought to have no misunderstanding on this issue. 
There are provisions of law that require the U.S. executive 
branch vote against lending in certain circumstances. That use 
of legislative language requires us to vote no. There are other 
provisions of law that require us to oppose, and those 
provisions of the law permit abstentions, which is the most 
typical behavior pattern, and no votes.
    Mr. Sherman. If I can interrupt, clearly Congress is going 
to have to write its language to provide less flexibility to an 
administration if you think it is that a statute requiring 
opposition allows something other than voting no, but in fact 
you do vote no, so that it not the issue.
    I have such limited time. I would like you to respond to 
the rest of that question for the record, because I want to go 
on to another question. You act as if we have no influence with 
the Europeans; that all we can do is beg; get down on our knees 
and beg again. And then if they vote against us, well, gee, 
there is nothing we can do about it. When it came to the issue 
of bananas, none of which are grown in the United States, we 
turned to the Europeans and threatened retaliatory tariffs. 
Have we ever indicated to any government that we would deprive 
them or their citizens of a single penny if they voted to in 
effect send World Bank, much of it ours originally, to those 
who are developing nuclear weapons to smuggle into American 
cities? One penny, one nation, one instance?
    Mr. Schuerch. I will answer that directly very quickly, but 
you should also be aware when you are looking at the no versus 
abstain issue that the Congress changed the law as it related 
to terrorism in 1994, and switched from a mandatory no vote to 
an opposition position. So there is no doubt that the people 
writing the legislation understood its meaning.
    In terms of the latter question, have we threatened 
different sorts of trade sanctions and so forth tied to the 
World Bank?
    Mr. Sherman. Or anything, maybe like skipping a 
Presidential visit; not letting them come to the Fourth of July 
party. Have we deprived them of a single hors d'oeuvre? Or have 
we basically said, you can vote the way you want to; you can 
subsidize the nuclear destruction of American cities, if it 
ever comes to that; and you will not lose a single hors 
d'oeuvre?
    Mr. Schuerch. I think what I would say to you is, in short, 
I am not aware of us threatening France or Germany or Japan or 
Italy with that kind of behavior over this issue in the World 
Bank at any time.
    Mr. Sherman. So we were much tougher in defending our 
banana exports than in defending the American people from the 
terrorism and nuclear weapons programs of Iran.
    Mr. Schuerch. We have deep and complex relationships with 
our major allies that cover subjects much broader than this 
one.
    Mr. Sherman. Just to reiterate what I said, this 
administration cares more about our banana exports, which we do 
not even grow here, than it does defending American security 
from this threat. That is kind of what these hearings are all 
about.
    Mr. Schuerch. I think you better count the number of troops 
that we have over in this part of the region, if that is what 
you think.
    Mr. Sherman. Oh, there is Iraq. How many troops do we have 
in Iran?
    Mr. Schuerch. This issue is much broader than Treasury and 
a few dollars out of an international institution that has a 
weighted voting structure. We have Americans next door to this 
country day by day by day and dying day by day, so the 
characterization is not one we agree with.
    Chairwoman Biggert. The gentleman's time has expired.
    The gentleman from Illinois is recognized.
    Mr. Emanuel. I would like to thank the Chairlady.
    As indicated in the papers today, the Iraq Governing 
Council is negotiating with Iran a swap deal relating to oil 
and electricity, similar to what it is doing with Syria. Are we 
beginning to see the changes in how the Administration deals 
with countries that are, (A), developing nuclear weapons; and 
(B), supporting terrorist groups such as the Hezbollah, al 
Qaeda, and the Islamic Jihad? Is there now a shift in the way 
the Administration is dealing with on the original list of the 
axis of evil?
    Mr. Schuerch. I think a broad discussion of American 
foreign policy vis-a-vis Iran versus North Korea versus other 
countries, whether they are on the axis of evil list or whether 
they are behaving in ways we do not support is really an 
appropriate role for the State Department, which is in charge 
of this. The Deputy Secretary yesterday was in the Senate 
Foreign Relations Committee, and there have been other articles 
in the New York Times this morning.
    Mr. Emanuel. You can appreciate, then, how some of us could 
be confused. I read what the Deputy Secretary, Mr. Armitage, 
said. We have the issue of the World Bank. We have the issue of 
the Iraqi Council. Some of us are left with the job of 
connecting dots and trying to explain it. So all I am saying 
is, I am not here to have a global discussion of the 
administration's foreign policy. But you can understand that 
for those members of the great unwashed over here, it is a bit 
confusing.
    Mr. Schuerch. I think what I would say to you is that there 
are a multiplicity of foreign policy tools. One looks at what 
is available and one looks at the specific country situation, 
and one looks at their relationships with one's allies and one 
makes judgments about which tools to use because of their 
likelihood of success in different circumstances. It has not 
yet been a judgment of the United States government that doing 
something different than voting no in international 
institutions on lending to Iran and encouraging others to do so 
would be more successful than switching to an abstention or to 
a yes vote for some specific reason. I am not sure where your 
argument leads. I suppose you support a no vote in these 
circumstances.
    Mr. Emanuel. No. My argument actually is, one, whether you 
want to go up to the limit. Look, I think that for 15 years, 
three different administrations have tried to communicate to a 
moderate element in Iran. The interesting thing is every time 
you try to find that, when you really need them, you can't find 
them, but we spent 15 years trying to communicate with them. If 
one says offering financial incentives to Iran, whether through 
the World Bank or through an energy swap, is part of an 
emerging strategy, or saying we want to have a dialogue, as the 
Deputy Secretary said today in the paper and in testimony 
yesterday, I am interested in that as part of an overall 
strategy. But there are moments in which we list them on the 
axis of evil, say they are developing nuclear weapons, think it 
is a high priority to stop it.
    We know they are supporting terrorist groups, and yet we 
are giving them financial incentives. All I am merely saying, 
for me, it is a bit confusing. I am well aware of the nuances 
in foreign policy, but to list Iran on the axis of evil and 
then offer financial incentives is an interesting strategy. I 
am saying, is that part of the overall comprehensive strategy, 
or is Treasury going one way and State going another?
    Mr. Schuerch. We have not offered them financial 
incentives.
    Mr. Emanuel. Would you agree that we are funding the Iraqi 
National Council, given that the United States is supporting 
the reconstruction, some of the funding for Iraq does come from 
the American taxpayers, when you do an electricity-for-oil 
swap?
    Mr. Schuerch. I misunderstood you to suggest we are 
actually supporting Iran with finance.
    Mr. Emanuel. I do think they are going to probably generate 
some economic interest from that, wouldn't you? I do not think 
they are going to engage in that economic activity if it is not 
in their own self-interest.
    Mr. Schuerch. I guess what I would say to you is that when 
one gets in circumstances where one is trying to influence 
countries, whether they be in the situation in Iraq or Iran or 
North Korea, it is often the case that there is a back-and-
forth in relationships. Sometimes there are financial aspects 
to it. Sometimes there are financial aspects with other allies 
to that process. It is not a process that the Treasury 
Department is in the middle of on a day-to-day basis at all. 
There are no current plans that I am aware of to revisit the 
current policies in lending and votes on lending or 
discouraging others from supporting lending to Iran in the 
multilateral banks.
    Mr. Emanuel. No further questions.
    Chairwoman Biggert. Thank you.
    Perhaps the basic question that we are skirting around, is 
the World Bank the best tool to use to accomplish U.S. foreign 
policy goals in Iran. Perhaps you would be willing to address 
that in writing, since we do not have the time, or discuss it 
briefly.
    Mr. Schuerch. I want to comment on it briefly. I think if 
one understands the history of the creation of the bank and the 
regional banks and the shift in their mission from post-World 
War reconstruction to a much more development focus, we need to 
understand that a lot of the international economic system 
created after World War II was created because of a recognition 
of failing of dealing with economic dislocations post-World War 
I that in many people's minds were directly relevant to World 
War II.
    I think when we look at it, the bank is a good tool for 
long-term strategy; for encouraging development, which we 
believe fundamentally favors democracy and opening of markets 
and free-trading systems, and a fair and level playing field, 
if you will. When one tries to use it explicitly on a short-
term foreign policy basis or even a medium-term one, it is a 
much more difficult tool to either hold other shareholders 
together in support of a specific action, or to be successful 
influencing the country itself. Cutting off assistance to Iran, 
which we certainly have been voting for, one has to look at the 
dynamics and the size differentials of what one is talking 
about. Iran is a country with an economy of about $106 billion 
a year. The amount of resources we are talking about in the 
bank, which admittedly for the vast majority have not been 
disbursed yet, are a very small sum.
    Thank you.
    Chairwoman Biggert. Just one last question, then. I notice 
that there was a rather sizable amount of money that has not 
been disbursed. Could you just give us a reason for that? Is 
that because it is programmed to continue over a number of 
years? Or do they have to fulfill certain steps of what they 
are trying to accomplish to get the money?
    Mr. Schuerch. If I were going to be aggressive, I could try 
to assert that the United States has been successful behind the 
scenes in order to stop the disbursement or slow it down 
substantially. There are $390 million or so of undisbursed 
resources out of the $432 million that has been approved. If I 
were to take that position and argue it, it would have 
particular problems with other shareholders. I think if you 
were to ask that question of bank management, they would tell 
you that Iran is a particularly difficult place to do business 
in, and they are having trouble getting started and starting up 
programs. So it is an initiation factor in their mind.
    Thank you.
    Chairwoman Biggert. Thank you very much for appearing 
before us this morning.
    Mr. Schuerch. Thank you.
    Chairwoman Biggert. We will now turn to the second panel, 
if they want to come up and take their places. Welcome. Thank 
you very much for joining us today. I know that our Members are 
in and out. They said that they would be back in a few minutes, 
so we will continue on.
    First of all, we are going to hear from Dr. Ray Takeyh, 
Director of Studies for the Near East and South Asia Center for 
Strategic Studies at the National Defense University. Dr. 
Takeyh has written widely on Iran, political Islam, and 
terrorism, with many of his pieces in scholarly works, having 
appeared in the Financial Times, Washington Post, Foreign 
Policy and the Middle East Journal. Second will be Dr. Patrick 
Clawson, Director for Research at the Washington Institute for 
Near East Policy. Dr. Clawson is also a prolific author, having 
written more than 30 articles on the Middle East which have 
appeared in such scholarly media as Foreign Affairs, 
International Economy, Oxford Bulletin of Economics and 
Statistics, and the Middle East Journal. Dr. Clawson is 
currently senior editor of the Middle East Quarterly.
    Welcome both of you. If you would like to begin, Dr. 
Takeyh, again, 5 minutes summary of your testimony, and then 
there will be questions.

STATEMENT OF RAY TAKEYH, PROFESSOR OF NATIONAL SECURITY STUDIES 
   AND DIRECTOR OF STUDIES, NEAR EAST AND SOUTH ASIA CENTER, 
                  NATIONAL DEFENSE UNIVERSITY

    Mr. Takeyh. Thank you very much for inviting me. I will 
spend my 5 minutes, since I have already submitted a statement 
for the record, dealing specifically with the three questions 
that we were asked to consider, the first question being 
whether we believe that restricting U.S. contributions is a 
helpful policy.
    As I mention in my testimony, I believe the type of 
pressure that works on Iran is multilateral pressure 
spearheaded by Iran's traditional lending partners, traditional 
trading partners, the Europeans and the Japanese. The recent 
example of Iran subscribing to IAEA's additional protocol 
reveals that theocracy's policies are not immutable, and 
confronted with concerted international pressure, Iran will 
behave properly.
    Should the suppression of the World Bank loans be part of a 
larger multilateral strategy of pressure, I believe they will 
be effective. But in and of themselves, they are unique and a 
single gesture of U.S. dissent is unlikely to be as productive 
as Washington intends. Moreover, I believe at a time when the 
United States is involved in Iraq, confrontation with another 
international organization, given the troubles with the United 
Nations in the past year, is not helpful. Moreover, World Bank 
is an institution that is necessary for reconstruction of Iraq 
and perhaps the politicization of these loans in that 
particular sense is unhelpful.
    The second question, is the bank lending a significant 
factor for Iranian management of its economy? I would suggest 
that Iran's economy suffers from structural flaws that prohibit 
free market reforms. In the aftermath of the revolution, 
Iranian clerics created an economic system that benefits 
themselves and a very narrow group of merchants within the 
Bazar. This narrow collection of people tend to dominate the 
trading sector, the manufacturing sector. Corruption is endemic 
in this economic system. Therefore, I believe the level of 
corruption now has increasingly reached Iran's oil industry 
through a network of ostensibly private companies that have 
positioned themselves as compulsory partners for foreign 
investors seeking access to Iran's petroleum market.
    In this particular economy, the World Bank's loans, which 
are a rather paltry sum compared to the level of international 
investment that Iran gets, are unlikely to affect Iran's key 
military and spending priorities. The fact, as I said, remains 
that the sums involved are not large enough to make an 
impression on Iran's ruling elite. Again, the type of economic 
leverage that may do so would be reduction of trade and 
investment by Iran's largest partners, the Europeans, the 
Japanese and the East Asian community.
    At a time when theocracy requires a substantial amount of 
international investments to rejuvenate its economy, 
particularly to deal with the problem of youth unemployment, 
the investment that is coming from the international community 
is absolutely critical. The imposition of trade barriers by 
those international actors will make an impression on the 
theocracy and compel it to alter its priorities. However, 
limited World Bank loans are unlikely to have such a dramatic 
impact.
    Finally, whether World Bank loans and secession of those 
loans are going to make an impact on Iran's nuclear spending, 
once more I am not hopeful that suppression of World Bank loans 
will have the impact that is ascribed to them. Unfortunately, 
nuclear weapons are beginning to emerge as the centerpiece of 
Iran's deterrent strategy. Iran lives in a dangerous 
neighborhood with instability on all its corners, and a rather 
massive of American power on all if its peripheries. Iran's 
defense planners are learning some lessons from Operation Iraqi 
Freedom, namely that Saddam's purported possession of chemical 
weapons did not constitute a deterrent against the United 
States, and perhaps the possession of strategic weapons will. 
So in that particular sense, given the emerging centrality of 
nuclear weapons in Iran's strategic calculus, the World Bank 
loans are unlikely to disturb that planning.
    However, this is not to suggest that Iran's nuclear 
calculations are immune from international pressure, but that 
pressure has to be multilateral and sustained. The recent 
Iranian acceptance of IAEA's additional protocols came about 
only after the European Union suggested that they would not 
sign additional trade and cooperation agreements, and the 
Japanese similarly suggested that they will not participate in 
completion of the oil exploration agreements with Iran. That 
essentially pushed Iranians over the threshold.
    The combined pressure of the United States and its allies 
ultimately can compel important concessions from Iran. I do not 
see U.S. attempts to suspend World Bank loans as having the 
same type of an impact. A carefully crafted international 
consensus that combines American pressure and European 
determination, in my view, is the best manner and the only 
manner of obstructing Iran's proliferation tendencies.
    I would be happy to go into these in the question-answer 
time, but I will limit my opening remarks to the 5 minutes.
    [The prepared statement of Ray Takeyh can be found on page 
41 in the appendix.]
    Chairwoman Biggert. Thank you very much.
    Dr. Clawson?

 STATEMENT OF PATRICK CLAWSON, DEPUTY DIRECTOR, THE WASHINGTON 
                 INSTITUTE FOR NEAR EAST POLICY

    Mr. Clawson. Thank you very much for letting me speak here 
today. I have submitted a statement that I ask being included 
in the record.
    There are two important considerations in judging U.S. 
reaction to World Bank lending to Iran are, first, how 
important is World Bank lending to Iran; and second, how does 
lending to Iran fit within World Bank practice. Let me address 
these in turn.
    First, how important is World Bank lending to Iran? Iran 
faces difficult economic times for the next decade because its 
baby-boom, born after the 1979 revolution, is entering the 
labor market. A recent report from the International Monetary 
Fund predicted that Iran would need to mobilize $4 billion a 
year in foreign loans and direct investment if it is to achieve 
a level of growth which stabilizes unemployment. If Iran does 
not have access to that kind of foreign capital, Iran would 
suffer further from the loss of expanded oil exports that those 
foreign funds would finance. If Iran's oil exports were to 
stagnate at the 2002-2003 level, Iran would have $11 billion a 
year less in income by 2008-2009. In other words, the foreign 
funds and the expansion in oil exports they make possible are 
central to Iran's economic plans and could be key to preventing 
youth unrest that could threaten the current hardline 
government.
    Lending by the World Bank would under any circumstances be 
a small part of the $4 billion a year Iran needs to raise from 
abroad. However, as the World Bank correctly emphasizes, its 
lending has a catalytic effect on other lenders and investors. 
That is, lenders and investors are more likely to place their 
funds in a country where the World Bank has found that the 
business climate and economic policies are sufficient to merit 
World Bank lending. In other words, World Bank lending could 
have a significant impact on Iran's ability to raise 
international capital, and therefore on its economic prospects.
    That said, it is by no means clear that restricted access 
to international capital would lead Iran to reduce its military 
spending. It is quite possible Iran would respond to any 
shortfall in foreign loans and investment by cinching its belt 
in further. An additional complication is that Iran's 
international economic situation is highly dependent on the 
price of oil. Relatively small swings in world oil prices are 
as important to Iran's economic prospects as are its access to 
international capital.
    In short, World Bank lending will matter much more to Iran 
if oil prices declined father than expected. If Iran faces 
tough economic times due to low oil prices and lack of access 
to international capital, that could strengthen popular 
protests against the hardline government. At the same time, 
that hardline government could well decide to make whatever 
sacrifices are needed to keep the nuclear program on track.
    Let me turn briefly to the question of how would lending to 
Iran fit with World Bank practice. Iran has a highly distorted 
economy which makes it a poor candidate for World Bank funding. 
As it does in other countries with such poor economic policies, 
World Bank lending to Iran should be confined to social 
services and to semi-humanitarian loans. The United States 
should press hard to ensure that the World Bank does not bend 
its usual procedures, which are to insist on economic reforms 
and appropriate policies before the bank can lend to a sector. 
It would be entirely consistent with World Bank procedures for 
the United States government to vigorously lobby the bank's 
management and executive board about the inappropriateness of 
lending to a country with as poor economic policies as those of 
Iran.
    Raising more explicitly political objections is more 
problematical, but it could be considered, particularly if Iran 
is found in violation of its obligations under the 
nonproliferation treaty, where it would be appropriate for the 
Security Council of the United Nations to consider actions such 
as banning all new loans from international financial 
institutions.
    I should note that there are many voices which call for 
basing bank loans on explicitly political criteria. As Mr. 
Schuerch explained, the bank's approval of loans to Iran was 
made in large part because of an explicitly political judgment 
on the part of European countries that it would be appropriate 
to aid Iran's reformers. If decisions about lending to Iran are 
to be made in the future as they have been in the past, on such 
explicitly political grounds, then bank loans to Iran will 
become an international imprimatur for Iran's government. That 
would be most unfortunate.
    [The prepared statement of Patrick Clawson can be found on 
page 33 in the appendix.]
    Chairwoman Biggert. Thank you very much. Again, we will 
have a question period for 5 minutes each and I will yield 
myself 5 minutes.
    Dr. Takeyh, I think I will ask the same question that I 
asked at the end to Mr. Schuerch. Is the World Bank the best 
tool to use to accomplish U.S. foreign policy goals in Iran?
    Mr. Takeyh. I think as Patrick was saying, World Bank has 
been part of the American international policy objectives. In a 
sense, its creation was designed to rehabilitate the European 
economies, and then that mission was expanded to include other 
nations as well, the idea being that such rehabilitation will 
promote democracy and alliance systems not inconsistent with 
America's national interest objectives.
    However, in this particular case, my concern is that 
suspension of those loans, or some sort of American 
confrontation with the World Bank, is not appropriate at this 
time, given the fact that the World Bank and other 
international institutions are going to be utterly critical in 
reconstruction of Iraq. Once again, we have to use those 
international institutions in a constructive manner.
    Also, I do not believe that it will have the salutary 
impact that it seems to be suggested, namely that the 
suspension of those loans to Iran will have a material impact 
on some of its most troublesome decisions regarding its 
terrorism portfolio or its weapons of mass destruction. It is 
important to recognize that Iran has been under a considerable 
degree of economic pressure from the United States, and indeed 
the international community, since the inception of theocracy. 
For some self-defeating reason, it has maintained its support 
for Hezbollah and other such organizations. So closing Iran's 
terrorism portfolio will require broader multilateral effort, 
as opposed to sort of a contentious argument within yet another 
international organization.
    Chairwoman Biggert. Going a little bit further, with Iran 
agreeing to tougher United Nations inspections, I think at 
least, and I just glanced briefly at the article today and I am 
not so sure that is going to continue for too long, suspending 
its uranium enrichment program and cooperating with the 
International Atomic Energy Agency, would action on Congressman 
Sherman's legislation be wise at this moment?
    Mr. Takeyh. There are a lot of problems with the sort of 
agreement that Iran has reached with the IAEA, namely whether 
actually Iran will suspend enrichment of uranium. The position 
of Iranians is that they reserve the right to suspend when they 
want, and resume enrichment of uranium as they wish. It is the 
EU position that negotiated this agreement that they have to 
stop enrichment facilities.
    Would passage of this legislation have a material impact on 
those particular deliberations? I suspect not. This is a part 
of a larger set of discussions that Iranians are having with 
the Europeans, and it has to do with a multiplicity of 
interests and concerns that Europeans and other members of the 
international community have. There are a lot of problems with 
this deal, because under the auspices of IAEA's additional 
protocols, Iran can do a lot of research and activity for its 
nuclear infrastructure. But in and of itself, this particular 
legislation is unlikely to make those IAEA protocols even 
tougher. Even the enhanced, tough IAEA protocols are not going 
to stop Iran's weapons research program. That is the problem 
with IAEA, not World Bank versus IAEA.
    Chairwoman Biggert. Thank you.
    Dr. Clawson, let me ask you, and you having worked at the 
World Bank, do you think it is the best tool to use in 
accomplishing U.S. foreign policy goals in Iran?
    Mr. Clawson. No. It is certainly not. The question is 
whether or not it is one of an appropriate set of tools. 
Clearly, the World Bank would be a relatively small portion of 
our total toolbox that we use in dealing with Iran. I would 
quite agree with Ray that action at the World Bank would be 
much more effective if we were able to secure agreement with 
our European partners on a joint stance. I think the question 
that has to be considered is, how can the United States 
government most vigorously and forcefully and effectively lobby 
the European governments towards that combined stance at the 
World Bank? It may be useful for this committee to decide how 
useful it would be to have some kind of congressional push for 
the administration in its lobbying efforts.
    Mr. Takeyh. The World Bank loans will actually play a 
larger role if the issue of Iran's nuclear weapons goes from 
IAEA to the U.N. Security Council. If Iran is deemed in 
noncompliance with its IAEA nonproliferation commitments, then 
potentially this issue can go to the U.N. Security Council, and 
under the auspices of the Security Council a range of 
multilateral sanctions will be considered. One of them would be 
suspension of not just the World Bank loans, but all 
international lending organizations. In that particular sense, 
World Bank loans do have a role to play, but we are not at that 
stage yet.
    Chairwoman Biggert. What U.N. sanctions would have the most 
affect on the Iranian economy?
    Mr. Clawson. On the Iranian economy, that is quite a 
different question than on the Iranian nuclear program. On the 
Iranian economy, blocking access to international capital would 
be a powerful signal that the Security Council regards Iran as 
a problematic country, and would frankly scare off the 
international oil companies that are talking about large-scale 
investments in Iran. It is the additional oil revenue that 
would be produced by the investments of those international oil 
companies that are really central to Iran's plans for growth. 
So scaring off international oil companies is what is going to 
have the impact. You probably do not have to ban the 
international oil companies in order to have that impact. You 
could probably get almost all of that impact by just banning 
new loans by international financial institutions to Iran.
    Mr. Takeyh. I think there is a paradigm of success enacted 
through the U.N., namely that sanctions that were imposed on 
Libya as part of the Lockerbie process. I don't think anyone is 
going to necessarily stop buying Iranian oil. They did not stop 
buying Libyan oil when Libyans were blowing up European 
aircraft in the air. Nevertheless, those U.N. sanctions had a 
significant and important impact on the Libyan economy in the 
sense that they prohibited financial transactions, technology 
transactions, travel restrictions, and so on. They did make an 
impression on the Libyan regime.
    A similar set of sanctions enacted through the U.N. and 
adhered to by all the members of the Security Council, and 
indeed the international community, can have a similar effect. 
I do not necessarily think that it is going to stop 
international countries that rely on Iranian oil, that an 
increasingly large amount will stop buying this. Nevertheless, 
as Patrick said, once the U.N. Security Council makes 
prohibitions, it has intangible effects in terms of deterring 
foreign investments because Iran becomes a very risky area and 
the international investment community is inherently risk-
averse.
    Chairwoman Biggert. I think, Dr. Takeyh, that you commented 
in September that the U.S. Government should be flexible in its 
relations with Libya, since they were beginning to comply with 
international standards. You stated that they should be removed 
from the terrorist list. Do you feel the same way about Iran?
    Mr. Takeyh. No. I do not think Iran is the same say. Libya 
is no longer, according to documents by the State Department 
itself, engaged in terrorism in the sense that it is no longer 
participating and supporting rejectionist Palestinian groups 
and so forth. Libya has to remain on the terrorism list 
ostensibly because it had failed to come to terms with the 
Lockerbie sanctions, with the compensation for the families. 
Iran is very much engaged in terrorism. It is an important 
supporter for Palestinian rejectionist groups, Hezbollah, and 
therefore Iran has earned its place on the terrorism list. I do 
think that that classification should be sustained in the case 
of Iran. Libya is a different sort of an issue.
    Chairwoman Biggert. Thank you. I have run out of time.
    The gentleman from California is recognized.
    Mr. Sherman. Thank you. I first want to extend an offer to 
you gentlemen, but especially to the Deputy Assistant Secretary 
who was here earlier, to come to my district and explain why my 
taxpayers should be funding foreign aid if even a portion of it 
is being administered by bureaucrats who feel it should be sent 
to Teheran.
    Dr. Clawson, it is said by looking at documents, that the 
World Bank does not make any of its decisions based on politics 
or the political or military actions of the borrowing country. 
Has the World Bank in effect denied loans at some time or 
another to China, South Africa, India, Pakistan, and Iran for 
political rather than economic reasons?
    Mr. Clawson. I would say that in many of those cases, the 
political objections we have against a country are also 
objections about their economic policies. For instance, I 
worked at the International Monetary Fund when there was a very 
controversial loan considered for the South African government 
that many of us on the staff thought was a scandal because 
South Africa's apartheid policies were not just a political 
policy, but they had a profound economic impact on the country 
by introducing labor market distortions and rigidities. We 
thought that it was entirely appropriate for the IMF not to 
lend.
    Mr. Sherman. But the World Bank's decision not to lend to 
China right after Tiananmen Square was not as a result of 
Tiananmen Square being a change in Chinese economic policy, 
although there was certainly an economic effect of the entire 
world scene.
    Mr. Clawson. I would argue that after the Tiananmen Square 
episode, the Chinese government slammed on the brakes in making 
reforms on the state-owned enterprises and reversed direction 
on a lot of the efforts to introduce more market-oriented 
reform and to respect private property.
    Mr. Sherman. Since my time is limited, I will interrupt you 
and take another tack. Is it possible that developing nuclear 
weapons and perhaps smuggling them into the United States, 
funding terrorism, sheltering al Qaeda, could lead to events 
that adversely affect the Iranian economy and its credit-
worthiness?
    Mr. Clawson. Yes, sir, but I would suggest that we can just 
rely upon rather more traditional World Bank considerations. 
This is an economy which by most estimates 70 percent of the 
economic activity is controlled by these shadowy foundations.
    Mr. Sherman. So we have lots of good reasons not to lend 
money to Iran from the World Bank.
    Mr. Clawson. Exactly.
    Mr. Sherman. Okay. There is this idea that if you are 
walling off Iran economically, that no one brick is important. 
But you have ILSA, you have stopping World Bank loans; you have 
eliminating all non-energy exports from Iran to the United 
States; you have efforts to stop further trade deals between 
Europe and Iran. Are all those bricks of some importance to 
building that wall, or are some of them irrelevant?
    Mr. Clawson. They all have some importance. Some are great 
big huge bricks, and some are relatively small bricks.
    Mr. Sherman. But if you are trying to build a wall, you try 
to put up all the bricks you can.
    Mr. Clawson. And hopefully to have as large bricks as you 
can.
    Mr. Sherman. Yes. Can you think of any other bricks? What 
other ways can we demonstrate to the Iranian people that they 
will be better off economically if their government changes its 
policies? What other bricks am I missing?
    Mr. Clawson. I would think it would also be useful for us 
to put forward some of the carrots that would be available. In 
other words, a policy that shows that there are carrots that 
are available if you were to change your approach would also be 
helpful.
    Mr. Sherman. I look forward to being an original cosponsor 
of the repeal of the ``I'' in ILSA when that government is no 
longer developing nuclear weapons and supporting terrorism. I 
look forward to finding additional ways to help the Iranian 
people.
    Have there been times at the World Bank where the United 
States has, what should I say?, used all of its force, bare-
knuckles or whatever, or just loud voice to stop a loan from 
the World Bank, situations where we have done more than just 
vote no, then have tea and crumpets with the people who voted 
yes?
    Mr. Clawson. Absolutely. As a former bank staff member, I 
would rather not go into my experiences as a bank staff member.
    Mr. Sherman. Wait a minute. This is not the CIA here.
    Mr. Clawson. Fair enough, but I was, after all, an 
employee.
    Mr. Sherman. Do you guys take some secret handshake loyalty 
oath, the hit squads if you violate?
    Mr. Clawson. I can say, sir, that there were many occasions 
on which the United States----
    Mr. Sherman. I am going to ask you to say specifically. You 
are not under subpoena here, but this is a congressional 
committee. Why should our tax dollars go to an organization 
that is more secretive than the CIA? They would answer the 
question, at least in closed session.
    Mr. Clawson. International organizations, sir, I have to be 
concerned about their ability to work with all member 
governments. I think part of the great merit that U.S. 
membership in these organizations brings is that we can extract 
out of these governments information that we might not 
otherwise get. It comes in part because of the confidentiality 
of the employees.
    Mr. Sherman. All I can say is, maybe you could come to my 
district and explain why money should go into a process that 
the American people who are paying at least 16 percent of the 
cost are deprived of finding out what is really going on. And 
also, how do you go to African countries and pound the table 
about the desirability of transparency when the World Bank 
itself gives opaque a new and startling definition?
    I see my time has expired, but I look forward to a World 
Bank that practices what it preaches.
    I yield back.
    Chairwoman Biggert. Talking about the transparency of the 
World Bank, I was going to ask the question, if you can 
attribute the pace of disbursements to projects in Iran to the 
World Bank transparency and accountability requirements, which 
may be reacting to the level of corruption and mismanagement by 
the Iranian officials, it seems to me that it is pretty 
transparent. If you could comment on that?
    Mr. Clawson. I would quite agree with you, and point out 
that Iranian observers also agree. There have been comments 
made in the Iranian press that the World Bank is insisting on a 
level of honesty in business transactions which is not the norm 
in Iranian procedures.
    Chairwoman Biggert. Okay. Could you comment, then, just on 
the level of corruption within Iran's government and the 
business community?
    Mr. Clawson. Outrageous, which is yet another reason why 
lending to Iran should be approached very carefully, because 
the Iranian observers tell us that the degree of corruption in 
Iran has grown very substantially over the course of the 
Islamic Republic. There have been numerous court cases which 
have revealed stunning levels of corruption in Iran.
    Chairwoman Biggert. Dr. Takeyh, could you comment on that? 
What do you think is the view of the U.S. business community on 
economic sanctions and the prohibition against doing business 
with Iran?
    Mr. Takeyh. I would echo what Patrick said. The level of 
corruption has grown since the Islamic Republic, and there was 
a fairly high threshold before that. So this is a system that 
is rewarding a very narrow collection of people. These 
philanthropic organizations, the bonehs, that have 
metamorphosed into business conglomerates. The problem with 
their conduct is not only they are unaccountable, not only they 
do not pay taxes, but because they dominate sectors of industry 
and their corruption is profound. Almost any business 
transaction that you want to do in Iran today, you require some 
sort of a back pay to somebody.
    Having said that, I am not involved in the American 
business sector, but I suspect that there are those who are 
willing to commercially interact with Iran, simply because the 
profits are high enough, particularly in terms of the petroleum 
sector. They are used to dealing with countries where there is 
some degree of financial opacity and corruption as a matter of 
course. Iran is a very difficult place to do business, and that 
in and of itself is a deterrent to foreign investment. There 
has been an attempt to pass foreign investment laws, but they 
have not been as successful as they should be.
    So I would suggest that if there was an absence of U.S. 
sanctions, I suspect many American companies, both in petroleum 
and non-petroleum sectors, will actually bear this difficult 
business environment and return to Iran.
    Chairwoman Biggert. I understand that foundations or quasi-
government entities may be providing the majority of funding 
for Iran's nuclear program. Does that affect your analysis of 
the role of the World Bank lending in Iran and its possible 
impact on the nuclear program?
    Mr. Takeyh. No. I think Iran has made a determination as a 
nation-state that it will pursue a robust nuclear research 
program. I do not believe they have made a decision to cross 
the nuclear threshold, but I think they are going to cuddle 
awfully close to that line. Bonehs I do not believe are 
instrumental in this. I think it is a national governmental 
decision made by all the relevant parties, not reformers, not 
conservatives. This is one of the few issues that everybody 
sort of comes together on. There is a consensus within this 
fractious body politic that nuclear weapons potentially could 
serve Iran's strategic deterrent interests. It is not a 
factional issue. It is a national one.
    Chairwoman Biggert. So it does not matter if its 
foundations are quasi-government. It is the whole state that 
has made that policy.
    Mr. Takeyh. Some of the most ardent proponents of nuclear 
arms are similarly proponents of democratic transition.
    Chairwoman Biggert. Okay. You said that despite some 
movement towards reform, the hardliners still maintain 
considerable political and economic control in Iran.
    Mr. Takeyh. Yes. The reform movement has not succeeded in 
dislodging the institutional influence of the hardliners. They 
maintain institutional control of the judiciary, key economic 
sectors, security services and foreign policy national security 
apparatus. The reform movement has power over elected 
institutions, but those elected institutions have not been able 
to infringe on the fundamentals of the conservatives' power. 
This is an evolutionary process. It may do so at some point, 
and we are in the beginning stages of democratic transition. It 
took many years for European countries and others to reach a 
more accountable, decentralized democratic polity. But at this 
particular stage, a snapshot would reveal that Iranian 
hardliners are in charge of the national security apparatus.
    Chairwoman Biggert. So then how effective has the policy of 
economic isolation been, since there is no restriction on oil 
sales?
    Mr. Takeyh. In the absence of that, I am not quite sure it 
has been as effective. We have had economic sanctions on Iran 
since the inception of theocracy, yet this behavior on 
terrorism and weapons of mass destruction and destabilization 
of its neighbors has continued. The argument has been made that 
by having economic sanctions, whose cost is very difficult to 
quantify, but there is undeniable cost, that Iran will be 
deprived of revenue to invest in its terrorism portfolio. Yet 
at the same time, the terrorism portfolio is rather robust and 
intense. So there is a sort of a contradiction in that.
    On issues that Iran has made an ideological or strategic 
commitment, it has not been deterred by imposition of 
unilateral American sanctions. If those sanctions become 
multilateralized, if the Japanese and Europeans begin to 
disinvest from Iran, that is a different category of issues.
    Chairwoman Biggert. My time has expired.
    Mr. Sherman?
    Mr. Sherman. Thank you.
    Dr. Takeyh, you talk about IAEA leading to U.N. Security 
Council, perhaps prohibiting further loans. Could this also 
prevent the disbursement of funds under loans already made?
    Mr. Takeyh. Patrick could speak about the World Bank 
procedures better than I can.
    Mr. Clawson. Absolutely. I think that would be the normal 
thing to do.
    Mr. Sherman. Dr. Clawson, what could the United States do 
to at least slow and use questions to slow the actual 
disbursement of loans already made?
    Mr. Clawson. We can carefully examine the procedures that 
are being used for the procurement. It would indeed be quite 
appropriate, given the history of corruption in Iran and its 
track record, for us to look very carefully at the kind of 
procurement decisions being made, to make sure that bank rules 
are not being bent or twisted.
    Mr. Sherman. Dr. Takeyh, we accept imports basically in 
three categories, nuts and fruits, carpets and caviar. Which 
political-family entities tend to control those three 
industries?
    Mr. Takeyh. I am betting the answer you probably already 
know is the Rafsanjani family. I think we sort of both know how 
this dance is going to go.
    Mr. Sherman. So the decision by the Clinton administration 
continued both before and after September 11 by the Bush 
administration, in effect three different decisions, is 
basically putting caviar in our mouths and dollars in the 
Rafsanjani family pocket.
    Mr. Takeyh. It is not putting caviar in our mouths.
    Mr. Sherman. In the mouths of certain Americans.
    Mr. Clawson. And hurting California pistachio producers.
    Mr. Sherman. That would be true as well. I know we don't 
have any carpets or caviar in California, though, and I would 
be happy to close off any one of those three.
    Mr. Takeyh. The robust Rafsanjani financial conglomerate 
benefits from those transactions, yes.
    Mr. Sherman. And unlike oil where all you need to do is 
find one or two customers willing to pay a world price, oil 
being fungible and kind of an economic necessity, those luxury-
type items need as many markets as possible. In the absence of 
markets, the price available to Iranian producers would 
decline.
    The bill I have put forward not only would take money away 
from the World Bank, but give it to USAID. There are two 
arguments for the World Bank, one, maybe it is more efficient 
than USAID; makes better decisions. The other is the idea of 
leverage. Now, put leverage aside, because we go to donor 
conferences where USAID puts some money on the table and 
leverages that. And whether it is a donor conference or just 
discussions, every dollar USAID gets from Congress is a reason 
for parliaments in Europe to provide more money to their 
organizations. In terms of efficiency, does USAID spend money 
in the countries that need it, as effectively as the World 
Bank?
    Mr. Takeyh. The procedures and operations of an 
international lending organization is not my specialty. Patrick 
might know better about it.
    Mr. Sherman. Dr. Clawson I think should be addressing that.
    Mr. Clawson. Unfortunately, the answer on the whole is no.
    Mr. Sherman. The World Bank is somehow smarter at spending 
money?
    Mr. Clawson. The World Bank is both smarter at spending the 
money and subject to less bureaucratic reporting requirements, 
which are a significant problem in the efficiency with which 
USAID can carry out its operations.
    Mr. Sherman. We have to get you over to the I.R. Committee 
and try to make USAID more efficient, although reporting 
requirements seem to be called for in dealing with countries 
with such opaque economic systems.
    Dr. Clawson, which members of the World Bank seem to be 
pushing forward and arguing for these loans to Iran, and any 
idea why?
    Mr. Clawson. I am not familiar with the debates going on 
there, but I would just point out a very interesting phenomena. 
As Mr. Schuerch pointed out, those who opposed the loans to 
Iran were the United States, Canada and France. So it is an 
interesting situation in which we and the French found 
ourselves on the same side, opposing a number of countries that 
are traditionally our allies, for instance, the British 
government.
    Mr. Sherman. Did France do that as a favor to us or out of 
agreement with some of the arguments that are being made in 
this room?
    Mr. Clawson. Agreement with some of the arguments being 
made in this room, and they said so explicitly.
    Mr. Takeyh. Particularly proliferation. The French are very 
aggressive on the Iranian proliferation issue, and they have 
the best intelligence on it.
    Mr. Sherman. I am done. Thank you very much, gentleman.
    Chairwoman Biggert. Thank you.
    And thanks to the panel for your insights and your input 
today. We really appreciate your being here. Let me just add 
that the chair notes that some Members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will be open for 
30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    With that, this hearing is adjourned.
    [Whereupon, at 11:42 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                            October 29, 2003


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