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





                  HIPC DEBT RELIEF: WHICH WAY FORWARD?

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

                                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

                             SECOND SESSION

                               __________

                             APRIL 20, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-79


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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          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
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 Chair   BERNARD SANDERS, Vermont
JAMES A. LEACH, Iowa                 MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware          MAXINE WATERS, California
RON PAUL, Texas                      BARBARA LEE, California
DONALD A. MANZULLO, Illinois         PAUL E. KANJORSKI, Pennsylvania
DOUG OSE, California                 BRAD SHERMAN, California
JOHN B. SHADEGG, Arizona             DARLENE HOOLEY, Oregon
MARK R. KENNEDY, Minnesota           LUIS V. GUTIERREZ, Illinois
TOM FEENEY, Florida                  NYDIA M. VELAZQUEZ, New York
JEB HENSARLING, Texas                RAHM EMANUEL, Illinois
TIM MURPHY, Pennsylvania             CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 20, 2004...............................................     1
Appendix:
    April 20, 2004...............................................    31

                               WITNESSES
                        Tuesday, April 20, 2004

Flood, Gerald, Counselor, Office of International Justice and 
  Peace, United States Conference of Catholic Bishops............    11
Hart, Thomas H., Director, Government Relations, DATA (Debt, AIDS 
  and Trade for Africa)..........................................     8
Melito, Thomas, Acting Director, International Affairs and Trade, 
  General Accounting Office......................................     7

                                APPENDIX

Prepared statements:
    Biggert, Hon. Judy...........................................    32
    Oxley, Hon. Michael G........................................    34
    Bachus, Hon. Spencer.........................................    36
    King, Hon. Peter.............................................    39
    Lee, Hon. Barbara............................................    41
    Waters, Hon. Maxine..........................................    43
    Flood, Gerald................................................    45
    Hart, Thomas H...............................................    54
    Melito, Thomas...............................................    79

              Additional Material Submitted for the Record

Melito, Thomas:
    Written response to questions from Hon. Judy Biggert.........    98

 
                  HIPC DEBT RELIEF: WHICH WAY FORWARD?

                              ----------                              


                        Tuesday, April 20, 2004

             U.S. House of Representatives,
         Subcommittee on Domestic and International
            Monetary Policy, Trade, and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:30 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[Vice Chair of the subcommittee] Presiding.
    Present: Representatives Biggert, Feeney, Oxley, Maloney, 
Frank, and Bell.
    Mrs. Biggert. [presiding] The Subcommittee on Domestic and 
International Monetary Policy will come to order. It is my 
pleasure to have witnesses here today and to welcome all of you 
to today's hearing on HIPC, or highly indebted poor countries, 
debt relief. We are here today to hear testimony and encourage 
discussion of a report released last week by the General 
Accounting Office concerning the possible cost of the enhanced 
HIPC program. The Financial Services Committee under the 
leadership of Chairman Oxley and Ranking Member Frank requested 
this report so that the members of this committee could have a 
better sense of the possible costs of the enhanced HIPC 
initiative.
    I might add that you might have noticed that I am not 
Chairman Peter King; I am the Vice Chair, Judy Biggert. Mr. 
King will have an opening statement for the record but he could 
not be here today.
    [The prepared statement of Hon. Peter T. King can be found 
on page 39 in the appendix.]
    The GAO report presents some very troubling estimates. It 
indicates that if HIPC countries are to benefit long term from 
their debt forgiveness, they are likely to need between now and 
the year 2020 significant continued assistance from the 
international lending community. In particular, the GAO 
estimates that an additional $153 billion will be needed in 
development assistance and another $215 billion will be needed 
to, and I quote, ``fund export earnings shortfalls.'' This 
would all be in addition to an expected $8 billion in debt 
relief likely to be needed when countries reach their 
completion point and the topping-up portion of the HIPC debt 
relief program is triggered. The grand total is $375 billion 
through 2020.
    The GAO also tells us that these are conservative estimates 
that could easily rise. Of course the estimate is a global 
number. If the past is any guide, the United States could be 
called upon to contribute a portion of the estimate, about 12 
percent. This may be a small portion, but it represents a large 
number, $52 billion over the next 18 years. If the GAO numbers 
are on the mark, this would probably work out to $2.8 billion 
per year to U.S. taxpayers. I probably am not the only Member 
of Congress that would question the wisdom of allocating that 
kind of funding for the next 18 years without further serious 
discussion and consideration.
    This GAO report will generate serious discussion. There 
will be questions about its assumptions and methodology. People 
rightly will point out that there exists no formal commitment 
from the multilateral lending banks or donor countries to make 
up for export earnings shortfalls. People rightly will point 
out the difficulty of accurately estimating development 
assistance needed by the HIPC countries for the next 18 years, 
especially if one assumes business as usual with no change in 
lending practices.
    Finally, people will question whether it is appropriate or 
correct to assume that export earnings and HIPC country 
exposure to export and commodity price volatility will remain 
more or less the same.
    I come from Chicago where commodities markets for years 
have helped our farmers hedge exposure to the same kind of 
commodity price volatility that complicates development 
assistance. I understand that the World Bank is exploring how 
to make better use of the commodities derivatives markets to 
help poor countries reduce the exposure their economies and 
export sectors have to price volatility. I also understand the 
World Bank is looking at how in the future it might approach 
lending decisions differently in order to prevent a linear 
accrual of debt burdens.
    And so I welcome this GAO report for the questions it 
raises. It gives Congress and other policymakers a sense of how 
expensive it could be if current lending and business practices 
in the development community do not change. It provides us with 
a concrete sense of the magnitude of the task at hand. It also 
provides a good basis for development experts to debate how 
further development assistance should be conducted in the 
future. And it raises additional questions that are not limited 
to the following: Does it make sense to continue lending to 
poor countries in all circumstances? What limits on lending 
should occur? What is the appropriate role of grants? Is it 
fair to refer to new grants as debt relief? How can developed 
donor countries facilitate policy changes and enhance access to 
modern financial hedging instruments that can help support 
countries' development choices? And finally, what can debt 
relief reasonably be expected to achieve and is it asking too 
much for debt relief to resolve broader development problems?
    Debt relief under the HIPC program already has begun to 
improve lives in impoverished countries. I look forward to 
hearing from our witnesses about what specific progress has 
been made. I also look forward to a spirited discussion of how 
to facilitate progress within HIPC countries. We want to learn 
from the failures of development lending in the past and 
explore the availability of new approaches that can help 
countries develop more responsibly in the future. I personally 
am not convinced that providing billions of dollars to support 
export shortfalls is a good use of anyone's resources, 
especially when other alternatives might exist to help 
countries develop more efficiently functioning markets.
    The GAO report makes clear that a failure to identify a 
delineation between debt relief, property reduction, and 
development assistance goals will be costly for U.S. taxpayers 
and people all over the world.
    With that, I will recognize the Ranking Member, Mrs. 
Maloney from New York, for an opening statement.
    [The prepared statement of Hon. Judy Biggert can be found 
on page 32 in the appendix.]
    Mrs. Maloney. I will defer to the ranking leader, Mr. 
Frank, if you would like to open and I will follow you.
    Mr. Frank. I thank my colleague. I appreciate the chairman 
of the full committee's accommodating us by having this 
hearing. We tend when we have hearings to focus on problems and 
criticisms in areas where we can do better, which is 
appropriate, but sometimes the underlying reality gets lost. 
The underlying reality has been that this has been quite 
successful.
    I appreciate the fact that two witnesses from the NGO 
sector, who are both representative of organizations that did a 
great deal to get us here, recognize this. There are some real 
concrete improvements for some of the poorest people in the 
world that came out of the HIPC.
    Secondly, I don't want the HIPC criticized for what it was 
not intended to do. Particularly the $375 billion figure is a 
figure well within reason but not to carry out--and the GAO 
didn't suggest that--the specific goals of the HIPC, of the 
highly indebted poor countries. The fact is, a very small 
amount is needed in relative terms for that. The 375 is a very 
worthy goal, but it is not the case that if we don't get $375 
billion--and I think the world could afford it over that 30-
year period--that somehow this would be a failure.
    The next point I want to make is--and let's be very clear 
when we talk about debt relief--we are not talking in any 
realistic sense about letting people who incur debts in any 
morally relevant sense out from under. The debtors here are 
countries, and in almost every case the residents of the 
countries were the victims of those who incurred the debts. 
This is not a case of individuals going out and spending 
recklessly, and now saying I don't want to pay my debts. As a 
matter of fact, many of us in the West have more responsibility 
for these debts than the people who are now bearing their 
burden, because it was in many cases the governments in the 
West, seeking in some cases to pursue geostrategic goals, who 
helped these countries incur the debt. That ought to be very 
clear. This is not one of those cases where we are letting 
people off a hook that they got themselves onto.
    We have some of the poorest people in the world who have 
been twice victimized by bad governance; one, by the abuses 
they suffered during the period of those governments being in 
power, and secondly by the long-lasting burden of the debts 
those governments incurred from which the people in the 
countries very often got no benefit.
    We are in the process of trying to reduce that debt. That 
does not solve all the problems. I am concerned about what 
seems to be an instinct to be negative far beyond what is 
required. The Department of Treasury put out a report in 
October of 2003, comments on proposed modifications to the 
enhanced heavily indebted poor countries. It responded in part 
to legislation that has been suggested by some of the 
organizations, the gentleman from New Jersey (Mr. Smith) and I 
and others worked on to try and talk about going further. I was 
particularly disturbed on page 8 to read the following quote 
from the Treasury's report: As highlighted in the World Bank's 
operations evaluation department's evaluation of the HIPC 
program, continued focus on HIPC and debt relief has been a 
distraction in terms of the greater emphasis needed on well-
defined economic growth strategies in these countries. The OED 
report stressed that HIPC debt relief is not a panacea, and 
that given institutional capacity constraints in the HIPCs, 
debt relief is not an efficient way of achieving desired social 
sector outcomes.
    Those comments are inaccurate, they are damaging, and I do 
not regard them as having been made in good faith.
    It is true that the OED report stressed that debt relief is 
not a panacea. I am prepared to ascribe to the general 
statement that nothing is a panacea. I have never seen a 
panacea. Maybe they exist somewhere. The role of panaceas is to 
be a stick with which people can beat things that they are in 
favor of and can think of nothing substantively bad to say 
about them.
    Of course it is not a panacea. No one ever said it was. It 
is helpful, as we will hear again from some of these witnesses.
    While there are some points of improvement here, I very 
much regret the negative spirit in which Treasury writes these 
comments. When I saw that, I was troubled and went and got the 
World Bank's report. That simply does not accurately convey 
what the World Bank's report said, and I would hope that the 
Treasury would be willing to correct that.
    Just a couple of last points. One debate where I do agree 
with Treasury and with this administration, we had a year ago--
I hope it is over by now, I think the witnesses are on the 
right side--for some reason when the administration proposed 
that we substitute grants for loans to poor countries, some of 
my ideological allies, not used to ever agreeing with this 
administration, objected. I think the sides got switched there 
and people got--it is like those old comedy routines where 
people are saying yes, no, yes, no; and somebody says no and 
the other guy switches to yes.
    Of course grants are better than loans. Improvident grants 
aren't good. Improvident loans aren't good. But everything else 
being equal, grants make more sense than loans when you are 
trying to keep people from getting into debt. I think we should 
be moving more in that direction, both with the multilateral 
institutions and bilateral institutions.
    Finally, I agree, and Mr. Hart makes this point: We ought 
to be going beyond that with regard to debt relief, and in 
particular I believe we should be working with the multilateral 
institutions, particularly the World Bank and the IMF, to get 
them to give the same degree of debt relief that was given 
bilaterally. After all, the multilaterals are in fact the sum 
of the bilaterals. They are not independent entities that make 
their own money. They get money from elsewhere.
    Particularly with regard to the IMF--and I want to pursue 
this, and I would ask people to join me--they did some 
monetization of their gold and were able to pay for some debt 
relief. They can go further. I don't know if we can get 100 
percent. It is harder with the World Bank than the IMF to come 
up with a funding source, but there is no reason why the IMF 
should not now be pressed to go back into this process of 
monetizing some of their gold which is undervalued and use some 
of those proceeds to give greater debt relief. That is one of 
the specifics that comes out of this for me.
    Madam Chair, I thank you and I thank the Ranking Member of 
the subcommittee for her recognizing me.
    Mrs. Biggert. I thank the gentleman.
    The gentleman from Ohio, the Chairman of the Committee on 
Financial Services, is recognized for an opening statement.
    Mr. Oxley. Thank you, Madam Chairwoman. Thank you for 
chairing this hearing today on an important issue for the 
global community. Last year, Ranking Member Frank and I 
requested that the GAO analyze financing issues associated with 
the initiative led by President Bush, at the Group of Eight 
level, to enhance debt relief for the most indebted countries 
in the world. We also asked the GAO to identify options for 
providing additional relief to help countries achieve debt 
targets, debt sustainability and lower debt service burdens.
    Providing humanitarian relief to the world's poorest 
nations is a duty of the United States and developed nations 
around the globe. The question is not whether to provide 
humanitarian aid but how to use the taxpayers' money most 
effectively in our quest to lift these nations from the depths 
of poverty.
    I look forward to receiving the GAO's testimony this 
afternoon as well as the reaction to the report from two 
leading organizations, DATA and the Catholic Conference. The 
HIPC initiative has already had a positive impact on the lives 
of real people around the globe. Our witnesses will provide 
some details on how funds within HIPC countries have been 
reallocated away from debt service and towards funding 
education and inoculation programs. I also understand that the 
process within HIPC countries for identifying how these funds 
should be allocated is strengthening democracy and civil 
society participation in government decision-making.
    While there is a long way to go in many of these countries 
towards full democracy, these are encouraging first steps. 
However, HIPC debt relief is a limited tool. It seeks merely to 
decrease debt service burdens for the poorest countries on the 
planet. It identifies as goals, but not commitments, broader 
ideals such as reducing poverty and increasing export earnings 
within these countries.
    Today's GAO report is controversial because it attempts to 
estimate the costs that could be associated with achieving 
these broader goals. The estimates in this report are sobering. 
GAO estimates that the cost of achieving both debt relief and 
economic growth targets in HIPC countries could be at least 
$375 billion between now and 2020 in present value terms. Even 
if the U.S. portion of this amount is as small as 20 percent, 
this is still a serious amount of money that will cause 
policymakers to consider carefully and strategically 
development assistance strategies.
    I welcome this report because it will require policymakers 
and development experts alike to devote renewed attention to 
distinguishing debt relief from development assistance. It also 
identifies the possible cost of continuing to do business as 
usual in the multilateral development banks. By assuming that 
business practices in the banks do not change and by assuming 
that export growth in HIPC countries will not be materially 
enhanced in the future, the GAO report shines a spotlight on 
the need for donor countries, development banks, and HIPC 
countries to renew efforts to find new ways of delivering 
development assistance, so that in the future poor countries do 
not amass crushing debt burdens.
    I am encouraged that the World Bank is already thinking in 
these terms. In a February 2004 report on debt sustainability 
in low-income countries, it explores the possibility of 
countries using market mechanisms such as derivatives markets 
to hedge their exposure to commodity market volatility. It is 
actively considering a new framework for lending to low-income 
countries that would limit the amount of debt a country could 
acquire. These are encouraging developments. As we discuss HIPC 
countries' need to expand and diversify their export sectors, I 
would also like to underscore the importance of reviving the 
Doha round of trade talks. Reduced trade barriers will provide 
all countries with opportunities for growth and development.
    I look forward to today's testimony and continued efforts 
to enhance the effectiveness of international development 
assistance. I yield back the balance of my time.
    Mrs. Biggert. The gentleman yields back.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 34 in the appendix.]
    The gentlewoman from New York (Mrs. Maloney) is recognized 
for 5 minutes for an opening statement.
    Mrs. Maloney. Thank you very much. In the interest of time, 
I will request unanimous consent to place my comments in the 
record and merely state that I am looking forward to the 
panelists' statements on the new GAO report of the HIPC 
program.
    We do know that where debt relief has been accomplished, it 
has been very successful. I have a series of examples in my 
statement that show where it has truly helped return children 
to school and helped to vaccinate children in Tanzania, Uganda, 
Mozambique, and others where debt relief savings were used to 
really provide essential services and education and health care 
to some of the world's poorest people.
    I support this program. I look forward to the testimony. I 
will place my 5-minute statement into the record. Thank you.
    Mrs. Biggert. Without objection, all members' opening 
statements will be made a part of the record. Are there further 
statements?
    Then we will proceed to the witnesses. Today we have Mr. 
Tom Melito, Acting Director, International Affairs and Trade, 
United States General Accounting Office. Welcome.
    Mr. Thomas H. Hart, Director, Government Relations, DATA--
Debt, AIDS and Trade for Africa. Thank you for coming.
    And Mr. Gerald Flood, Counselor, Office of International 
Justice and Peace, United States Conference of Catholic 
Bishops.
    I am sure that most of you probably know the drill. Without 
objection, your written statements will be made a part of the 
record and you will each be recognized for a 5-minute summary 
of your testimony. Then we will ask questions with a 5-minute 
limit which we will try and stick to.
    Mrs. Biggert. I will first recognize Mr. Melito for your 
testimony.

  STATEMENT OF THOMAS MELITO, ACTING DIRECTOR, INTERNATIONAL 
   AFFAIRS AND TRADE, UNITED STATES GENERAL ACCOUNTING OFFICE

    Mr. Melito. Madam Chairwoman and members of the 
subcommittee, thank you for the opportunity to be here today to 
discuss GAO's assessment of funding challenges related to 
heavily indebted poor countries, or the HIPC initiative. The 
HIPC initiative is a joint bilateral and multilateral effort to 
provide debt relief to poor countries to help them achieve 
long-term growth and debt sustainability.
    Our recently released report has two main findings. First, 
the three key multilateral development banks we analyzed, the 
World Bank, African Development Bank, and Inter-American 
Development Bank, face a funding shortfall of $7.8 billion in 
present-value terms under the HIPC initiative. We estimate that 
the United States could be asked to contribute an additional 
$1.8 billion to close this financing shortfall.
    Second, we estimate that the 27 countries that have 
qualified for debt relief may need more than $375 billion from 
donors to ultimately achieve their economic growth and debt 
relief targets by the year 2020. The United States may be asked 
to contribute about $52 billion of this assistance.
    Let me briefly provide some background on the HIPC 
initiative and then describe in greater detail the results of 
our work. The World Bank and IMF have classified 42 countries 
as heavily indebted and poor. Three-quarters of these are in 
Africa. The current cost for this initiative is about $41 
billion in present-value terms. This will be funded almost 
equally between bilateral and multilateral creditors. A major 
goal of the HIPC initiative is to provide recipient countries 
with a permanent exit from unsustainable debt burdens.
    I will now turn to our main findings:
    First, regarding the financing issues for the current 
initiative, the three banks we analyzed face a funding 
shortfall of $7.8 billion in present-value terms. The World 
Bank has the largest shortfall at $6 billion. Despite 
significant assistance from donor governments, the African 
Development Bank has a financing gap of about $1.2 billion. The 
World Bank and the AFDB have not determined how they will close 
their financing gaps. The Inter-American Development Bank is 
fully funding its HIPC obligation by reducing its future 
lending by $600 million beginning in the year 2009. We estimate 
that the United States could be asked to give an additional 
$1.8 billion to close the $7.8 billion shortfall.
    However, the total estimated funding gap is understated, 
because the World Bank does not include costs for four 
countries for which data are considered unreliable. In 
addition, all three banks do not include estimates for topping 
up, the additional relief that may be provided due to factors 
such as a weakening in countries' economic circumstances. The 
World Bank and IMF project that this additional relief could 
cost from $877 million to $2.3 billion.
    Let me now turn to our second finding, addressing 
countries' long-term economic growth and debt sustainability. 
The 27 countries that have qualified for debt relief may need 
more than $375 billion in present-value terms to help them 
achieve their economic growth and debt relief targets by the 
year 2020. This amount consists of three components: first, 
$153 billion in expected development assistance; second, $215 
billion to cover lower export earnings; and, third, at least $8 
billion to reach debt targets.
    The World Bank and IMF project that these countries will 
need $153 billion in development assistance after HIPC. 
However, this is an underestimate because it assumes that 
countries will achieve overly optimistic export growth rates. 
Under more realistic historical rates, we found that 23 of the 
27 countries are likely to experience higher debt burdens and 
lower export earnings. This will lead to an estimated $215 
billion shortfall over 18 years. These shortfalls are due to 
weather and natural disasters, lack of access to foreign 
markets, or declining commodity prices, all factors outside 
these countries' control. If countries are to achieve economic 
growth rates consistent with their development goals, donors 
would need to fund the $215 billion. Otherwise, countries would 
grow more slowly, undermining progress toward poverty 
reduction.
    Finally, we estimate that countries will need at least 
nearly $8 billion to achieve their debt targets, both those 
under the existing initiative and those the committee asked us 
to examine. Based on its historical share of bilateral and 
multilateral assistance, the United States may be asked to 
contribute about $52 billion, or 14 percent of the $375 billion 
in additional assistance.
    Madam Chairwoman, this concludes my prepared statement. I 
would be happy to answer any questions you or other members of 
the subcommittee may have. Thank you.
    Mrs. Biggert. Thank you very much.
    [The prepared statement of Thomas Melito can be found on 
page 79 in the appendix.]
    Mrs. Biggert. Next, Mr. Hart, if you will proceed.

 STATEMENT OF THOMAS H. HART, DIRECTOR, GOVERNMENT RELATIONS, 
            DATA, (DEBT, AIDS AND TRADE FOR AFRICA)

    Mr. Hart. Thank you, Madam Chairwoman. Mrs. Maloney, Mr. 
Frank, and other members of the subcommittee, I would like to 
talk briefly about what has been achieved by the HIPC debt 
relief program, which has been significant; how it can be 
improved and how debt relief compares to other forms of 
assistance, which is a lot of ground to cover in a short amount 
of time, and I hopefully can react briefly to the GAO report at 
the end. I will be happy to answer any questions you might have 
as well.
    First, let me say what a real pleasure it is to address 
this subcommittee on this critical issue. While DATA, which 
stands for Debt, AIDS, Trade, Africa, is a relatively new 
organization, many of the people who helped found DATA started 
their work during the Jubilee 2000 campaign. The best known of 
whom, of course, is Bono from U2, who is the co-founder of our 
organization. But also some of the most influential people in 
the debt campaign are actually members of the U.S. House 
Financial Services Committee. I would like to thank Mr. Leach, 
Mr. Bachus, Mr. Frank, Ms. Waters, as well as many others of 
this committee, who created the essential authorizing 
legislation as well as the political momentum to approve the 
HIPC initiative and get it funded here in the United States, 
which then had the impact of triggering the international 
agreement among the other donors.
    Over the last 4 years, Congress has provided approximately 
$860 million to the enhanced HIPC initiative, canceling both 
U.S. bilateral debt and contributing to writing off 
multilateral debt. And I am delighted to report that the 
results of this program have been substantial. Twenty-seven of 
the poorest countries in the world have now qualified, almost 
all of which are in sub-Saharan Africa. These countries will 
see their debt reduced by two-thirds, cutting $52 billion in 
debt stock.
    Other donors, in addition to the United States, have 
provided $30 billion to finance this initiative. A new process 
has emerged in which poor country governments must engage with 
their civil societies to determine poverty reduction priorities 
for their country and have increased ownership and transparency 
within their governments. For development advocates like DATA, 
very importantly, more than $1 billion annually in debt service 
is now staying in these 27 countries to fight poverty.
    And just a couple of brief examples: Uganda has used 
savings from debt relief to more than double school enrollment 
to 94 percent, which has contributed to that country's 
remarkable decline in HIV/AIDS rates. Mozambique has vaccinated 
children against tetanus, whooping cough, and diphtheria as 
well as built and electrified schools. And Cameroon has used 
debt savings to launch a national HIV/AIDS plan for prevention, 
education, testing and mother-to-child transmission.
    So, being the Financial Services Committee, what kind of 
return on this investment have you got? For an investment of 
less than $1 billion over the course of several years, the U.S. 
has leveraged $30 billion of donations from other donors and 
canceled $50 billion of debt stock, a significant clearing of 
the books of decades-old debt. It also has freed up $1 billion 
a year in debt service which is now building schools, clean 
water wells, and AIDS prevention programs.
    That said, of course, the program could be improved. The 
debt service relief has been rather uneven among the 27 
countries, some receiving 5 percent debt service to revenue, 
others up to 34 percent. We are hoping that we can even out 
some of the benefits in the program.
    Secondly, 27 countries is wonderful, but not enough. There 
are many countries who could benefit from debt relief. As we 
have seen recently in Iraq, any reconstruction and development 
package should include debt relief as a way of easing financial 
pressure on a burdened country.
    And thirdly, even though these countries have saved $1 
billion annually in debt service, they are still paying $2.5 
billion annually, mostly to the World Bank and IMF. These are 
critically needed resources for putting girls in school and 
fighting AIDS.
    So it is with some of these improvements in mind that Mr. 
Frank, along with his colleague Mr. Smith from New Jersey here 
in the House, and in the Senate, Senator Santorum and Senator 
Biden, drafted legislation to try to address some of these 
concerns. Very quickly, it proposed a simple change to the HIPC 
program. Instead of using 150 percent debt stock to export, 
which is the measure the current HIPC initiative uses to 
measure debt, it proposes to change so that no country spends 
more annually in debt service than 10 percent of its general 
revenues, or, in the case of a country with a high AIDS burden, 
5 percent. That would more closely link debt relief to a 
country's ability to pay and limit some of the volatility that 
changing exports have had on debt sustainability. It would 
increase the amount of money these countries have for poverty 
reduction by over $430 million, a 50 percent increase in the 
benefit to these poor countries for only a minimal cost.
    This proposal was actually passed into law last year with 
the Global AIDS Act, but the Administration has not yet 
implemented its provisions. I hope one of the outcomes of this 
hearing will be to encourage the Administration to do so.
    In my last minute of time, I want to relate how debt relief 
works as part of a development package. Of course debt relief, 
as Mr. Frank noted, is not a panacea. It never was designed to 
be. Poor countries need additional aid and much better trade 
terms with rich countries, something that speaks to the GAO's 
very large gap in export financing that they have in their 
report. But debt relief under HIPC does have several features 
that make it an effective form of assistance.
    (1)It coordinates donors. Like any bankruptcy, all the 
donors have to move together and that eases the burden of 
paperwork, financing, and accountability that poor countries 
have to deal with.
    (2)It promotes country ownership. The HIPC initiative, as I 
mentioned earlier, asks members of civil society to design a 
poverty reduction plan, creating better consultation by the 
countries themselves as well as highlighting country priorities 
rather than donor priorities.
    (3)Debt relief gives untied aid, meaning the countries make 
their spending decisions themselves.
    (4)And, as noted, debt relief leverages far greater sums 
because it coordinates the donors together. As noted, every 
U.S. taxpayer dollar is leveraged 30 times by other donors.
    Very, very briefly on GAO, Tom is an old friend so he will 
know the spirit in which I say this, but this was GAO's shock-
and-awe strategy. Even though this was a report intended to 
address some of the challenges of debt relief, he ends up 
bringing in export financing and development assistance as a 
way of achieving certain growth goals. While DATA firmly 
supports a robust and comprehensive development financing 
package for the poorest countries, to somehow imply that the 
debt relief programs shoulder that burden is simply not going 
to happen.
    One of the factors that I have pointed out, the largest gap 
in financing here that the GAO points out is in export 
financing. I know this will be a controversial suggestion to 
Congress, particularly during an election year, but instead of 
actually costing the U.S. taxpayer money, we could in some 
respects solve this problem by saving taxpayer money. U.S. farm 
subsidies contribute dramatically to Africa and other poor 
countries' inability to export their goods to the Western 
world. We spend billions of dollars subsidizing our farm 
products, which make them very, very cheap and make it very 
difficult for poor countries to compete globally. In many 
instances also those products are actually dumped on markets in 
poor countries. Therefore, that export gap could be closed by 
other means other than U.S. taxpayer dollars.
    The shortfall in debt relief that is mentioned, the $8 
billion, could largely be addressed. It is partially being 
addressed currently--there is a $650 million shortfall, of 
which the United States has agreed to provide $150 million, 
half of which has already been appropriated by Congress. The 
other half has been requested for 2005. It is a very small 
amount. The second part of that shortfall is largely to the 
World Bank. This is because to date, the World Bank has taken 
its substantial annual profits and transferred some of those 
profits to the HIPC initiative. It has done that to date and is 
now proposing to stop doing that. That is the reason why the 
shortfall exists.
    I hope some of these issues can be considered as the 
committee moves forward. Thank you very much.
    Mrs. Biggert. Thank you very much.
    [The prepared statement of Thomas H. Hart can be found on 
page 54 in the appendix.]
    Mrs. Biggert. Mr. Flood, you are next.

 STATEMENT OF GERALD FLOOD, COUNSELOR, OFFICE OF INTERNATIONAL 
JUSTICE AND PEACE, UNITED STATES CONFERENCE OF CATHOLIC BISHOPS

    Mr. Flood. Thank you, Madam Chairman. Madam Chairman, 
members of the subcommittee, on behalf of the United States 
Conference of Catholic Bishops, I would like to thank the 
members for the opportunity to testify here today. Debt relief 
for poor countries has been a high priority for the Bishops 
Conference and of the relief and development agency, Catholic 
Relief Services, for many years. In my testimony, I will be 
focusing on a number of issues at a level of technical detail 
which the Bishops would not normally address and on which they 
therefore would not have a position, as I think you can 
understand. Thus I am offering my testimony primarily as a 
former development agency official who has worked on debt and 
related issues with both the World Bank and the Bishops 
Conference for many years.
    First I would like to reiterate what Tom Hart said and just 
to acknowledge my great appreciation and gratitude for the 
leadership and the long and faithful support provided by many 
members of this committee in favor of debt relief for heavily 
indebted poor countries, particularly Mr. Leach, Mr. Bachus, 
Ms. Waters and Mr. Frank.
    In my written testimony, I discuss six areas where the HIPC 
program and related activities seem to be producing good 
results for the beneficiaries, including, among others, 
substantial increases in expenditures for poverty reduction, 
prudence in new borrowing and improved processes for tracking 
poverty reduction expenditures. Time won't permit me to go into 
each one of these, but what I would like to do is just 
highlight one of them and then as is our wont, as suggested by 
Mr. Frank, to go into some of the deficiencies for the program 
as I see them, but briefly.
    The first point I want to make on the positive side is that 
the poverty reduction strategy process, or the PRSP which was 
introduced as an integral part of the HIPC debt reduction 
program, has facilitated an active, unprecedented role for 
civil society groups in monitoring of expenditures for poverty 
reduction. Catholic Relief Services reports impressive examples 
of civil society participation in a number of countries 
including Bolivia, Uganda, Malawi and Zambia. They have formed 
active and effective debt monitoring organizations which 
actually examine and track how debt relief expenditures are 
being spent in their countries. This shows that in many 
countries the procedures instituted under the HIPC program are 
helping to strengthen democratic processes in places where 
historically weak governance has often led to serious neglect 
of the needs of the large majority of the very poor and 
vulnerable citizens.
    On the other side of the ledger, although the program is in 
its fifth year of completion, only 11--and I understand 
yesterday that number is up to 12--of the 27 beneficiary 
countries have reached their completion point. This is the 
point at which they become irrevocably entitled to full debt 
relief. Zambia is a case in point. My understanding is that the 
completion point is being held up because pressures to increase 
salaries led to an overshooting of the wage bill target agreed 
with the IMF. This is a very complex issue. A recent World Bank 
report analyzed the wage bill problem. It says that low 
remuneration in the public sector is a major factor 
contributing to problems of poor productivity, motivation, 
recruitment and retention. At the same time, the wage bill in 
Zambia has remained large relative to overall government 
expenditures, thereby crowding out operational expenditures.
    The World Bank report outlines a broad strategy for 
addressing the issue. But the challenge is an enormous one: how 
to make wages sufficiently remunerative to attract and retain 
qualified staff while at the same time minimizing the cost. In 
the meantime, Zambia continues to be plagued by a heavy burden 
of past debt. In fact, the fiscal bind which Zambia finds 
itself in can be attributed in large measure to its heavy debt 
service obligations. According to the latest projections, 
Zambia's debt service will be an extremely high 31 percent of 
government revenues in 2004. The delay in granting full debt 
relief is restricting the ability of HIPC countries to create 
the kind of fiscal space so important for moving ahead to 
address in a more effective way the human needs of their 
people.
    The IMF and World Bank should reexamine the conditions for 
reaching the completion point, particularly those that are 
unrelated to assuring that the debt relief savings will reach 
the poor.
    Tom Hart has already covered the next several points and I 
don't want to waste the committee's time by repeating things 
which I am in full agreement with. I just want to thank very 
much Representatives Chris Smith and Barney Frank, and Senators 
Santorum and Biden for their leadership in introducing the bill 
which is now the new legislation which Tom Hart discussed.
    So let me talk briefly about the GAO report. This report 
makes a very important point, which is that even if the HIPC 
program is fully financed, substantial additional external 
assistance will be required to enable HIPC countries to achieve 
growth and poverty reduction targets. Debt relief is not--a 
well used word--panacea. Even if the existing debt of HIPC 
countries is reduced to zero tomorrow, it will not end poverty. 
The problem is too complex and deep seated for that. It must be 
addressed first and foremost by the countries themselves, with 
their governments and people working together on a variety of 
fronts for the common good. But they are too poor to do it 
alone. They need additional aid and support from the wealthier 
countries.
    There are questions of course that arise with respect to 
the numbers that are used in GAO's report, but let me make one 
additional point and that is that the GAO scenario assumes that 
the export shortfall they project will be made up entirely by 
aid. This overlooks an important element of the development 
agenda--external trade, as Tom Hart indicated. Developing 
countries can achieve important benefits by more open trade 
provided that it is also fair trade. The World Bank estimates 
that trade barriers in Europe, the United States, and Japan 
cost poor nations more than $100 billion a year.
    One final point. The GAO estimates that almost all the 27 
HIPC countries could achieve debt sustainability if 
multilateral creditors converted an average of one-third of 
their new loans to grants. In fact, in a statement by President 
Bush in 2001, he said that IDA should convert about half of its 
loans into grants. The Bishops Conference supported the 
expansion of IDA's grant authority in IDA 13. But they also 
emphasized the importance of donors beginning to make 
contributions very soon to offset the loss of reflows of loan 
payments to IDA which constitute close to 40 percent of their 
resources for new lending. Otherwise, the necessary 
contributions would mount quickly to unfeasible levels and 
cause IDA to sharply cut back its assistance to the world's 
poorest countries. This will be an important issue in the 
negotiations of IDA 14 which have just begun. Thank you.
    Mrs. Biggert. Thank you very much.
    [The prepared statement of Gerald Flood can be found on 
page 45 in the appendix.]
    Mrs. Biggert. We will now proceed with the questions. I 
will recognize myself for 5 minutes.
    Mr. Melito, your report identifies a range of development 
and export support lending that will be needed between now and 
2020 for HIPC countries to meet the targets identified in their 
PRSP. Do your estimates take into account the impact that 
programs such as the Millennium Challenge Account, the Global 
Fund for HIV/AIDS, TB and Malaria, the USAID, and UNCTAD will 
have in helping to meet some of the development needs you 
identify in your report?
    Mr. Melito. In our report, we are using World Bank and 
IMF's 20-year projections which make the assumption, which we 
follow, that these countries are on a reform program that is 
supported by the donors, which would include bilaterals such as 
the United States as well as multilaterals. We hold that 
assumption constant. So U.N. reforms, World Bank reforms, U.S. 
reforms, would all be assumed to be followed. This would then 
result in high GDP growth rates, which we hold constant. So 
yes.
    Mrs. Biggert. So yes?
    Mr. Melito. We are assuming those sources of financing are 
there and the reforms that those particular programs are 
looking for are being followed.
    Mrs. Biggert. Have you actually taken into account the 
monetary amount, or is that just that these reforms will raise 
the quality of the health, for example, of the people of those 
countries?
    Mr. Melito. Once again we have used the World Bank and 
IMF's breakdown of development assistance, which doesn't go 
into great detail. It has information on different 
multilaterals, how much the World Bank will provide, how much 
the other MDBs will provide. It also has very general numbers 
on the bilaterals. It doesn't break it down to how much is 
actually the U.S. share, and certainly not within the U.S. 
Share how much would come from MCA versus regular development 
assistance. We abstract from that. We are just taking the total 
numbers they provide us.
    Mrs. Biggert. For example, with the Millennium Challenge 
Account, what would you say about that?
    Mr. Melito. That would be one of many possible sources of 
financing which could be used to help the HIPC countries as 
well as other HIPC countries as we move forward. But it is not, 
in the case of financing HIPCs, different from any of the other 
sources. It is one of many possible options.
    Mrs. Biggert. How about, then, the Global Fund for AIDS? We 
put so much money into this program. I am trying to just figure 
out if you would say, well, so much money is going to go to 
this?
    Mr. Melito. It is a very difficult thing to project out 20 
years. We tried to put a lot of caveats in the report. We are 
actually, for the most part, piggybacking on the World Bank and 
IMF's projections, just changing some key assumptions and 
seeing what the impact of those assumptions are. They are the 
ones who estimated how much development assistance would come 
to the countries. We don't actually change that number. We 
leave that number as it is. So when we say that $153 billion is 
expected in development assistance, that is the World Bank and 
IMF's number. That is not our number. That number is about 
equally distributed between multilateral assistance of about 
$75 billion and about $78 billion for bilateral assistance. But 
they don't actually break it down and say how much is coming 
from the global fund, how much is coming from MCA or anything 
else. And that is certainly not within the scope of what we 
did. So we left that as is.
    Mrs. Biggert. How do you determine the rate of growth each 
year, how much of this is going to factor in for the years to 
reach 2010?
    Mr. Melito. The DSA has a number of optimistic growth 
rates. We made a choice to keep the optimistic GDP growth rates 
constant, because those are the rates which are geared towards 
poverty reduction, with the notion that these countries will be 
expected to strictly follow the reform programs which will 
contribute to their ability to grow, and in exchange for 
following reform programs, donors would provide them 
assistance.
    We also, though, looked at the fundamental--we considered--
weakness in one of their growth rates which is on the export 
side. We think it is important to highlight that. While we find 
that there is a $215 billion export shortfall, we still 
calculate that these countries are going to raise quite a bit 
of revenue from exports. It is not that we are wiping out their 
export revenues. It is just that we bring a more realistic 
historical perspective and our estimate is about 40 percent of 
what the World Bank and IMF estimate. But we have reasons to 
suspect the export levels. We are being hopeful on the GDP side 
for the value estimated.
    Mrs. Biggert. There has been recent research that has begun 
to quantify how improvements in public health can drive 
economic growth. With some of the written testimony and 
testimony today on how inoculation and other health initiatives 
have been supported by the HIPC initiative and these other 
administration priorities, how can one assume that export 
growth in the future will be consistent with the historical 
experience?
    Mr. Melito. The reason we are concerned about the export 
growth rates is that a lot of the vulnerabilities come from 
factors outside these countries' control. As we mentioned in 
our statement, they rely heavily on a few primary commodities, 
agriculture products like coffee or cocoa, minerals like 
copper. Over the last 20 years, the prices of these items have 
actually gone down over that time in real terms. They have wide 
fluctuations which also hurt these countries. These countries 
also have large weather extremes, other natural disasters. So 
on the export side, they really have very little that they can 
sell, and what they are selling has been going down in price. 
For them to have good outcomes in exports, they need to 
diversify their exports and probably moving into manufacturing, 
which would be an important development goal, but it takes a 
long time for them to reach that point.
    Mrs. Biggert. Thank you. I recognize the gentlewoman from 
New York.
    Mrs. Maloney. I would yield to the Ranking Member of the 
full committee.
    Mr. Frank. I thank the gentlewoman.
    Mr. Melito, one thing that I think may have caused some 
confusion, when you talked about the $375 billion, which of 
course $8 billion of that is for the HIPC--we ought to be 
clear--the HIPC. To carry out what we started a few years ago 
cost $8 billion. So the overwhelming majority of that is to get 
to very, very good outcomes. We might say that $368 billion is 
the price of a panacea which we claimed we were doing there. 
But even there I think it may mislead some people unless we are 
very explicit about something.
    As I understand what you are saying, that is not $375 
billion more than is currently planned. That includes $153 
billion that is assumed foreign aid going forward. So even at 
that, it is a $215 billion increment, currently planned amount, 
over this period, is that correct?
    Mr. Melito. That is so. We are explicit about that in the 
report.
    Mr. Frank. I understand that. I don't mean to impugn your 
pride of authorship. But some people might wait for the movie 
and not read every word in the report, so I wanted to get that 
out. So we are talking not about $375 billion additional but 
$215 billion additional to reach the point where they are all 
in very good shape. I would love to get there, but I don't want 
to scare people.
    The only other thing I would ask about were exports. You 
are right, exports are uneven but not with regard to 
agricultural commodities but with regard to, you mentioned 
copper and other things. We are currently in a situation where 
with sanctions of the Chinese vacuum cleaner, some of those 
things are going up. Do you assume that is going to end soon? 
In fact, while export prices for raw materials might have been 
going down a while ago, currently my reading is that a lot of 
them are going up because China is putting such upward pressure 
on them. Do you have any response on that?
    Mr. Melito. Even over the last 20 years, there have been 
periods of growth, but the overall trend has been downward. 
Certainly some of the commodities may be turning around.
    Mr. Frank. If the Chinese continue this?
    Mr. Melito. Overall demand worldwide may be going up but 
they are still vulnerable.
    Mr. Frank. I agree. In fact, that also leads me to the last 
point I want to make on this. That is, I have been struck, as 
we have debated free trade over the years, that some of us who 
have been concerned about the impact that unrestricted trade 
without any labor or environmental rights would have on 
particularly some of the industrial workers who have been 
accused of being protectionists. In fact, as I think this 
report makes clear, the greatest negative impact any public 
policy in America has on our ability to help poor people is 
America's agriculture policy. It is restrictive, it is 
subsidized, and I find it odd that people who are strong 
proponents of our agricultural policy, which I generally vote 
against, which costs tens of billions of dollars and is quite 
restrictive, are somehow allowed to call themselves free 
traders.
    I gather with regard to export growth that significantly 
increasing the amount of agricultural product we allow to come 
into the United States would be very helpful. Is that correct?
    Mr. Melito. It is generally outside the scope of this 
report, but we do highlight that the ability to sell their 
products will obviously decrease this shortfall.
    Mr. Frank. Would you say that agricultural products are a 
large part of what these particular countries would be able to 
sell?
    Mr. Melito. Their primary commodities are generally 
agricultural or metals.
    Mr. Frank. Thank you. I think that is kind of an illogical 
point here. The most protectionist, the aspect of American 
economic policy that falls hardest on these countries is our 
restriction on agriculture.
    I guess finally I would say this. You don't seem to be too 
optimistic about the impact of various free trade agreements 
that the United States might be signing with these countries. 
Have you taken that into account? Suppose the President and Mr. 
Zoellick's trade agenda were put through. Would that increase 
your optimism about their exports?
    Mr. Melito. Certainly to the extent that markets would 
open, that would increase their ability to achieve high growth.
    Mr. Frank. But there is nothing in there. You wouldn't bet 
on it?
    Let me ask Mr. Flood with whom I generally agree, this one 
point--and I did want to note that I think some of our liberal 
friends were just wrong in their resistance to going to more 
grants, although it does mean that you have to take advantage 
of the reflows. But one point that was raised by Treasury and 
some others, and I know I supported this amendment with Mr. 
Smith but we did, I think, give Treasury an alternative. We 
said either do this or come up with an alternative. I share 
your disappointment that Treasury basically just blew us off 
and sent back a report which I think unfairly denigrates the 
HIPC and mischaracterizes what the World Bank said. But there 
is the moral hazard thing. There is the perverse incentive 
thing. How do we respond to that? I must say I am impressed 
with that. Namely, that if you tell people that we will make 
sure that their debt isn't more than a certain percentage of 
their revenue, to some extent that gives them an incentive to 
kind of push up their debt and reduce their revenue. Are there 
ways that we can achieve the goal of reducing the burden of 
debt and avoid those negative incentives, Mr. Flood?
    Mr. Flood. I have never really understood that point too 
well, because we have a situation where a country is paying, 
let's say, 30 percent of its revenue currently in debt service. 
Under the legislative proposal that was passed, the country 
would then go to a situation where it is paying perhaps 5 
percent of its revenues in debt service. Therefore, it is in 
effect in a position where it makes more sense to go out and 
raise revenues because fewer of its revenues are going to have 
to be used up in providing funds for debt service.
    Mr. Frank. What about if they are closer to the margins 
where an increase might have a negative impact?
    Mr. Flood. I think that the other thing is that this is a 
retrospective program. It is not a prospective program. What we 
are talking about is getting rid of old debt.
    Mr. Frank. I know that it has been suggested that one of 
the things you do is to have these be only as applied to the 
past but that future either debt or revenue would somehow be 
excluded from the calculation, Mr. Hart?
    I am sorry. Go ahead, Mr. Flood.
    Mr. Flood. I was going to say that I think in going 
forward, I don't think that the countries can expect to have 
repeats of HIPC every few years, which it seems to me would 
create quite a moral hazard, that they wouldn't in effect be 
responsible for the debt service of future lending because 
somebody's going to always come around and forgive it. But if 
you went to a grant system, which I think is really a very good 
alternative, it will avoid that problem.
    Mr. Frank. Mr. Hart?
    Mr. Hart. I was going to respond to the first part of your 
question, which is that Treasury has argued that somehow when 
you have a debt service-to-revenue formula you are somehow 
depressing--that you are creating an incentive not to collect 
revenues. And it was in response to that that you and your 
colleagues who passed the legislation gave Treasury the 
flexibility to design another mechanism which achieved similar 
results, including tying it to GDP, which has been an example 
that Nancy Birdsall from the Center For Global Development has 
recommended. That option is there for Treasury to pursue.
    Mr. Frank. Let me say to Treasury that I would renew our 
request that they give us more on this than they have. I think 
there is a great deal of interest.
    Just a last point on this, if I could, Madam Chair, and I 
thank you for the indulgence. Unfortunately reflective of--I 
don't know--a lot of things, we are more sparsely attended 
today than if we were talking about richer people.
    Mr. Frank. I can see how we can get the IMF to finance 
greater debt relief. I think we need to do some more work on 
how we get the World Bank to do that, because it seems we ought 
to be going forward on that.
    There was one suggestion that they raise the interest rate 
on sort of middle-income countries. I do not think that works. 
I do not think you want to make Mexico pay for Uganda. That is 
not a good idea.
    But any off-the-top-of-your-head suggestions about what we 
can do with the World Bank? And that would be my last question.
    Mr. Hart. Just briefly, ask the World Bank to do what it 
has been doing for the last 5 years. As part of the enhanced 
HIPC framework, the World Bank agreed to take net profits it 
earns from interest on income--between $1.5 billion and $2 
billion a year, in net profits. They then transfer that to 
their pension plan and to other accounts. One of those accounts 
that they transfer profits to is the HIPC trust fund.
    They have been giving between $200 million and $300 million 
a year as their part of contributing to writing off this HIPC 
debt. They have agreed to do that until 2005.
    Between 2006 and 2020, they have not agreed to do so, thus 
creating that massive shortfall in funding that GAO referred 
to.
    Mr. Frank. So they just agree to continue this forward if 
they could do that, and it would not cause shortfalls in the 
other accounts?
    Mr. Hart. It would at least substantially reduce that 
shortfall.
    Mr. Frank. Mr. Flood?
    Mr. Flood. No, I just wanted to say that even when they are 
contributing $240 million to the HIPC trust fund out of their 
revenues, they are still able to increase their general 
reserves by $2.4 billion. I mean they have a lot of leeway in 
there.
    Even with the continuation of the current level of 
contributions to the HIPC, there will be still a gap, and I 
think that really the $240 which they are currently doing has 
to be considered the minimum as to what they can contribute 
going forward.
    Mr. Frank. So that would not get us to further debt? That 
is just to finish up on HIPC?
    Mr. Flood. That is right.
    Mr. Frank. We have to work on that.
    Mrs. Biggert. Thank you.
    It appears that the gentleman from Massachusetts would be 
in favor of another hearing at some point.
    Mr. Frank. Yes, I would be.
    Mrs. Biggert. To include Treasury and perhaps the World 
Bank.
    Mr. Frank. Yes, although, we did not ask Treasury. I do not 
mean to be critical of Treasury, because they have been 
cooperative. We had not asked them to come here.
    But yes, I think because the World Bank will not testify, 
but they could sit and listen, and maybe they are already doing 
that.
    Yes, I thank the vice chair. If we could get Treasury to 
come back, or to come--it is not their fault today, we did not 
ask them--but if they were to come and address this, that would 
be helpful. And maybe the American ED, the American executive 
director of the Bank, could accompany Treasury.
    Mrs. Biggert. The gentleman from Florida is recognized for 
5 minutes.
    Mr. Feeney. Thank you very much, Madam Chairman.
    I happen to be a new Member of Congress and, of course, a 
new Member of the Committee. And this is my first experience 
with HIPC, so I hope you will give me the grade 1 through 5 and 
not the advanced level.
    I want to ask first, Mr. Melito from the GAO, with respect 
to your study, you named the donor nations that are eligible 
for HIPC. You also I think we probably admit, as some of the 
folks on the other side tried to point out earlier, that there 
are huge variables when you start estimating the burdens that 
these countries are going to have, all sorts of things, not 
just gross domestic product increases but the value of specific 
resources, whether it be oil or gold or commodities or 
products, all sorts of political decisions that are made, not 
just by that Nation, but by the world community. I think we 
very much understand that.
    One of the things I would be interested in knowing is, 
historically, how some of these poor debtor nations got into 
the condition they are in the first place. One of the things 
that I would be specifically interested in, since it is 
something we have an impact on, is what their history has been 
over the last 3, 4, 5 decades in terms of receiving foreign 
aid. What have we done with our foreign aid dollars to actually 
help these folks acquire the types of governments and policies 
that will lead them to economic prosperity?
    I note that one of the key goals of HIPC is not just to 
relieve debt. I mean, that is the symptom that we are 
attacking, but it is to eliminate or reduce poverty and promote 
economic growth. And I guess sort of the tongue-in-cheek 
proposal from somebody who has been very disappointed in a 50-
year history of financial aid from America and other nations 
and how little it has actually impacted the quality of life of 
people there, I guess sort of the tongue-in-cheek proposal is, 
have we thought about translating the Wealth of Nations by Adam 
Smith into all of the different languages available and 
providing it to the finance ministers and advisers and economic 
professors in each of these countries?
    Because my view of this is pretty simple. Our policies are 
not designed to promote not just free trade but low taxation, 
low regulation, the rule of law, property rights, both for real 
and intellectual, that no amount of aid is going to be enough 
to keep these countries out of deep trouble. So if I could--and 
I will end early, Mr. Melito, because then I would like to have 
the other panelists if I could, who are advocates for aid--I 
would sort of like you to address your response to my monologue 
here, to how we know when we are succeeding.
    We really are trying to remodel what I have described as a 
massive failure of foreign aid from America for the last 4 or 5 
decades. By the way, the only exception is maybe some short- or 
even long-term intelligence or military with strategic 
advantages. If we are going to buy or bribe countries to be our 
friends for a while, that would be a different discussion.
    But to the extent our goal is economic growth and reduction 
of poverty, I have been totally disappointed in the results 
that foreign countries have gotten from our aid and that our 
taxpayers have gotten as well.
    Some of the things, Mr. Hart, that you point out that are 
huge successes--and I do not mean to diminish the importance of 
any of these--but I would like you to tie the ultimate goals of 
HIPC programs, eliminating and reducing poverty and promoting 
economic growth. You have twice as many people in schools in 
Uganda. Are they teaching the right things to twice as many 
students? You are measuring inputs there, and I am more 
concerned if we are measuring outputs.
    I think that, finally, and then I will end, if you can tell 
me how you are measuring--and by the way, you talked about 
disease control and AIDS. Africa is three-quarters of the 
nations involved here. Famines come and go in Africa in a 
tragic way, not every decade, but every year. Even when the 
famine is eliminated, poverty is not, and economic prosperity 
never, ever results on the African continent. And that is a sad 
fact of life.
    Finally, Mr. Flood, you have suggested that Malawai and 
Zambia are examples of where HIPC may be making a difference, 
but this is more of a suggestion on your part. Do you have any 
empirical evidence that you can give us to that effect?
    So with that, thank you very much.
    Mr. Melito. I will just briefly talk a little bit about 
history and let my colleagues deal with the effectiveness.
    The causes for these countries getting these debt problems 
is actually an ongoing issue of overly optimistic export growth 
rates. Back in the 1970s, these countries received a lot of 
commercial debt or debt from governments, including the United 
States, at commercial rates, on the notion that they would be 
growing rapidly. Well, they did not, and in the 1980s, they 
ended up having very high levels of debt which they could not 
pay.
    That debt got slowly converted over time from bilateral to 
multilateral debt, as they went to the concessional windows. 
But this problem has been existing for a couple of decades, and 
failure to reach high export growth rates would be one of the 
main causes of this debt, going back since the 1970s.
    Mr. Hart. Thank you, Congressman.
    There is a lot of, many parts to your question, and I am 
not sure I will do justice to all of them. Let my try.
    First of all, I do not think it would be correct to say 
that the last 40 years of development aid have been a 
categorical failure. Life expectancy rates in the developing 
world from World War II to the 1990s was actually increasing, 
which is a real output, to use your word, of direct assistance. 
Then HIV/AIDS began to take its toll, particularly in Africa, 
and we have seen life expectancy decline.
    That is not to say that I disagree with everything you are 
saying. I do actually agree. I think we could do a lot better 
with our development assistance. I think, actually beginning 
with debt relief 5 years ago, began a trend toward several 
things that have improved U.S. assistance and indeed the global 
fight against poverty. One is that donors are acting better in 
concert with one another. That does, in fact, have a real 
impact on these countries.
    I think also the ability of countries to leverage money 
from one another increases the impact of assistance.
    I think in no small measure the success, political success, 
of debt relief and the results that we have begun to see, at 
least the input that we have begun to see in these countries 
with debt relief, have helped lay the groundwork for the 
substantial increase in assistance for HIV/AIDS. Beginning with 
Mr. Helms in the Senate who was a long-time critic of U.S. aid, 
his support for debt relief and then HIV/AIDS helped begin to 
turn the corner.
    And I think that also has led to the Millennium Challenge 
Account, which, in my view, is an historic rethinking of the 
way we do development assistance--focusing large amounts of 
resources on well-governed countries, countries fighting 
corruption and promoting democracy. And we are firm supporters 
of that program and look forward greatly to the Administration 
implementing this program with haste, because we do think that 
we will begin to really see the results that we are all hoping 
for, as well as revealing the credibility of aid with the 
American public and with policymakers.
    Mr. Flood. In terms of aid effectiveness, I think that, for 
one thing, we do not often really appreciate some of the 
smaller improvements that are actually happening on the ground 
at the micro level that do not get built up and put into the 
global statistics. Because I remember when I was working for 
the World Bank in Nigeria, I visited a rural community. What 
was going on there is amazing, even though it will never appear 
in any statistics anywhere, in terms of what was happening with 
a group of maybe 500 people, something like that.
    They had, through technical assistance, introduced new 
varieties of cassava, a basic commodity for them, and they had 
doubled the output of the cassava in a few years time. They had 
new water supply systems, and these were, of course, wells, 
simple, just wells in the middle of a town. Before, the mothers 
would have to travel for miles to get water out of a river 
which was usually polluted. And now, they did not have to 
travel so far. They could spend their time on more productive 
ventures, and the water that they had was pure. It did not 
cause them to get sick all the time.
    These sorts of things do not always show up in the 
statistics. They take a long time to filter up and to spread, 
and maybe impact on, the global economy of that particular 
country.
    Malawai and Zambia--I have not been there, so I cannot give 
you a very precise answer. But what I can tell you is that one 
of the problems with aid deliveries in the past has been the 
question of ownership. Too often the countries did not really 
feel that they owned the activities that were being financed by 
the external donors because too much of the time they were the 
donors' preferences and priorities and not the local people's 
preferences.
    I think an important thing about the Malawai and Zambia 
experience is that civil society is having a major role which 
they did not so much have in the past. They are really 
influencing the shape of the programs, and more than that, they 
are able to monitor what happens.
    Now, even in the HIPC program, it is too early to have any 
solid measures of outputs. You are really stuck, for the time 
being anyway, mostly with input measures, but the input 
measures are good. I mean, the fact that so many more school 
children are attending primary school in Uganda, I think that 
is a major accomplishment. All the donors that I am aware of, 
they have programs for teacher training, for improving the 
curriculum.
    In Nigeria, we financed 1 million textbooks, which were 
geared to the local environment, for example, to primary school 
children. So the input side, I think, is important, and I am 
confident that we are going to see some good output measures, 
output coming out of all of this.
    Now, again, I think the development agencies also are 
improving their techniques for measuring outputs, and I think 
that is a positive sign.
    Mrs. Biggert. The gentlewoman from New York, Mrs. Maloney, 
is recognized for 5 minutes.
    Mrs. Maloney. I have a question for Tom Hart on the ability 
to pay.
    Last year, in the Global Aids Act of 2003, the United 
States committed to seek deeper multilateral debt relief. The 
current enhanced Heavily Indebted Poor Countries Initiative 
sets 150 percent debt-to-export ratio as the index of debt 
sustainability.
    Secondly, the Administration has yet to implement the 10 
percent of fiscal revenue measure of ability to pay. So Mr. 
Hart, and GAO, Mr. Flood, if you would like to comment, can you 
elaborate on these two measures of ability to pay and, more 
broadly, in your opinion, has the Administration, the 
Government, complied with the mandate in the Global Aids Act to 
seek deeper debt relief?
    Mr. Hart?
    Mr. Hart. Thank you. I can answer the last question fairly 
quickly, which is, not yet. And again, this hearing, I hope, 
will spur the Administration to consider the recommendation the 
Congress gave them in the AIDS law, building upon the enhanced 
HIPC framework, in beginning to seek deeper relief for these 
qualified countries.
    The primary motivation of this legislation is to change, as 
you said, from 150 debt stock-to-export ratio, which is really 
in the weeds, and I apologize. Very quickly, the reason for 
that is, I mean, it is an arbitrary level. All of these numbers 
are fairly arbitrary. But one assumes that you would need 
exports, hard currency, in order to pay off international debt. 
So the notion was, great, we need to earn money from exports 
and that will be somehow related to our ability to write off 
international debts.
    The problem with that measure, of course, is not only is it 
too high, but exports, as GAO has mentioned, are incredibly 
susceptible to shocks and commodity prices change. Uganda, 
which was our star performer under the enhanced HIPC framework, 
for a time actually became unsustainable under their debt 
portfolio because coffee prices went through the cellar. So no 
matter how well you are doing, your debt sustainability is 
overly affected by this.
    So the notion in the legislation was to more directly apply 
debt relief or to relate debt relief to a country's ability to 
pay. These countries were spending 25, 30, 40 percent of their 
government budgets on interest on their debts. We were saying, 
no, that is a silly investment of this poor country's money. 
They should be spending it on putting their girls in school and 
digging clean water wells. So that is what this legislation 
tries to do.
    As I mentioned earlier to Mr. Frank's point, the 
legislation actually does give the Treasury the flexibility to 
design another similar type mechanism if that one is flawed in 
some way.
    Mr. Melito. I would just like to add that, how to measure 
the sustainability has been a challenge since the initiative 
was created. There are weaknesses in every measure they have 
suggested, but the World Bank and IMF are actually looking at 
trying to address all of these concerns. Whether or not 
something will emerge remains to be seen, but they do recognize 
that there is no perfect measure.
    Mr. Flood. I was just only going to add the fact that there 
is a real concern about the countries particularly that are 
suffering from HIV/AIDS. They really need to maximize the 
amount of their domestic resources they can use to fight that 
terrible scourge. That is part of the motivation behind the new 
legislation.
    Mrs. Maloney. I would like to ask a question about Iraqi 
debt, and even though they are not a HIPC country, there is a 
lot of effort and focus on Iraq. And I really applaud the 
Administration's efforts in Iraq for debt relief.
    But I am concerned that by gaining only partial debt 
relief, and I have legislation in with Congressman Leach that 
would really erase all of these debts, with IMF and the World 
Bank taking the leadership role in that by reducing and erasing 
their debt first. But I am concerned that by gaining only 
partial debt relief, the value of outstanding debt may actually 
increase as the chance that countries might be paid for some of 
their debt increases. And I am concerned because I do not 
believe the Iraqi people should be saddled with Saddam's debts, 
particularly when they were odious debts spent for arms and 
palaces.
    And certainly, I do not think that the American people 
should be sending aid for reconstruction to Iraq that may end 
up paying for debts that were incurred by the former regime.
    Can you, Mr. Hart, address whether you believe the value of 
Iraqi debt outstanding may increase as partial debt relief is 
accomplished? And again, GAO, Mr. Flood, if you would like to 
comment?
    Mr. Hart. Well, let me handicap myself by saying I am not 
intimately familiar with the Iraqi debt case. But of course, 
you are describing a scenario which seems plausible, which is 
that as the Iraqi debt is lowered--and this is true for HIPC 
countries as well--what remains becomes more payable. 
Therefore, the discount value of that debt shrinks. You are 
more likely to have to end up paying off the face value than 
you were before.
    Now, I do think the Iraqi debt case presents an interesting 
example, of course, and lessons to be learned as we look at 
other debt relief for other countries, which is that, indeed, 
when Saddam took on all of these debts and now he is gone from 
power, the country is left burdened with the debt. And that is, 
in fact, the case with many of these African countries, many of 
these HIPCs. Dictators long ago have been replaced in some 
cases, and in many cases, surprisingly, by multi-party 
democracies, but being sovereign nations, they absorb the 
history left behind by corrupt dictators.
    One of the notions of Jubilee 2000 and this enhanced HIPC 
initiative was the idea of providing a clean slate, giving them 
a fresh start, indeed for some of the very reasons that you 
cited.
    Mrs. Maloney. Just very briefly, I would like to ask GAO, 
why in the world did you intertwine the two issues? The HIPC 
program is directly focused on poverty alleviation. Helping 
countries to get a level of sustained economic growth is a 
larger, far more complex question. Why did you combine the two 
when that really is not what the HIPC program is, and the 
amount, as Mr. Frank mentioned, is astronomically larger when 
you put the two together? So I am just curious about your 
thinking on that.
    Mr. Melito. Sure. If you agree with the assumption that the 
export growth rates are overly optimistic--and most people do, 
and even the World Bank itself is agreeing that their growth 
rates are too optimistic--you then have to come up with an 
alternative set of rates. And we chose to use historical, and 
maybe something a little higher would be what someone else 
would use. But if you use lower rates, you suddenly find very 
large gaps emerge in the amount of resources these countries 
have available. Some of it is exports; some of it is debt.
    If we were myopic about the issue and just reported how 
much their debt component was, we would be missing most of the 
story. And we were concerned about how to present the story, 
and I think we were very careful in how we wrote the report in 
making those different components clearly distinct of each 
other.
    But if we just reported the $8 billion without reporting 
the export shortfall, I think we would be susceptible in a 
legitimate sense of missing the whole story or missing a big 
part of the story, so we had to report them both.
    Mrs. Maloney. Thank you very much.
    I ask unanimous consent to place in the record the opening 
statement of Barbara Lee.
    [The following information can be found on page 41 in the 
appendix.]
    Mrs. Biggert. Without objection, so ordered.
    Now, the gentleman from Texas, Mr. Bell.
    Mr. Bell. Thank you, Madam Chair.
    I would like to thank the panel for your testimony here 
today. I just have a couple of questions. First, for Mr. 
Melito, and it is really a follow-up to something you were 
discussing with Congressman Frank regarding the situation 
involving China. You pointed out that all of these projections 
are somewhat difficult. But looking at China and realizing that 
its bubble could burst at some point and its demand for 
developing world exports could be greatly diminished, is there 
any way for you to tell us here today how that might impact 
some of the projections in your report?
    Mr. Melito. I want to be quite clear that we actually do 
not look at that level of detail, although those are one of a 
number of factors which create the vulnerability which these 
countries face in export growth. There are many reasons, 
including potentially a particular market that was open to them 
now closing. China right now has been increasing its demand for 
certain commodities, and we do not know if that will sustain 
overtime.
    Mr. Bell. So it would be fair to say, any situation like 
that would impact and could impact your numbers?
    Mr. Melito. When we used 20 years of historical rates, we 
wanted to basically cover good years and bad years. If you look 
at the history of these countries, there are a number of years 
for many of these countries, 3, 4 years in a row where they had 
very rapid growth. If you just cut off the story there, you 
might say the problem is solved. But often those periods of 
rapid growth are followed by periods of large declines that 
persisted.
    There are always circumstances. You point to a market that 
opened up to them or something, but then something else 
changed. We considered 20 years forward, which is what we did, 
and the most representative is to go 20 years back.
    Mr. Bell. I see.
    Mr. Hart, in your report that you gave us, you point out, 
on page 7, after talking about the debt legislation, despite 
debt legislation being law for nearly a year, the 
Administration does not pursue negotiations with international 
partners to implement its provisions. I am sure you find that a 
little bit alarming, and probably, the best folks to address 
this question to would be representatives of the 
Administration, but we do not have that opportunity today.
    So I am just curious if you have been able to receive any 
information on that particular topic as to why the 
Administration has not pursued any negotiations.
    Mr. Hart. There are reasons, and yes, we have spoken with 
them about this. And their reasons are varied, including a 
general sense, that at the boards of the Bank and the Fund, 
there is not support for going further. Actually, DATA is an 
organization that works not only here in the United States but 
in London and other capitals around the world. And the sense to 
improve the HIPC initiative actually is fairly strong, from our 
perspective.
    Fundamental to their critique is, as I mentioned earlier, a 
feeling that tying debt relief to revenues is a disincentive to 
collect taxes. If you have smaller revenues, then you owe less 
debt.
    Our response to that has been, as Mr. Flood indicated, 
there is actually no evidence to suggest that that is what has 
happened, that that sort of reverse incentive would take place. 
But in response, the legislation described actually does try to 
address that and say, come up with another measure that would 
avoid that disincentive to collect revenues.
    Third, and I think most importantly, and it is cited both 
in Treasury's report and in GAO's testimony, is the funding gap 
of the current initiative. They are hesitant to try to increase 
the relief of the current initiative until it has been fully 
paid for. And that is an understandable position. However, I 
believe the way that both GAO and the Administration have 
presented the shortfall case overstates the problem, and I do 
not mean that lightly. I mean that the Administration, with the 
donor community has already taken strides to meet that gap and, 
as I testified earlier, the World Bank, if the World Bank will 
continue to do what it has already been doing, that gap will be 
substantially reduced.
    I think, as a final point, I would just like to advocate 
for the legislation. It was quite expensive to get rid of a lot 
of the debt stock that was not being serviced. We got rid of 
this huge amount of debt stock at a cost $30 billion, to which 
the United States contributed $1 billion.
    And we have just begun to get at some of the debt that was 
being serviced, thus relieving resources on the ground for 
building schools and wells. Every dollar that we put in from 
now on, because these countries are actually paying this debt 
back, actually generates benefits on the ground. So the return 
for the countries now is amplified if we take it an incremental 
step further.
    Mr. Bell. I just have one last question, and I will begin 
with Mr. Flood. And I guess this is really one of the major 
questions that needs to be resolved and is somewhat of a 
follow-up to what Mr. Feeney was saying.
    I certainly understand the need for this debt relief and am 
fully supportive of it. But I think we all fear becoming a 
precedent or an example and that countries will look on future 
borrowing as somewhat artificial borrowing, that at some point, 
there will be enough political pressure brought to bear in the 
United States and across the globe to forget the debt, and it 
just becomes a recurring situation.
    I am just curious what recommendations you all have to keep 
that from happening and keep that from becoming the situation.
    Mr. Flood. Well, there are many, many aspects to that. I 
think one is that the countries have to continue to try to 
address better their development problems. I think that we see 
evidence through this HIPC program of some advances in that 
direction. I mean the basic challenge is for the countries 
themselves to strengthen their economies in a way in which they 
can develop their creditworthiness to continue to be able to 
borrow.
    On the moral hazard issue, I think that there are several 
ways to address that, but I think that the best one for these 
very, very poor countries is to consider a larger percentage of 
grant financing. I think they are going to have to have that. 
It would be nice if we could say, it should all be grants, but 
I do not think the donors are that generous, that the entire 
amount that they need would be able to be provided through the 
grant process.
    One thing that is encouraging, again in the HIPC program, 
is that the expected levels of post-HIPC borrowing by these 
countries has been quite modest. I mean, any kind of reckless 
borrowing has not occurred since the HIPC program. As a matter 
of fact, the Bank did the funding projections as to what they 
anticipate a prudent level of borrowing for these countries 
would be, and the numbers show that they are borrowing actually 
less than that right now.
    So there is more prudence. I think there ought to be a 
larger percentage of grant financing in what they receive. The 
poorest countries are going to, obviously, need more, 
relatively speaking, than the more--well, they are not wealthy, 
that is not the right word--but higher-income poor countries, 
if we can call it that, would require.
    Mr. Hart. Just briefly, to amplify that I completely agree. 
It is not DATA's nor would I assume the Catholic Bishop's 
intention to be here again in Jubilee 2050, to keep coming back 
because we have gotten ourselves into this problem again.
    I have to say that the Administration ought to be applauded 
for their initiative in trying to convert some of these loans 
to grants. It makes absolute sense, and we have supported it. 
And it is trying, in fact, to address that prospective problem, 
trying to avoid getting back into it.
    What we have not sufficiently dealt with are the problems 
of the past. We are still cleaning up some of that mess and 
have some work to do. They are complementary ideas meant to 
keep the poorest countries from being burdened by an 
unsustainable debt level.
    Mr. Melito. As we discuss in our report, the mix of the 
optimum level of grants for each country results in basically 
the loans they do take being ones that they should be able to 
repay. So it does provide an open and honest bookkeeping 
process, so they get grants in those areas where they cannot 
pay and loans for the resources they can repay.
    Mr. Bell. Mr. Hart, I think it is completely fair to say 
that it is not Mr. Flood's intent to be here in 2050 discussing 
this same subject.
    Mr. Flood. Oh, but I beg to differ.
    Mrs. Biggert. Thank you very much.
    We will have another round, I guess.
    Let me ask again, Mr. Melito, recent World Bank research 
suggests that debt thresholds are dynamic, and specifically, 
they indicate that countries that advance and improve their 
policies and institutions will be able to sustain higher levels 
of debt.
    Do you agree with this analysis? And is this concept 
included in the report's projections, or do the GAO projections 
assume that all countries' official sector debt is equal?
    Mr. Melito. The report uses the agreed-upon measure for 
HIPC, which is the 150 percent debt-to-export ratio, which my 
colleagues discussed previously.
    But as I mentioned earlier, there are other possible 
measures, and the World Bank and IMF are exploring those 
measures, but they are not policy yet. If they actually ever 
change the initiative, we would probably in future work 
integrate that, but it is not the policy yet.
    Mrs. Biggert. Okay. Then the World Bank this year published 
research providing a substantially different assessment of 
projected debt-to-export ratios through 2023. I am sorry we do 
not all have a graph that shows the difference between the 
historical and the baseline that they use, and it really does 
show what Mr. Flood was just talking about, where it goes down 
while the historic goes way up by 2023.
    So that methodology that they show rejects the reliance on 
historical data alone being appropriate to project the future 
debt service burdens. Are you aware of this methodology?
    Mr. Melito. Sure. They have, in recent years, the last 
couple of years especially, been doing sensitivity analyses 
where they have been trying to look at alternative rates lower 
than optimistic levels, and I am familiar with that. We could 
debate, and it is reasonable to debate what would be a 
reasonable proxy for the future.
    We have done our own analysis on the previous 10 years. 
Well, if you use the previous 10 years, the average would be 
4.5 percent compared to 3.5 percent for 20 years, still 
substantially below what they project. They project over 7.5 
percent, about 7.7 percent.
    If you use the most recent 10 years, you would reduce the 
burden to around $150 billion instead of $215 billion, and that 
would be a nice, substantial change.
    But the point is, their reliance on overly optimistic data 
creates the impression there is no problem. They provide debt 
relief at the completion point. They then show us these 20-year 
projections, and countries look like they have no problems 
moving forward.
    Well, we think it would be much more realistic if they 
actually used lower growth rates and showed that HIPC, while it 
is very important and it has done a lot of good work, it is 
probably not going to provide a permanent exit from debt 
problems.
    Mrs. Biggert. Well, would you say that methodology might 
provide the Treasury with more flexibility?
    Mr. Melito. This should be something that the Treasury and 
the donors debate. I mean, it seems arcane on the surface what 
growth rates should be used, but there are policy implications. 
And it would probably be useful if the boards of the Fund and 
the Bank actually put this on their agenda to decide for future 
projections for HIPC countries. We should adopt some standard 
or maybe report two or three, a low estimate and a medium 
estimate and a high estimate. But their official projections 
only use what I consider a very high estimate.
    Mrs. Biggert. If I might, I would submit the question for 
the record and perhaps you could give the GAO views on the 
merits of using the historical projections to assess HIPC needs 
relative to the World Bank methodology.
    [The following information can be found on page 98 in the 
appendix.]
    Mr. Melito. Sure.
    Mrs. Biggert. Then my next question is that I understand 
that the World Bank is exploring innovative use of financial 
instruments and other methods for helping HIPC countries hedge 
their exposure to the commodity price risk and thus stabilize 
their export sector.
    What are your views on using the hedging instruments to 
decrease exposure to commodity price volatility?
    Mr. Melito. That is not something that we looked at, and I 
really would like to look very closely at it before I could 
comment on that.
    It does seem like it would be difficult limiting it to poor 
countries because you would normally want to involve the 
private sector, and I do not know exactly how they would 
involve the private sector in these transactions. But if they 
have a paper about this, we could review it and potentially 
make comments.
    Mrs. Biggert. And assuming that these instruments could be 
used for hedging, I would suppose then that estimates in the 
GAO report would need to be adjusted?
    Mr. Melito. Well, again, the paper would be theoretical. I 
would like to see their plan and then ascertain whether it is 
feasible to implement such a plan.
    Mrs. Biggert. Okay. Thank you. I see everybody has left me.
    Would you like to comment on that Mr. Hart or Mr. Flood?
    Mr. Hart. I do not think I have a specific reaction to your 
questions. They are largely theoretical and ones that I do not 
have a good answer to.
    But I would like to just comment briefly again on GAO's 
report. Actually, I have very little argument with the 
assumptions that they have made about growth rates. The World 
Bank and IMF, as stated earlier, agree that those are 
optimistic.
    I guess what I would challenge is the way that it is 
presented to the Committee, as though $375 billion is needed to 
make debt relief successful. That is not the question; that is 
neither the purpose of the HIPC debt initiative, nor do I think 
that necessarily helps the Congress or this Committee grapple 
with the issues of HIPC that are before it.
    It also, I would just reiterate, counts money we are 
already spending. It also is an 18-year figure and global 
figure, not just the U.S. share.
    In my written testimony, I went through the calculation--
and I believe you said in your opening statement--that could 
roughly translate into $2.8 billion for the United States.
    Well, if you look at the global AIDS initiative, the 
Millennium Challenge Account, existing bilateral development 
and multilateral development assistance that we give, as well 
as export financing to poor countries, we give a lot more than 
$2.8 billion already. So what this analysis does not, nor could 
it, provide is an assessment of what actions Congress might 
take and really the state of health of the HIPC initiative 
moving forward.
    Mrs. Biggert. Thank you. That really goes back to my first 
question, which was, were these other factors really accounted 
for in this report? And the answer I guess was, yes, and yet I 
cannot figure out how that figures in, looking at that number.
    Mr. Hart. Well, I do not want to answer on behalf of GAO, 
but my understanding of their analysis is they took the World 
Bank estimate that the global community would provide. Fair 
enough. That seems logical. It does not assess what the United 
States actually has given or plans to give in development 
assistance moving forward.
    Mrs. Biggert. All right. Thank you.
    Mr. Flood, do you have any comments?
    Mr. Flood. No. It is just that I think as I recall--and 
this may have changed, I have not been in the Bank for quite a 
few years--but what they used to do is to estimate a reasonable 
growth rate for these countries. In some respects it would have 
a certain optimism in it so that one could know that we were 
talking about countries that were on an upward path, moving 
towards a higher level of development. And then they would 
determine what are the financial implications of that in order 
to achieve that particular growth rate. And then they would 
fill the amount in, and that is where you get your numbers.
    It comes out of starting with a growth rate which you think 
is realistic based on various parameters, and then you fill in 
the financing plan that is required to get there.
    I am not at all an expert in this area, but I would say 
that I am pleased to see that the World Bank, in response to 
this GAO report, admits that their export projections have been 
too optimistic in the past. I think that is an important point, 
that they recognize that fact.
    I think that perhaps just extrapolating from the past is 
too pessimistic. I remain more optimistic that the countries 
will be able to move forward to a situation where, through 
export diversification and other measures, plus some support 
from the outside on trade measures, that they will be able to 
reduce their export volatility more than is implied by just the 
historical rate of growth of exports.
    Mrs. Biggert. Okay. In the past then, the Department of 
Treasury underscored the importance of distinguishing between 
debt relief, which would be defined as to include only 
decreased debt service burdens and broader development goals. 
Would such a distinction imply that the majority of the 
estimated costs presented in the GAO report would not be 
appropriate when considering debt relief?
    Mr. Flood. Well, I think that what I got out of it all is 
that one has to say that debt relief is only one part of the 
total picture, and it is important, but far from sufficient.
    You have to look at a lot of other types of assistance, 
changes in policies as a whole, a large number of different 
issues which must be taken into account in order to project out 
what the total package is that is required. But clearly, there 
are different types of instruments, different items on the 
agenda which have different financial implications that go well 
beyond what you can ever expect from a debt relief program.
    Mrs. Biggert. Thank you.
    Well, seeing that no other questions or questioners--I will 
note that some Members may have additional questions for this 
panel which they may wish to submit in writing.
    Without objection, the hearing will remain open for 30 days 
for Members to submit written questions to these witnesses and 
place their responses in the record.
    Mrs. Biggert. I thank you all for being here, your time and 
your expertise and being part of this panel.
    With that, this hearing is adjourned.
    [Whereupon, at 4:10 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             April 20, 2004


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