[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE ROLE AND EFFECTIVENESS OF THE
WORLD BANK IN COMBATING GLOBAL POVERTY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 22, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-33
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
May 22, 2007................................................. 1
Appendix:
May 22, 2007................................................. 39
WITNESSES
Tuesday, May 22, 2007
Beckmann, David, President, Bread for the World.................. 10
Eizenstat, Ambassador Stuart E., co-chair, Atlantic Council
Commission on Transatlantic Leadership for a New Global Economy 13
Stiglitz, Dr. Joseph E., professor, Columbia University, and
Chair, Columbia University's Committee on Global Thought....... 5
Wade, Dr. Robert Hunter, professor of political economy,
Development Studies Institute, London School of Economics and
Political Science.............................................. 8
APPENDIX
Prepared statements:
Beckmann, David,............................................. 40
Eizenstat, Ambassador Stuart E............................... 44
Stiglitz, Dr. Joseph E....................................... 53
Wade, Dr. Robert Hunter...................................... 67
THE ROLE AND EFFECTIVENESS OF THE
WORLD BANK IN COMBATING GLOBAL POVERTY
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Tuesday, May 22, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 3 p.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Velazquez, Watt, Sherman,
Scott, Green, Cleaver, Moore of Wisconsin; Bachus, Castle,
Paul, Gillmor, Garrett, Neugebauer, and Marchant.
The Chairman. The hearing will come to order. I apologize
for the delay. We had votes scheduled at just the wrong time
and I thank the panel for indulging us. This is the first in a
series of hearings, and I do want to say--because obviously the
World Bank has gotten somewhat more attention of late than it
had previously. But I will say that this hearing began in a
conversation that Dr. Stiglitz and I had at Davos in January.
We have long had an interest here, the ranking member and
myself, with two of the four members, along with a former
colleague from Iowa, and our current colleague from California,
who pushed hard for the debt relief at a time when there was
some resistance to it.
This committee's concern and the concern of many of the
members with a more effective use of the international
financial institutions for the fight against poverty is long
standing, and I do want to say that this is not an
opportunistic hearing. I will say as an elected official,
though, that I do not mean by that to denigrate opportunism as
a mode of operation. I don't want to be saying something that
could be used against me later. But in this case we really had
been thinking about this for some time, and this is the first
in a series of hearings we are going to have about the role
that the international institutions, financial institutions,
can play in the war against poverty. I think it is important to
reaffirm that it is possible, through thoughtful action, to
reduce poverty. Not to abolish it or eliminate it--we are not
in the miracle business--but to substantially reduce it.
I believe, as do many others, that we have existing
institutions which are, (A), imperfect and, (B), indispensable,
and therefore it is our job to do what we can to improve them
without going after them in a most negative way. When I first
began involved in this we had the campaign called ``50 Years Is
Enough.'' Well, we now know that 60 years is too little, not in
terms of duration, but in terms of activity, and there are some
very important issues that we plan to deal with.
On the question of the Bank, there was a legitimate set of
concerns about what role the IMF should be playing as things
have evolved from when it was first set up. There were problems
of excessive conditionality. Many of us, on the Democratic side
in particular, have been concerned about what appears to be a
bias against the rights of workers that has crept into some of
the activity. There is a question about how you fight
corruption effectively, and how you fight corruption in a way
that does not make people who live in corrupt countries double
victims of corruption--victims first when people steal money
that was meant for them, and victims again when people then
withhold any further money from them. We need to be able to
sharpen that fight against corruption so that we go after those
who are really the problem.
There is the question of the extractive industries, of the
failure of mineral wealth to benefit the large numbers of
people whom it ought to, and all of those are things we are
going to study on an ongoing basis.
I have 2 minutes left in my statement, and I am going to
yield it to the gentleman from California, and then in a step
that the parliamentarian tells me is okay, I am going to give
up my second 5 minutes. The ranking member and I have 10
minutes each, and we both agreed not to extend the time. I
appreciate that because we do have a little bit of a
truncation. I am going to divide my 5 minutes up among the
witnesses because I don't know that all of the testimony will
be summarized within 5 minutes. And at this point I recognize
the ranking member, the gentleman from Alabama.
Mr. Bachus. I thank the chairman. I welcome our panel, and
I am going to make my remarks very brief because if I realize
anything, it is that our four panelists all know more about
this subject than I do, so I am going to spend my time
listening.
I would make one comment. Dave Beckmann--who is one of the
panelists--and I worked very hard on debt relief, and his book
``Grace at the Table'' was one of the books that inspired me to
become involved. And in that book, one of the questions asked
is, what will the United States and our generation be
remembered for? Will it be--if we are leaders in the world, or
we are to display leadership, what do we do with that
leadership, what influence do we have? And I think it is
becoming more and more apparent to all of us that it is in our
best interest to improve the plight of people all over the
world. Global poverty is a threat not only to the citizens of
the poor countries, but it is a threat to the rest of us, as
well.
And I will close with this one fact, prior to the Taliban's
takeover in Afghanistan, according to many of the world
surveys, Afghanistan was the poorest uneducated country in the
world. Almost none of the young women in Afghanistan had ever
seen a school and about 75 percent of young men had never set
foot in a classroom. And it was into this vacuum that the
Taliban came. And as we know, they filled that vacuum with
something that was really a threat to all freedom-loving
people. When they told the Afghan people that you are not
educated--you are not capable of educating your children, you
can't afford to do it, so we will educate them. And they taught
the young children in Afghanistan really a doctrine of hate,
and it didn't isolate that situation to Afghanistan. It affects
all of us. And throughout many parts of our world today, that
same doctrine, those same forces are going into countries where
there is a lack of education and infrastructure, and they are
taking advantage of that. As opposed to nothing happening in
that country, in those countries, what is happening in those
countries is dangerous, which is actually far worse than
nothing happening.
So I think it is definitely in not only in the best
interest of those countries, but in the best interest of our
own national security to see that those countries are stable
and that they have that basic education and as a consequence,
as we know, different rights and freedoms are respected.
Thank you, Mr. Chairman.
The Chairman. I now recognize for 2 minutes the gentleman
from California, Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman. The world goes gaga
because one guy at the World Bank gets $195,000 for his
paramour. The press ignores the fact that the World Bank is on
schedule to disburse $1.3 billion--a substantial portion of
which is American money--to the Iranian government, and that
some $270 million was disbursed to the Islamic republic during
Wolfowitz's short tenure. The Administration has substantial
clout with the World Bank purchased at the expense of the
American taxpayer. It used it first to install Wolfowitz, then
to back him as he tried to back the World Bank out of family
planning, and then finally used up every bit of clout in an
all-out effort to help him save his job.
The Administration has done nothing to try to stop the loan
agreements or the disbursements. Now it is true that the
Administration voted against the loans, but they were required
to do so by law. So perhaps we should consider ourselves
blessed that no one in the Administration was willing to commit
a crime in order to assist the Islamic Republic of Iran. Not
only do these laws provide resources to the government of Iran,
they also give it the Good Housekeeping seal of approval. How
can we convince the Iranian people that they will be cut off
from the world if they continue to develop nuclear weapons when
they are getting money from the World Bank, some of it ours?
In addition, governments stay in power by bringing home the
bacon. We know how to stay in office, that is why we are
sitting up here, and it is by bringing home the bacon even
though it is not halal or kosher. The Islamic republic is
bringing home the bacon from the World Bank, part of it ours.
We will go back to the Floor of the House, I hope, and vote
for foreign aid as I have again and again and hope that our
constituents don't realize that a portion of that foreign aid
is going to a government that is developing nuclear weapons.
I yield back.
The Chairman. The ranking member of the Subcommittee on
Domestic and International Monetary Policy, Trade, and
Technology, the gentleman from Texas, is recognized for 3
minutes.
Mr. Paul. Thank you, Mr. Chairman. Of all the elements of
the Bretton Woods system, perhaps the most enduring has been
the World Bank and its associated institutions. Although highly
regarded in some circles, the Bank has been a significant
failure in helping the residents of poor and developing
nations. Like many bureaucracies, the World Bank has constantly
attempted to reinvent itself and redefine its mission. Some
critics have referred to this as mission creep. It is the
reaction of self-interested bureaucrats who are intent on
saving their jobs at all costs. The noninstitutional elements
of Bretton Woods, such as the gold backed dollar standard, have
gone by the wayside, but the World Bank and IMF soldier on.
What is most annoying about the World Bank are the
criticisms alleging that the Bank and its actions demonstrate
the negative side of free market capitalism. Nothing could be
further from the truth. The World Bank is not an organization
devoted to capitalism or to the free market but to state-run
corporate capitalism. Established and managed by a multitude of
national governments, the World Bank promotes managed trade by
which politically connected individuals and corporations enrich
themselves at the expense of the poor and the middle class.
Western governments tax their citizens to fund the World
Bank, lend this money to corrupt third-world dictators who
abscond with the funds, and then demand repayment, which is
extracted through taxation from the poor third-world citizens
rather than from the government officials who are responsible
for the embezzlement. It is in essence a global transfer of
wealth from the poor to the rich. Taxpayers around the world
are forced to subsidize the lavish lifestyle of third-world
dictators and highly paid World Bank bureaucrats who don't even
have to pay income taxes.
The World Bank has outlived its intended purpose. Capital
markets are flush with money and well-developed enough to lend
money not just to national governments but to local and
regional development projects at competitive market rates.
In the aftermath of Mr. Wolfowitz's departure, much will be
made of the question of his successor when the questioning
instead should be directed toward the phasing out of the
organization. And I yield back.
The Chairman. The gentleman from New Jersey is recognized
for the remaining 2 minutes.
Mr. Garrett. Thank you, Mr. Chairman, for holding this
hearing today. I thank the witnesses in advance. While the
World Bank was created with the direct mission to make loans
and grant loans to low- and middle-income countries to reduce
poverty and promote economic development, and that is an
admirable goal and one I support, unfortunately the World Bank
has become, as many have said already, a bloated bureaucracy
that is increasingly moving its focus away from its core
mission. Desmond Lachman, a resident fellow at the American
Enterprise Institute, states, ``By extending its mandate, the
Bank has not only lost focus of its primary goal of poverty
reduction, but has also made it difficult to hold the Bank
accountable for its core activities.'' He goes on to say that
it might be in the World Bank's best interest to narrow its
focus, suggesting that ``These narrow goals might include the
eradication of debilitating illnesses like malaria, feeding the
hungry and supplying clean water.''
Another way that I believe the World Bank has ventured away
from its original charter is by focusing too much of their
resources on making loans to middle-income countries such as
China and India. These countries already have access to vast
amounts of private investment capital and should no longer need
the World Bank's help in financing infrastructure improvement.
Approximately 50 percent of the loans made in 2006 went to just
five countries, China and India included.
Mr. Chairman, I believe the World Bank is an organization
that is still trapped in the 20th century and has not moved
forward with the times. Studies have shown that its past record
shows that it is a failure in many of the countries it has been
involved in. New York University concludes, studies show, that
those countries that have been the largest recipients of World
Bank loans have performed no better, and oftentimes worse, than
those countries which did not receive the Bank's favor. And to
make matters worse, those countries like China, India, which
have ignored the Bank's nostrums, comfortably outperform those
countries like Russia and Argentina, which were more receptive
to the world advice, as has been stated.
Finally, I do applaud outgoing President Wolfowitz for
trying to rein in the out-of-control corruption within the
organization. The anti-corruption agenda has been a primary
objective of this Administration, but I do hope that whoever
his successor comes in line that he will continue to focus on
this important problem.
And with that, Mr. Chairman, I yield back the balance of my
time.
The Chairman. I thank the gentleman. I thank all of the
members for their cooperation. We will begin with Dr. Stiglitz.
I have 5 minutes remaining and I am going to yield a minute-
and-a-quarter to each of the witnesses, so each witness will
have 6.25 minutes. This is useful stuff. That may not seem like
much, but it is when you start talking. So each witness will
get 6.25 minutes. I will tell the timekeeper. Dr. Stiglitz.
STATEMENT OF DR. JOSEPH E. STIGLITZ, PROFESSOR, COLUMBIA
UNIVERSITY, AND CHAIR, COLUMBIA UNIVERSITY'S COMMITTEE ON
GLOBAL THOUGHT
Mr. Stiglitz. Thank you very much for holding these
hearings. I want to agree with the sentiment that you expressed
in the beginning, that America and the world have a strong
interest in contributing to reducing poverty and promoting
growth in the developing world. Aid can be an effective
instrument in achieving these objectives.
The multilateral institutions, of which the World Bank is
the premier lending institution, play an important role in this
global effort. For a variety of reasons, assistance
administered through the World Bank and other multilateral
institutions can be even more effective in achieving our
objectives than assistance provided by the United States
directly. This is especially true at the current time, when
American credibility, especially in the developing countries,
has sunk to an all-time low.
The question is, is the World Bank today playing the role
that it should be playing? And if not, what can be done about
it? Even before the recent turmoil within the institution,
there was considerable concern about its direction. Large
numbers of its senior people have departed in the past 2 years.
The most important asset of the institution is its staff, its
human capital, and it will take years to replace what has been
lost.
I want this afternoon, however, to focus on broader, though
not totally unrelated issues: How the World Bank should conduct
its business, what the development agenda should be, and what
the United States can do to help ensure that this happens.
It is in our interest that the World Bank remain strong,
credible, and effective. The Bank has greatly emphasized good
governance in corruption, but the Bank can only be effective if
it is seen as having good governance itself. There has to be
confidence that there is not corruption in the corruption
agenda, that there is not a hidden political agenda with
corruption in some countries being overlooked, while in other
countries there is a policy of virtually zero tolerance.
Finally, part of democratic values is due process. The
implementation of a corruption agenda itself must conform to
the highest standards. With the resignation of its president,
the question is the choice of successor and, most importantly,
the process by which this is done.
Good governance and the commitment to basic democratic
values requires that the head of the institution be chosen in
an open and transparent process. It should be the most
qualified person for the job regardless of race, gender, or
nationality. It is in America's interest that the head of the
institution not simply be chosen by the President of the United
States.
There are other important changes in the governance of the
World Bank and other multilateral institutions that will
increase their effectiveness. These require careful balance,
more democratic accountability, and strengthening procedural
safeguards.
There are reforms to the governance of the Bank, the need
for which the present scandal has highlighted. I want to
comment briefly on them. On the positive side, the review
process shows that the Board could exercise its fiduciary role
even in a very difficult situation where the largest
shareholder was not fully supportive, by setting up a committee
that included four members from developing and transition
economies. In spite of the pressures that were brought to bear,
22 of the 24 directors concurred with the finding of the panel
and, realizing that the wellbeing of the Bank required that the
President had to go, supported that action.
On the negative side, it is clear that the president of the
World Bank had enormous elements of discretion in making
appointments, in circumventing rules, in suspending loan
programs, and in directing bank programs, with insufficient
checks and balances in place and insufficient oversight. Some
of the systems designed to provide the checks and balances are
clearly flawed, with offices that might receive complaints
about presidential abuses actually reporting to the president.
Fears of retribution against whistleblowers or those raising
complaints were not totally unfounded. The powers of the
president had previously not been abused in this way, but the
fact they could be abused also highlights a fundamental flaw in
governance.
Reform will require careful balancing. There needs to be
more accountability of the World Bank, both to the Board and to
other stakeholders, including donor countries, but this has to
be done in ways that avoid excessive politicization of the
institution. The Bank has created one of the most talented and
qualified bureaucracies around the world; bureaucratic
procedures have been put into place that ensure that by and
large they attract and choose highly qualified applicants. But
left to themselves, the bureaucratic safeguards could lead to
an entrenched bureaucracy pursuing its own agenda or
insufficiently flexible to adapt to changing circumstances,
including new learning about the costs and benefits of
privatization and liberalization, new attitudes about country
ownership, or new agendas, such as those concerning worker
rights.
The Board, working with the president, must establish what
the Bank's overall agenda and priorities will be. As I argue
below, this agenda must be more balanced and more consistent
with our own values and our own practices. While the Bank is
likely to continue to be focused on promoting growth and
poverty alleviation, it is inevitable that there will be
changing views on how that can most effectively be done.
The Board, and not just the president, must play a central
role in constructing and approving this agenda, and then
ensuring that the president and the staff of the Bank implement
that agenda in an effective and consistent way. At the same
time, the checks and balances and safeguards against abuses by
the president of the World Bank have to be strengthened. In the
text, I provide details on how that might be done. There are
problems in both internal and external governance that I
discuss in the text.
International economic institutions like the World Bank are
at some distance from direct accountability. To address this
problem, at least three actions are required. Responsibility
for the World Bank should shift from Treasury to USAID or
should be shared with USAID. This is a practice followed by
many other countries, and it is essential if the developmental
perspective is to remain paramount in dealings with the World
Bank.
Second, there needs to be more parliamentary/congressional
oversight. The appropriate form of this oversight will need to
be worked out. A committee of the parliaments/congresses,
including donor and recipient countries, could be formed to
review the agenda and procedures and to discuss widely
perceived grievances.
Third, there needs to be more transparency and public
oversight of decisions, both before and after they are made.
These reforms--and there are many other reforms in
governance which I have discussed elsewhere--are, I would
argue, as much in the interest of the United States as they are
in the interests of the world as a whole.
No system is perfect. A president determined to evade the
set of safeguards put into place may still be able to do so,
even after those are strengthened. Humans are fallible and so
are the institutions that they create.
I want to turn to more specific aspects of the World Bank
agenda, beginning with corruption. Fighting corruption requires
more than just speeches; it requires a comprehensive agenda
that includes the development of policies that reduce the scope
for corruption. There are ways that the United States and other
advanced industrial countries can contribute to the fight
against corruption, most notably strictly enforcing anti-
bribery laws, eliminating bank secrecy, not just for terrorists
but also for tax evasion and corruption, and demanding
transparency in payments to governments by, for instance, using
the Tax Code to enforce the Extractive Industries Transparency
Initiatives.
Successful development requires, however, more than just
attacking corruption. Aid effectiveness can be undermined not
just by corruption but by incompetence or by the absence of the
appropriate complementary policies. It requires a comprehensive
development agenda.
There also needs to be country ownership of development
policies, programs, and strategies. Excessive conditionality
undermines this and development effectiveness. While the
conditions that have been imposed have been reduced, in many
cases they still remain excessive.
IMF cross-conditionality is especially problematic, and
even as up-front conditionality has been reduced, new forms of
hidden conditionality have been introduced through the IDA
allocation formulae. These formulae fail to deliver aid to
where it is likely to be either most needed or most effective.
The challenge to the World Bank and other aid agencies when
confronting a country with poor governance is to find
alternative delivery mechanisms for aid. It is bad enough that
the people in these countries are suffering from poor
governance. To be doubly punished by denying aid would seem
unfair, especially if there are alternative ways by which
assistance can be provided, especially in health and
education--investments in the youth of these countries. The
problem is that the conditionalities that--
The Chairman. You will need to sum up, please, Dr.
Stiglitz. You need to sum up.
Mr. Stiglitz. Okay. The problem is that the
conditionalities that have been imposed in the past have in
some cases actually reduced aid effectiveness. Moreover, these
imposed policies represent values that are contrary to those
that are held by the vast majority of Americans. The disparity
between what we require of others and what we do ourselves
further undermines the credibility of the institution and aid
effectiveness.
Thank you.
[The prepared statement of Dr. Stiglitz can be found on
page 53 of the appendix.]
The Chairman. Next, Dr. Robert Hunter Wade, who is a
professor of political economy at the Development Studies
Institute, London School of Economics and Political Science.
Dr. Wade.
STATEMENT OF DR. ROBERT HUNTER WADE, PROFESSOR OF POLITICAL
ECONOMY, THE DEVELOPMENT STUDIES INSTITUTE, LONDON SCHOOL OF
ECONOMICS AND POLITICAL SCIENCE
Mr. Wade. Thank you. I want to step back from the concerns
that Joe Stiglitz was talking about and address the current
deep crisis of relevance that the World Bank is facing. The
Bank's market has changed fundamentally in the past decade, but
the Bank continues to operate in much the same way and with
much the same products as a decade ago. The change in the
Bank's market was dramatically symbolized just last week while
the U.S. and European governments were fighting over President
Wolfowitz's future. At that same time, the African Development
Bank held its annual meeting not in Africa, but in Shanghai.
This event will be looked back upon as a milestone in the
history of the 21st century.
The main message of my testimony is that the World Bank can
potentially add much more value to the solution of some of the
world's most urgent problems than it has been doing and,
secondly, that the U.S. Congress and the next Administration
can help the Bank do so by signaling strong support for a
revived World Bank.
In the immediate future, that signal of strong support
means supporting the current Administration and selecting a
first-rate candidate as the next president, a candidate with an
excellent record as the leader and manager of a large complex
organization. That criterion would knock out some of the names
on the current short lists.
And secondly, congressional support means the Congress
paying over the still outstanding U.S. payments on the IDA 14.
Looking beyond the immediate future, the Congress should
support the World Bank in taking more of a leadership role in
several genuinely global areas. In its traditional products of
aid projects and economic advice to governments of developing
countries, the World Bank's market has changed in the sense
that it now faces a whole array of new competitors supplying
much the same kind of products, such as China and Korea, which
have become big sources of financial assistance to poorer
countries, such as private consulting firms which have
developed superior skills in many of the Bank's traditional
areas of expertise, such as banking and finance, and also such
as the Gates Foundation and other private philanthropic
foundations which have become big players in this financial
assistance game.
But given all that, the Bank still retains a big
comparative advantage over these other entities, which is based
on its combination of: (A), intergovernmental guarantees; (B),
its own large revenue base; and, (C), its global reach. This
combination makes the World Bank almost unique. And in
particular, I suggest that the Bank should take a leading role
in addressing one of the biggest specific issues of our time,
which is how to get economic growth with much less by way of
carbon emissions, how to decouple economic growth from carbon
emissions.
The Bank has a lot of experience in formulating economic
policies, translating them into investment plans, and
translating the plans into investments on the ground, and it
should use this general experience to take the conclusions of
reports like the IPCC reports and the Stern report and then
translate those general conclusions into what they mean for
specific countries, such as China, India, Bangladesh, Brazil,
and so on, and then to help those governments work out country
programs focused on decoupling their economic growth from their
emissions. This task would be a relatively new task for the
Bank and it would require the Bank to develop new financing
instruments in order to accelerate the take-up of
environmentally friendly technologies. For example, the Bank
could establish a carbon fund, a fund which would, for example,
allow a developing country such as China or India to borrow
from the Bank for a power station and to choose a state-of-the-
art technology for that power station, a state-of-the-art
technology, reduction technology, even though that technology
is more expensive. But with this fund, rather than the
government of the country having to bear the incremental cost,
such a fund could be used to accelerate the uptake of climate
friendly investments in the power sector, in transportation,
railways for Africa, for example, in forestry and land use
practices, and in still other sectors.
Some of the finance for this fund could come immediately,
tomorrow, straight from the World Bank's current reserves. The
World Bank currently has $36 billion in reserves. It needs only
$25 billion in order to retain its all-important AAA credit
rating, so the balance between--or much of the balance between
the $25 billion that it needs and the $36 billion in reserves
that it has could go into such a climate stabilizing fund. This
fund could also receive grants from OECD governments, from
private foundations and the like.
This is just one small example of how the Bank could be
playing a significant catalytic role in addressing
international environmental issues generally and climate change
in particular. To do this, to reposition itself in this way, it
would have to undertake some pretty big internal changes and to
develop some new streams of revenue. I leave the details of how
I think the Bank could do these two things to the written
testimony.
The bottom line of what I am saying is that even though, if
we were starting fresh in 1944, we would surely not start with
the present World Bank. But the present World Bank is what we
have to work with, and I suggest that the present World Bank
does need U.S. support to reposition itself in order to fulfill
the valuable role that it is almost uniquely able to play in
the world.
And just to address directly Mr. Paul's point about how
capital markets, private capital markets are now growing to the
point where they can take care of all the tasks that the World
Bank might do, I suggest that in this area of meeting these
genuinely global problems, providing what economists call
global public goods, capital markets, private capital markets
are not going to do the job. For that job to be met, there is
plenty of scope for a multilateral public institution like the
World Bank.
Thank you.
[The prepared statement of Dr. Wade can be found on page 67
of the appendix.]
The Chairman. Thank you, Dr. Wade.
Next, Mr. David Beckmann, the president of Bread for the
World.
STATEMENT OF DAVID BECKMANN, PRESIDENT, BREAD FOR THE WORLD
Mr. Beckmann. Thank you, Chairman Frank, Ranking Member
Bachus, and members of the committee. I am honored by this
opportunity to testify before you on the role of the World Bank
in overcoming world poverty.
The world is making progress against poverty. The Bank just
announced that we are now down below 1 billion people in the
world who are living in what it calls extreme poverty. That is
still a terrible number, but in 1980, they estimated that the
number was 1.5 billion. So we live at a time where we can see
dramatic progress against hunger, poverty, and disease, and the
World Bank is playing a critical role in that great liberation.
I have a relatively positive view of the World Bank, and it
is built on 30 years of working with the Bank in various
capacities. I worked in the Bank for 15 years in operations,
and then I was a speech writer for the president of the Bank in
the early 1980's. Then I led the Bank's engagement with civil
society around the world. In the late 1980's, it was a fringy
idea that the Bank should not just deal with governments.
I have been at Bread for the World for 15 years. I think
you know that Bread for the World is a large citizens' movement
that organizes people and churches across the country to lobby
Congress on issues that are important to poor people around the
world and also in our own country.
At Bread for the World, we have continued to focus on the
World Bank, and in the early 1990's, we did our part to try to
get the Bank to focus more explicitly on poverty reduction, and
to make the Bank more transparent and accountable. At the end
of the decade, we chaired the legislative coalition for the
Jubilee campaign. On all of those issues, this committee has
played an important leadership role, and, in fact, the Bank
today is more focused on poverty than it was when I worked
there.
It is more accountable and more participatory than it used
to be, and I think the Bank's leadership of the debt reduction
initiative in general has been just excellent in reducing
impossible debts, and doing it in a way that really has
fostered economic growth, especially among poor people. Right
now, Bread for the World is campaigning to change the U.S. farm
bill in ways that would be good for rural America and rural
Africa, too, and some of the analysis behind that campaign
comes straight out of the World Bank.
It is hard to figure out the World Bank. It is a
complicated institution. But I have been feeling different
limbs of this beast for 30 years, and I have come to a deep
appreciation for the Bank. Now any institution has its
weaknesses, but I want to highlight five strengths. First, the
World Bank is focused on reducing poverty. You can see the
effect of that most clearly by where the money goes. If you
compare the Bank to, say, AID, the Bank's aid money goes much
more to low-income developing countries. The Bank does all
kinds of things. It may be working on policies that facilitate
the private sector, to develop capital markets, but staff
always have to link that back to the overarching purpose of
poverty reduction.
A second strength is that the Bank has improved and adapted
over time. Dr. Stiglitz has criticized the Bank, and I think it
is clear that the Bank listened to that criticism and has made
some adaptations so it is a stronger institution now. He is
probably not satisfied with all that they have done, but it is
clear that they have listened to him and have made some
adaptations. That is one example.
Third, the Bank is an extraordinary center of knowledge.
Even when I don't agree with the Bank, I check what they are
thinking.
Fourth, the Bank's governance structure works fairly well.
It is a compromise. The governments that put in the most money
get the most power, but all the governments that are members
get to sit at the table and be part of the discussion. And it
seems to me that, remarkably, most decisions are made on the
basis of reasoned debate.
And finally, the Bank evaluates itself. The independent
operations evaluation department concludes that three-quarters
of the Bank's operations are satisfactory, so there is a lot of
room for improvement. But I don't know of any other institution
in international development that is so self-critical and so
open to learning from its own experience.
Now, looking to the future, I would highlight three
recommendations. First, I think the binding constraint on
progress against world poverty is still a lack of political
commitment in developing countries and also in the
industrialized countries, and there are things that you can do
that build political commitment over time. For example, you can
set up institutions--strengthen non-governmental and
governmental institutions that represent the interests of the
poor. The Bank does a lot to build political commitment, and I
would like to see a systematic review of what it is doing to
deal with this fundamental constraint and what it could
appropriately do to provide stronger leadership.
Second, I would recommend that the Bank not adopt a bunch
of new initiatives right now. In my judgment, Jim Wolfensohn
launched more new initiatives than the Bank could effectively
absorb. The Wolfowitz controversy has really caused some
damage, so I think the Bank should focus on implementing the
priorities that are already in place, notably, continuing the
turnaround in Africa, changing the Bank's role in the middle-
income countries, and curtailing corruption.
And then finally, the new president of the Bank needs to
get all of the Bank's diverse stakeholders, notably the Board
and staff of the Bank, to start working together again. I think
the way to do that is fundamentally to focus on the mission,
because the Bank's mission of reducing poverty is compelling to
all different kinds of people. As the chairman and ranking
member of this committee show, this is a mission that people of
different political persuasions are drawn to. Virtually all the
governments of the world say that they want to reduce poverty.
I am a minister of religion as well as an economist, and
all of the world's religions and ethical traditions know that
what is happening in the world to reduce extreme poverty is
sacred business. The transition that is happening at the World
Bank is a turning point not only for the Bank, but for the
world's progress against poverty.
The Chairman. Sum up, please, Dr. Beckmann.
Mr. Beckmann. I think it is incumbent on all of us to play
our various roles to strengthen the Bank and to make it a yet
more effective instrument in overcoming poverty.
[The prepared statement of Mr. Beckmann can be found on
page 40 of the appendix.]
The Chairman. Thank you. And finally, our once and future
witness, I know his face is familiar to many of us in a number
of capacities, but he is here today as the co-chair of the
Atlantic Council Commission on Transatlantic Leadership for a
New Global Economy. Stuart Eizenstat.
STATEMENT OF AMBASSADOR STUART E. EIZENSTAT, CO-CHAIR, ATLANTIC
COUNCIL COMMISSION ON TRANSATLANTIC LEADERSHIP FOR A NEW GLOBAL
ECONOMY
Mr. Eizenstat. Mr. Chairman, and Ranking Member Bachus, I
am appearing as co-chair of a bipartisan commission with Grant
Aldonas from the Atlantic Council, looking at ways in which
Europe and the United States can transform all of the
international financial institutions in light of the major
changes that have occurred in the world's economy. I will focus
on the World Bank, and to some extent, the IMF.
The international economy has undergone radical changes in
the past 50 years, with economic power shifting south and east,
but the World Bank and IMF have not sufficiently taken this
into account. Today, China, India, Brazil, Russia, and other
emerging countries represent 45 percent of global GDP, 40
percent of world exports, and 65 percent of the world's foreign
exchanges. And yet they have much less of a central role in
global economic governance than their economic importance
dictates.
Another major change is the remarkable growth of global
private financial markets increasingly available to developing
nations without the time delays and conditionality from the
World Bank and IMF. For example, in 2005, the amount of private
debt and equity flows to sub-Saharan Africa, one of the poorest
places in the world, dwarfed the amount of money spent by the
World Bank. Another development is the new entrants into
overseas development assistance, particularly from China, which
is building infrastructure projects all over the world for
political and economic reasons, not to benefit the countries
involved, with no conditionality, using oftentimes their own
workers, not the indigenous workers, to build the very projects
they are funding.
All of these changes impose significant challenges for the
World Bank and the IMF, including the desire of emerging
economies to have more input into their governance. At the same
time, our Commission strongly believes that the Bank and the
Fund continue to be highly relevant. No other private or public
institution, for example, can do the kind of macroeconomic
surveillance as the IMF to prevent future global crises. And
for the Bank, over half-a-billion people have risen above the
poverty line over the last decade. While there are many reasons
for that, the Bank's programs have played a role.
In addition, private lenders want their borrowing country
clients to belong to the IMF and World Bank, and the World Bank
still has a major role in long term financing for
infrastructure. I was doing work for BP on the BTC pipeline in
Azerbaijan, Georgia, and Turkey. There is no question but that
having gotten World Bank financing in part for that project
elevated the social and environmental standards of the project.
No private capital will finance many of the projects that
are now financed through the world's IDA program. It is the
world's premiere poverty focused aid agency, with 81 of the
world's poorest countries, 40 in Africa, IDA-eligible. IDA has
a greater capacity to deliver developmental assistance on a
larger scale and in more sectors than any other agency in the
world, and certainly than the private sector. No other private
or public institution can address complex cross-sectoral issues
like IDA, like, for example, linkages between
macrostabilization and banking sector reform. Nevertheless, the
World Bank faces challenges which require significant reform.
And permit me to summarize briefly our Atlantic Council
Commission's recommendations. Number one, the top leadership of
the World Bank and IMF should be chosen on the basis of merit,
not nationality. Since their creations, this has been a
monopoly for Europe and the United States--Europe for the IMF,
the United States for the World Bank. This is antiquated and
unfair. It doesn't recognize the growth of African, Latin
American, and Asian countries. And moreover, with the special
focus of the World Bank on development and poverty alleviation,
it doesn't produce leaders who have the expertise in those
areas. Indeed, it can lead nations to go the other way, like
Chavez is trying to do, by creating a new body called the Bank
of the South.
With Paul Wolfowitz's departure, President Bush can send a
powerful signal to the world that he is turning a corner on
American unilateralism by throwing open the contest to the
entire world and supporting the best candidate, regardless of
nationality. That would turn the tragedy of the Wolfowitz
incident into a plus for America's image in the world and for
the future management of the world economy.
Second, the World Bank and IMF governance should reflect
actual economic power and influence. Emerging economic powers
in Asia and Latin America are seriously underrepresented in
voting power and board representation. If developing countries
and emerging economic powerhouses are to take these
institutions seriously, they must be given a genuine leadership
role.
And we recommended, therefore, in our Commission, two
reforms to rectify this imbalance. First, European
representation should be consolidated into two seats, an EU
Euro zone, and an EU non-Euro zone seat. European countries are
highly overrepresented, with 7 directorships out of the total
of 24.
Second, we recommend that the U.S. and European
representation be rebalanced in terms of voting shares. Third,
there is serious confusion and overlap in the World Bank and
IMF programs, with inadequate consultation and coordination.
The Bank and the Fund have responded to changes in the
international environment by reaching out beyond their
mandates. Since they work in many of the same countries at the
same time, this leads to inefficient overlap in their programs.
We found that there was insufficient coordination between
staffs, often going to the same countries at the same time.
This costs public assets, gives conflicting advice to recipient
nations, and fails to meet the needs of members.
For example, the Fund's financing activities in low-income
countries have moved beyond their core responsibilities, and
overlap with the Bank's work in development finance. The Fund,
for example, is moving into areas beyond their core capability,
like civil service reform, land and energy sector reform,
privatization, and judicial reform that are the Bank's
responsibilities. We recommend to rectify this the following: A
clear delineation of responsibilities between the Bank and the
Fund, each focusing on their core strengths, not based on the
income of the recipient countries. We felt, for example, that
the IMF should gradually withdraw from providing long-term
baseline financing in low-income countries, and focus instead
on short-term balance of payments financing and global
imbalances.
Next, the Atlantic Council recommended closer coordination
between the Fund and the Bank by double-hatting executive
directors. It does not make sense, at a time when there is a
lack of cooperation, Mr. Chairman, to have separate executive
directors serving for the board of the Bank and for the Fund.
By appointing the same person to serve as an executive director
at both, you assure greater coordination and collaboration and
reduce duplication of programs.
Third, even with this, we think that is not enough, and
that there should be an eventual merger of the organizations no
later than 2030. The Malan Report suggests a number of ways to
achieve greater collaboration, but these simply will not
achieve the degree of coordination without a merger. There are
simply inherent overlaps only a merger could alleviate. For
example, the Fund needs to take into account the sectoral level
and composition of public funding, which is within the Bank's
responsibility, to achieve macroeconomic stability. Their work
overlaps and duplicates of necessity. This means that the IMF
and the--
The Chairman. We will need you to sum up, Mr. Eizenstat.
Mr. Eizenstat. --Bank should be under the same roof. And
last, greater accountability. The way to achieve greater
accountability is to follow a recommendation of the Meltzer
Commission for an independent performance audit, or even
better, a group like the GAO, the Government Accounting Office,
inside the Bank for continuous evaluation of its programs.
Also, the emphasis that both Jim Wolfensohn and Paul Wolfowitz
placed on anti-corruption efforts is essential for sustainable
development. The World Bank estimates there are a trillion
dollars a year paid in bribes to all countries. The approach
may be open to debate, but the necessity is clearly there.
[The prepared statement of Mr. Eizenstat can be found on
page 44 of the appendix.]
The Chairman. Let me apologize to the witnesses, but ask a
favor of them. We have some votes that are going to take
probably about 40 minutes. I would hope the witnesses could
stay. If you have to get back and out of town, I understand
that. If you are from Washington, the day's probably shot
anyway, so you might as well hang out. This is a very important
hearing. We have had very good testimony. I promise you this
committee plans to stay with this. If you can stay, I
appreciate it. I plan to come back. Some others will. We will
have maybe another hour when we come back. And if not,
obviously you are entitled, you were already here, you thought
you were at 2:00. But I just want to thank all of you.
If you can stay, this has been very insightful. I promise
you your time is not going to be wasted. I think you are going
to find this committee engaging very seriously with the range
of things that you said. So we are going to recess for about 40
minutes, but we are going to come back. And if you can stay, I
appreciate it, and thank you.
[Recess]
The Chairman. I am going to begin with some questions. As I
listened to the testimony, I believe there is a piece of
legislation here, maybe several. For example, the President
could appoint the same person, I assume, to be the ED, but we
could also change the law to make that an appointment. That
could be done statutorily. Dr. Stiglitz had a number of
legislative suggestions, and I think we can work with those.
There are some restrictions, obviously, in terms of members of
the Bank staff themselves testifying. But one of the things
that I did in 1993, when I chaired this subcommittee, was to
convene a meeting of parliamentarians who were interested in
the World Bank. I am going to indulge both myself and the
ranking member, and we can make this more of a conversation, if
that is acceptable to everybody. One of the things that struck
me when I was first a member and then when I became
subcommittee chairman was the point that Dr. Stiglitz talked
about, that these important institutions, and you all talked
about the political and economic and social aspects of them,
but they are run entirely by finance ministries. Neither the
diplomatic side nor the social justice side are involved, and
the parliamentarians were excluded.
I remember at one point suggesting during the Clinton
Administration that we invite the State Department to testify
on some things, because some members had some concerns about
this. And the Treasury Department was very unhappy about that
and reacted, I thought, unfortunately, in a kind of turf way.
Well, we are not going to deal with that anymore. And one of
the things I did was to convene a meeting of parliamentarians
from 25 countries or so. There were some people very
interested. And we had a meeting in this room and it seemed, in
my mind, to be the beginning of a parliamentarians group. We
did have officials of the Bank and the IMF come before us,
because it was not any one parliament. That is when we began
talking about what we had already begun to work on--the
inspection panel and some other things.
Unfortunately, from my standpoint, from a number of
perspectives, that meeting was the first and the last, because
I called that meeting in the summer of 1994 as chairman, and
presided over it in December of 1994 as the lame duck, soon to
be ex-chairman. But I think there is a great deal of
bipartisanship in the respect I mentioned. I said that Mr.
Bachus and I, Mr. Leach, and Ms. Waters, worked closely
together. And we are going to get back in this business in a
serious way. So let me just ask a couple of these questions,
and then I would share the time with my colleague.
Let me ask Dr. Stiglitz, Dr. Wade correctly pointed out the
challenge of trying to promote growth without increasing carbon
emissions. And obviously, the World Bank seems to be one of the
forums in which we can deal with that, because you have the
problem--Dr. Stiglitz talked about it in his testimony, and
others have talked about it--obviously, you have this dilemma
of how do you treat the disparity in carbon emissions between
the rich countries and the poor countries? And clearly great
growth will come there. What is the ratio? How do you meet the
argument that no, you can't just treat everybody equally when
they start so unequally? It would seem to me that the Bank
would be a very important place in which we could do this,
including the environmental fund. Is that still functional? And
that could be a piece of it.
But another one that I am particularly interested in is
important domestically and also internationally, and I will ask
Dr. Stiglitz, and that is equally important is to show that we
can make growth compatible--that growth does not mean
increasing inequality. And there is the question of equality or
increased inequality, since nobody is talking about equality in
this system, but what degree of inequality you get. There is
inequality between and among countries. But it seems to me
increasingly here that unless we can deal with inequality
within countries, we will not have the political support we
need to try to diminish equality between nations. And I have
talked about a bargain between business and some of us on the
liberal side. I think we are beginning to see the possibilities
here, but it is still in the early stages. Trade and
immigration are two areas where there are the beginnings of
compromise between liberals and the business community, two
elements that I think would be in the interests of what we are
trying to promote, but there is a lot of resistance to them by
people who are still skeptical that they are not going to get
burned.
Now one of the areas that did strike me was a kind of
cultural lag or is it the vampire reappearing? There had been
this view, we had hoped that the World Bank and the IMF would
stop trying to impose a particular kind of political economic
orthodoxy, the Washington consensus, on countries, and we did
seem to be making progress. It seemed that the picture of Mr.
Camdessus standing over the president of Indonesia with his
arms folded would not be repeated. And it wasn't--obviously, it
was a picture taken out of context, but it came at a time when
there were these attacks.
Some people have argued, and I would ask all of you who
watched this, that the Bank and IMF, to some extent, but the
Bank particularly, is slipping back into that, that we are
seeing a kind of conditionality that represents a set of
particular policy choices, in this case, ideologically
conservative ones, but ideologically, liberal ones could be as
much of a problem both because they interfere with the notion
the countries are really deciding what to do. But also for any
of us because they, in my judgment, exacerbate some of the
problems we have had of growth and inequality.
Are we getting back into the kind of conditionality, Dr.
Stiglitz, that you complained about, and we thought was
receding?
Mr. Stiglitz. Yes, I think there is some concern about
that. One of the things I emphasized in my talk that we have
become aware of in recent years is that in the IDA allocation
formula, there were some hidden conditionalities. That is to
say, the formula that determined who got aid was based on how
well countries were doing on certain measures, and how well
they were doing in those measures was, in effect, determined by
how well they were doing in conforming to the Washington
consensus policies.
One of the ironies is that a lot of these measures are
about good governance, and part of good governance is being
transparent, but the measures themselves were not transparent,
so there is almost an internal inconsistency. But when they
became transparent, we realized the extent to which they were
actually advancing some of the old-style conditionalities.
I think the point that you raised is correct, that there
has been a step backwards, that there had been a reduction in
the set of conditionalities. There is a sense that in the last
couple of years conditionalities have increased, or at least
pressure has increased. What is particularly of concern is the
fact that there are a number of conditions that have been
imposed that are very inconsistent with the way that we, in
fact, conduct economic policy in the United States. For
instance, we have a central bank, a Federal Reserve, that
focuses on inflation, unemployment, and economic growth. There
is a three-partite macromonetary policy. One of the conditions
that is often imposed, particularly with IMF cross-
conditionality, is that central banks in other countries are
supposed to only focus on inflation. The conditionalities
require that they don't pay any attention to employment or to
economic growth.
As another example, something which in the past has been a
great deal of trouble and is still, to some extent, is that the
IMF and the World Bank push privatization of Social Security.
The United States had a big debate about privatization of
Social Security. Different people came out with different
views, but the country as a whole came out on the side that we
didn't want to privatize Social Security. Thus, the question
is, are we forcing other countries to do something that we
rejected, in the sense that a very significant fraction of
Americans said no, this is not the right economic policy.
Incidentally, as an economist, I also thought that
privatization was a bad economic policy.
The third topic that I talked about in my written testimony
is this issue of worker rights and worker conditions. There is
a lot--
The Chairman. Which I put into the country policy example.
Mr. Stiglitz. Exactly. The point is that they put on things
like labor market flexibility, which is often a code word for
letting labor wages go down and unions being weakened, but
nothing was said about core labor standards, so there was
nothing to balance the debate. My view is that there should be
discussions about the pros and cons and an awareness of the
economic and political arguments, but labor market flexibility
should not be demanded as a matter of conditionality.
The Chairman. Thank you. I find that flexibility is often a
quality that people find very desirable in others. Any of the
other panelists? Mr. Eizenstat.
Mr. Eizenstat. Well, I was in the Administration as Under
Secretary of State at the time of the Asian financial crisis,
and I certainly saw some of the negative impacts of the
conditions that were imposed and the manner in which they were
imposed. And we ended up trying to pull together programs to
ameliorate some of the cuts in social programs. At the same
time, I think we shouldn't go to the other extreme and think
that IDA or other grants and loans should be made without
conditions. That is exactly what the Chinese are doing. There
need to be conditions to assure that the funds are properly
used--transparency, anti-corruption, good macroeconomic
policy--or the money simply goes down a hole. So I think that
there needs to be a proper balance.
I would also say that for all the mistakes that were made
during the Asian financial crisis, and there were mistakes
made, that those countries did bounce back very quickly, and
they now have, in many cases, current account surpluses, and
good macroeconomic policies, much better than they did before.
They are much more alert to exchange rate problems, in part
because of the conditionality. So I would urge that we not
throw the baby out with the bath water when we talk about
conditionality and just look at what the Chinese are doing with
no--
The Chairman. That is a fair point. I think it is something
of a distinction to some extent, and I am talking a procedural,
substantive one. The conditions you talk about are procedural,
but not in a superficial sense, transparency and honesty. I
think that is an appropriate overall balance. I think the kinds
of conditionality to which I have objected and others, they
were both too specific and too ideological, that you--that
those are the kinds of conditions you want to avoid, that you
want to recognize a legitimate set of policy choices, but yes,
I think we should be clear that doesn't mean that you ignore
whether the money is just being wasted, whether there is
corruption, or whether there is a lack of any kind of openness
to let you know that.
Any of the others? Yes, Dr. Wade.
Mr. Wade. In 2005, the World Bank published a 350-page
report called ``Economic Growth in the 1990's: Learning From a
Decade of Reforms.'' So this was the Bank's effort to write
down what had been learned from the experiences in the 1990's.
And the main conclusion of this 350-page report was that we
have learned that one size does not fit all. We must be more
pragmatic in the kind of advice that is given, more contingent,
make it more contingent on country circumstances, and so on. On
the basis of this report, some economists declared that the
Washington's consensus is dead; nobody believes it anymore. I
think that is quite misleading, because if you look not at what
the World Bank says in its reports, but at what country
directors say to their counterparts in government, they still
tend to be pushing a rather hard, and I have to say quite
ideological, version of the Washington consensus.
The Chairman. And inappropriately, so you would say.
Mr. Wade. Yes, inappropriately. The idea that there must be
completely free trade, just sort of get the government out,
privatize everything that can be privatized, and so on, a hard
version of the Washington consensus. So that is where you have
to look. And that is--and when you look there, you see that
bank country operatives are still pushing this agenda.
The second point I want to make is that quite a lot of the
thrust for sort of homogenization of a one-size-fits-all kind
these days, and since the Asian crisis, is coming from the IMF
in the forms of the codification of standards of good or best
practice in banking, in financial regulation, in corporate
governance, and in data dissemination. These are universal
standards, they are comprehensive standards, and the IMF's
business now is undertaking surveillance of all economies to
see to what extent these economies are complying with these
standards. And that, I think, has some quite worrying negative
consequences, as well as some desirable.
The Chairman. What is the enforcement? Is it that the Bank
then picks up on the IMF standards and enforces them? Because
the IMF by itself, absent a crisis, do they have any
enforcement on those? What is the enforcement mechanism?
Mr. Wade. No. There is some formal enforcement through IMF
conditionality and also cross-conditionality with the Bank, but
the main enforcement mechanism is an informal one through
market signals. That is, the idea is that this information of
compliance with the standards is made available to market
participants, and they will then react and will be more
favorable towards countries that comply more and will punish
countries that comply less. That is the mechanism, the main
mechanism.
The Chairman. Yes, Mr. Beckmann.
Mr. Beckmann. Can I address the first comment you made
about governance, and how to get social concerns, equitable
growth, and how the governance--
The Chairman. When we get down to five members, you can
pretty much do whatever you want. Since you stayed so long, we
owe you.
Mr. Beckmann. Well, just on that, the governance of foreign
assistance within the U.S. Government is a mess. We haven't had
a reauthorization of foreign assistance since 1961, so the U.S.
Government has been making its development assistance and
foreign aid policy through the appropriations process in an ad
hoc way, and that has been debilitating. The Bush
Administration's response to some of the debilitation of AID
has been to start new agencies, so we have now the MCA and
PEPFAR and AID. And then the MDB's; the U.S.'s representative
within the multilateral banks is from Treasury.
I think we ought to have a cabinet-level department, as the
U.K. does, a Department of International Development. It
wouldn't work, as Dr. Stiglitz suggested, that the MDB's should
be governed from AID; AID is too low in the bureaucracy. And
now especially, it is really dominated by the State
Department's objectives, so that doesn't really work. But I am
hoping that in 2009 we are going to see a comprehensive
reauthorization of foreign assistance. Fundamentally, what is
needed is for the President and the Congress of the United
States to agree on what they want to do with all of our foreign
aid, whether it goes through IDA or through AID. What do we
want to achieve? And to get the job done, we will need a more
integrated institutional structure. That would mean that this
committee would need to work with the International Relations
Committee.
The Chairman. Right. It is interesting. In the Senate, this
jurisdiction is with the Foreign Relations Committee, where you
might logically argue it belongs. I am very interested in this,
so I am very happy that somebody, it seems to me quite
mistakenly, said, ``Oh, the World Bank, that is a bank, so it
will go through the Banking Committee.'' That is why we have
it. I am not giving it up with any--
Mr. Beckmann. This committee has actually done a great job
on World Bank issues.
The Chairman. Thank you. I appreciate it. But we have
already collaborated with--it has gone back to being called the
Foreign Affairs Committee now--with Congressman Lantos and
others, and we will continue to do that. Thank you.
Let me turn to Mr. Bachus now.
Mr. Bachus. I thank the chairman. In fact, my first
question was going to be, is the World Bank a bank? And you
sort of hit on that, but let me just sort of change it around a
little bit. I will just start--I want each of you to answer
this. What do you see was the purpose and the function of the
World Bank in 1944 and what is its function and purpose today?
And has it changed? If you will, touch on economic growth,
economic development, and also poverty reduction, and poverty
alleviation, and how they go together. Professor Stiglitz?
Mr. Stiglitz. Sure. Remember that in 1944 it was called the
International Bank of Reconstruction, and then they added the
word ``and Development,'' so it really began with helping
Europe reconstruct. But fortunately, they added ``and
Development,'' and that has become the major focus. But it has
gone from just a question of lending for development projects
to a much broader focus, not just on development, but on
poverty alleviation in developing countries. And that clearly
is its focus. Some questions have been raised about capital
markets. The fact is that capital markets are not going to be
focused on poverty alleviation. They are not going to lend to
the poorest countries. They are not going to lend for education
or health. A little bit sometimes, but they just can't go into
those areas. Thus, there is a vast need there.
Now, I think one of the things that has changed is a
recognition that what separates developing and developed
countries is not just money, but also knowledge. And with that
has gone a change from being just a bank which lends money, to
being sometimes called a knowledge bank, with a broader set of
objectives.
Mr. Bachus. The technical expertise and knowledge.
Mr. Stiglitz. Exactly. There is an advantage of being a
global institution that in principle is trying to learn from
all the experiences, failures and successes all over the world,
and then transmit that knowledge. It hasn't always done it as
effectively as it should. It has come in, I think, often with
blinders. But the idea of having an international institution
that would learn from all over the world and then transmit to
the whole world what has been learned, that principle seems to
me one that makes a lot of sense.
Finally, I want to pick up on something that Dr. Wade said
that I think is important. As the world has become more
integrated, we have also become more interdependent; that means
there are more areas where we need to act together. The World
Bank is an important institution for acting together in areas
that we call global public goods or global externalities, such
as global warming, where there is an international interest in
addressing this problem: It will affect all of us. How to help
the developing countries do what they ought to be doing is at
the current juncture potentially one of the most important ways
that we can work together. If I were saying what are the new
items in the agenda, that is one of the items that ought to be
listed.
Mr. Bachus. Okay. All right. Dr. Wade? Anything? Mr.
Beckmann?
Mr. Beckmann. Yes. If you go back to the charter of the
Bank that was written in 1944, it talks about economic
expansion. There is a reference to labor conditions; that is
the way they talked about poverty. And there is a strong
reference to promoting international trade. That provides a
clear statement of what the Bank meant to do when they set it
up, and those purposes are still relevant. The Bank still is
promoting economic expansion, paying attention to labor
conditions, and promoting international trade, but in the
1990's, the Bank adopted a new mission statement, which is
pretty simple. If you go into the atrium of the Bank, up on the
wall it says, ``We dream of a world without poverty.''
There has been a real evolution in the Bank's mission over
the decades. When Robert McNamara was president of the World
Bank, the mantra was that we promote economic growth and
poverty reduction. And in the 1990's, there was a further
shift, an agreement among the nations of the world that what we
want this institution to do is to end poverty. I know that is a
dream you share, and I find it to be a very exciting and
compelling dream. What the charter says is still quite
relevant; if you want to end poverty, you have to have economic
growth, attention to labor conditions, and trade.
Mr. Bachus. Sure. Okay.
Mr. Eizenstat. It is an excellent question. Let me just add
to what has been said. I think the biggest change that has
occurred since 1944 has been the remarkable growth of private
capital and the access that developing countries have to that
private capital. In 2005, for example, in sub-Saharan Africa,
not in middle-income countries, you had almost $25 billion in
new equity flows, compared to $3 billion in net disbursements
by the World Bank. But having said that, I think what that
means is that to deal with the issue of poverty alleviation,
which is now the goal of the Bank, you need first closer
collaboration between private sector donors and the World Bank
on what kinds of projects each will fund. Because for poverty
alleviation you do need infrastructure, you need electricity,
the things that business needs to invest. You need an open
investment climate, you need an open trading climate, or you
are not going to the economic growth.
At the same time, you also need, as Joe and Dr. Wade were
indicating, you need to have an institution, and that is what
IDA particularly does, it focuses on things that the private
sector won't do--energy security, communicable diseases, global
warming, and refugee resettlement in developing areas where
that is a drag on growth. And that is where the Bank should be
placing its expertise. But it needs to work more closely with
the private sector, which is willing to fund infrastructure
projects and other things that also contribute to growth. And
that lack of collaboration, I think, is a significant barrier
to poverty alleviation and to achievement of the Bank's new
mission statement.
Mr. Bachus. One thing Mr. Beckmann said, and I don't know
if the others agree with him, he said the expertise, the
technical knowledge of the World Bank was probably one of its
greatest strengths and values. Do you also--how would you grade
their expertise and their knowledge of being able to supply
that expertise? Dr. Wade?
Mr. Wade. I think it is true that in the past 10 to 20
years, private consulting firms have developed expertise in
some of the areas that the Bank has long been in which excels
that of the Bank. The Bank, I think, is no longer competitive
in a lot of areas within banking and finance, probably within
areas of private sector development. But on the other hand,
there are some current activities that the Bank is in where the
Bank's expertise is exceptionally high relative to anyone
else's. There are many. But one of them would simply be
resettlement. Resettlement of people who are involuntarily
ousted from a project, a reservoir project, for example. But
there are many others.
But my worry is, looking forward, that the Bank on the one
hand has an opportunity to take a leadership role in the
international environmental issues that I was talking about,
but it seems to me--including climate change--but is not yet
very well staffed up to take that role. But this is an obvious
direction of expansion. As other players become more active in
areas where the Bank was traditionally strong but is no longer
so strong, the Bank's root of expansion, its comparative
advantage is in these more strictly global issues, which nobody
else is as well placed to deal with. But the Bank is not very
well staffed up yet in those areas. So it has to expand in
those areas and cut down in some of the more traditional ones.
Mr. Bachus. Mr. Scott, if I could have 2 more minutes or
something if that would be possible? I note the chairman took
about 12 or--said we were going to have a little more--
Mr. Scott. [presiding] Two more minutes.
Mr. Bachus. --relaxed atmosphere. The Administration is
looking for a new president. Now Mr. Stiglitz, I read in the
BBC, one of the articles, that you said they ought to be
looking for an economist that understands development. And I
would agree with that. What else would you add to that, any of
you? Now, would you think that a passion for global poverty, or
at least some expertise in that field would be at least a good
qualification?
Mr. Stiglitz. Of course. The major thrust that I think all
of us agree on is helping countries grow and reducing poverty,
and that requires a certain kind of expertise. That is why I
said it was important to have somebody who knows economics. I
also will argue that you need somebody who can work with all of
the diverse constituencies of the Bank, both the contributing
countries and the countries that you are giving aid to. The
staff of the Bank is very important. This picks up with
something that Dr. Wade talked about in his remarks, which is
that you have to have somebody who has the confidence of the
staff, the donors, and the countries.
One of the reasons that I suggested we ought to really
think about how the head is chosen is because that process is
going to affect that confidence. No matter who that person is,
if he comes in through a process in which people have
confidence, it is more likely that he will have an easier time
of it.
Mr. Bachus. Okay. Thank you. Ambassador Eizenstat has to
leave in just a minute, I am told, so I appreciate you being
here. I appreciate your grandson's patience while you
testified. But Dr. Wade or Mr. Beckmann?
Mr. Wade. Yes. I just wanted to add one thing to what Joe
said. It seems to me really critically important, especially in
the wake of current events, or recent past events, that the
head of the organization have had--has an excellent record in
running a large and complex organization. It is not enough
simply to be sort of an academic expert economist in poverty
reduction or something of the kind. You have to have had
experience in running a large and complex organization. That
seems to me to be a more important criterion probably than
anything else.
Mr. Bachus. Okay. Thank you.
Mr. Beckmann. I think one criterion is clear, unalloyed
commitment to the mission. There have been questions raised
about Paul Wolfowitz's personal loyalties, or his political
loyalties coming in in an inappropriate way. What we have to do
now is to get people working together--working and working
together again. That includes the staff of the Bank, the Board
of the Bank, but also the Bank has diverse shareholders all
over the world--people who disagree as much as people in this
committee disagree with each other and who are spread all over
the world. So I think the next president needs to be somebody
who is just straight in terms of being committed to the purpose
of the Bank. It is that purpose that can draw all these folks
together. And then I do think management, having experience in
managing a large and complex organization is important. I think
knowledge of development is important, real expertise in the
area of international development.
Ability to be a diplomat is clearly important. I think we
have just seen that, in fact, we are not going to have the kind
of international selection process that Dr. Stiglitz talked
about. I don't think this Administration would go along with
that. And we have just seen that the Board of the Bank wasn't
willing to take on the Administration, so there is not the
political will there to move to a completely different kind of
process. But the Administration needs to put forward a
candidate or candidates who are clearly qualified, and there
needs to be some kind of process of consultation so that the
next president can go into the Bank with support from the whole
Board.
Mr. Bachus. Thank you. Let me just close with a comment.
You know, I think you are going to have to have a person who is
a real diplomat, who knows how to work for people, particularly
in that just last month they announced the anti-corruption
strategy, and you are going to have to do that with a lot of
diplomacy.
The Chairman. Thank you. The gentleman from North Carolina.
Mr. Watt. Thank you, Mr. Chairman. And I thank the chairman
and ranking member for convening this hearing, which has been
very interesting and informative. At some level, however, I
guess the question of at least the conditionalities and the
Washington consensus have kind of an academic component to them
except for the obvious conditionalities of transparency and
more process-related things. Sometimes the Washington consensus
I agree with, and sometimes the Washington consensus I disagree
with. When I agree with it, I want the World Bank to move in
that direction. When I disagree with it, I probably don't want
it to move in that direction.
But that is kind of an intellectual academic discussion,
and I would like to try to take this to a more practical
discussion, because I don't think you can get there from here
without doing some of the concrete things that you all have
suggested.
As long as the United States is dictating who the
leadership of the World Bank is, we basically will be setting
the Washington consensus, whoever that person in the White
House is who is sending that person there. How, as a practical
matter, do we get from that posture to a position where the
most qualified, the most--all of these criteria that you all
talked about that you would want in a leadership is able to be
named? How exactly is the naming process done now? I mean, does
the Board have the authority, if they were willing to confront
the president, to say we reject the notion that this person has
to be a Washington former cabinet person or this person or that
person? Or I mean, what is the process for getting us from
where we are now to where it seems like everybody on this panel
would like for us to get? Because I don't think you can change
the conditionalities unless you change the leadership and
change the attitude of the United States toward what this is
all about. Anybody who wants to take a shot at that. That is
the only question I have, interestingly enough.
Mr. Stiglitz. The rules give the discretion to the Board to
make the choice. It is nothing more than a convention, and it
is an old boys' agreement that Europe gets to appoint the head
of the IMF and the United States gets to appoint the head of
the World Bank. There is nothing constitutional, so there
wouldn't have to be any change in legislation. It is just the
Board's decision. Now, the problem is that in the case of the
World Bank, the United States does not have a veto power. It is
the largest shareholder, but the Europeans as a whole have many
more shares than we do. This means that they have many more
votes. But there is a reluctance to engage in confrontation, so
there is a sense in which one can ask the question if they knew
that--
Mr. Watt. How do you move that?
Mr. Stiglitz. Okay. There are a couple of possibilities.
One of them is that if Congress made a strong statement and
said, we disagree with that, it would obviously have a big
impact. If they said this president, this appointee, or this
process does not have their support, that they think the old
boys' route does not make sense, while it may have made sense
in 1944 but doesn't make sense in the 21st century, I think
that would have a very big impact. I have talked to a number of
the European Ministers of Development and they feel the same
way that I do. They are nervous about a confrontation, having
just had a confrontation. If one changed that balance and said,
look, we actually agree with you, I think it might give them
some energy to address that.
On the second issue, you can have more effect than you have
on even the conditionalities. For instance, Congress instructed
the American representative, the ED, to vote against cost
recovery, which is this euphemism that the poorest kids in the
world have to pay tuition. As a result of that, eventually the
IMF and the World Bank gave up this requirement on cost
recovery. I think that it is a delicate balance of this issue
that I talked about. You don't want to have excessive
politicalization of the process, as it is a multilateral
institution. On the other hand, there are certain areas where
you can say, look, we think there is a global consensus on
conditionality.
Mr. Watt. I am focused less on the conditionalities than I
am on the more practical, and Mr. Eizenstat seems to be having
heartburn over some of the things that you said.
Mr. Eizenstat. I was Deputy Secretary of the Treasury--
Mr. Watt. So I better get him at the counter.
Mr. Eizenstat. I was Deputy Secretary of the Treasury when
the head of the IMF was being chosen at that time, and the
United States, in effect, vetoed the first European candidate,
Ciao Koch-Weser, who was, I think, perfectly qualified. But it
is more than what Joe indicated about lack of confrontation; it
is mutual back-scratching. That is, it is not just that Europe
doesn't want to confront the Administration now because of the
whole Wolfowitz thing. It is that if they do, then they will
lose the monopoly on taking the IMF post, and they need the
U.S. vote for that.
So it is a mutual back-scratching between the United States
and the European Union to keep this process going. The question
is how to change it. I think that, you know, it is something
perhaps to interject in the presidential campaign. It is
something to get Congress and the European parliament to act
on. It is one thing for the development ministers, Joe, to say
that they want that, but when you talk about the political
ministers, the finance ministers, the foreign ministers, and
the prime ministers, they don't want to give that up. So you
need to build support by the parliaments, particularly, I
think, the European parliament, and the United States.
The second thing is on conditionality. Again, I saw this
absolutely firsthand during the Asian financial crisis, where
there were conditions like the cost recovery and things that
were really unreasonable. But I think it is more than what the
chairman called just process. One would be loathe to, in my
estimation, to say that the World Bank could do its job unless
you were also encouraging the country to open up their
investment climate so that you could have foreign direct
investment and know that you wouldn't have your profits
expropriated, that there was an arbitration process. You would
be wasting money if you didn't have an open trading
environment, if you didn't have a good macroeconomic policy and
good monetary policy and good governance policies. Now that's
part of the Washington consensus. I think it was taken too far
in some instances. But again, I am not prepared to say we
should throw the baby out with the bath water, because I think
those are all preconditions to economic growth and poverty
alleviation, along with investing in public goods.
The Chairman. Just briefly on that good macroeconomic
policy is what, roughly, at this level?
Mr. Eizenstat. Well, I think good macroeconomic policy,
first of all, is having a transparent budget, one that's--
The Chairman. That is procedural, not substantive?
Mr. Eizenstat. That is substantive. It means running fiscal
deficits that have some rational relationship to GDP, that
don't expend so much that you inflate the economy and make your
currency non-competitive in terms of your products. Having an
exchange rate that allows your products to be competitive on
the world market. And one of the reasons I am sure everybody on
this panel would agree on the Doha Round is to open up the
markets of--
The Chairman. I agree with that.
Mr. Eizenstat. I don't consider macroeconomic--
Mr. Watt. Even on that, there is a connotation that goes
with opening up markets that basically allows corporate--the
corporate community a free run that doesn't always enure to the
benefit of the country or the people in that country. So at
some--I mean, to a point, I agree with you, but there are
limits to that, too, unless you are going to put some
constraints on that that make sure--I mean, I think what China,
for example, is doing in Darfur is outrageous. You know, it is
building like mad, but I don't see any benefit that the people
of Sudan are getting from it other than the corrupt leadership
there.
Mr. Eizenstat. Let me give, if I may, one concrete example.
It was mentioned here briefly. One of the best things Tony
Blair did was promote the so-called EITI, which is an Energy
Industry Transparency Initiative, in which mineral companies
and oil companies investing in poor countries have to publish
what they pay to those governments.
Now, I had a specific instance with BP and the BTC
pipeline. And Azerbaijan, which has significant corruption
problems, is part of the EITI now, and deserves great credit
for doing so. And that is being published, what BP and the BTC
consortium pay to that government is being published and is
audited. What is not being done is the next step--and here
again, I think Congress has a role--and that is while you are
publishing the inputs into the Fund, the government is not
required to publish what they do with it. And that is the other
half of it.
So you are certainly correct that just having foreign
investment is not enough, but the EITI was a very powerful
weapon to at least take a step to ensure that this investment
begins to help the people, and not just the companies or the
corrupt leaders.
The Chairman. Let me just say that to Mr. Eizenstat, I
think you are underestimating the extent to which the
objections to the Washington consensus went beyond what you are
talking about. I think there is a genuine consensus, it is not
just a Washington consensus. I think the Washington consensus,
as many of us talked about had a more specific, very free
market ideology beyond the more general level you are talking
about, for instance, the labor and other kinds of things.
It did seem that the Washington consensus got much more
specific, and to be honest, you, as a Democrat who served in
the Administration of Bill Clinton, I thought that there was a
point in which there was a real disparity, as Mr. Stiglitz
suggested, or said, between the policies of the Clinton
Administration which were being pursued at home, and those it
was pushing abroad.
I think politics stopped at the water's edge, it seemed,
before Bill Clinton liberalism. And he was Franklin Roosevelt
until he hit the water and he became Ronald Reagan in terms of
some of what got pushed. I think that got turned around some,
but I do think we can differentiate.
But, Mr. Beckmann or Dr. Wade, do you want to talk about
that subject? Or we can go to Mr. Scott.
Go ahead, Mr. Beckmann.
Mr. Beckmann. One thing that is good about the Bank's
governance is that there is a real recognition of the
distribution of economic power in the world--where the money
comes from--so that in the councils of the Bank, when a
decision is made to do something on debt reduction for poor
countries, there is a good chance that there is actually going
to be money and power behind the decision.
Just like the Security Council recognizes that some
countries have a lot more power than other countries, and if
there is going to be a decision about the direction of the
United Nations, those powerful countries need to be part of the
decision.
In the councils of the Bank and the IMF, the countries that
have more money, that put more money on the table, have more
power. I thought Ambassador Eizenstat made a good point about
the need for adjustments over time. There is no excuse for
presidents of the World Bank who are not very well qualified;
we need a qualified person in that position. It can't just be
an Administration official that they are trying to move
someplace.
But I think there is something to be said for moderation in
moving toward a more democratic, egalitarian governance of the
Bank. The way we have it now--and it is partly by having an
American at the top of the Bank and a European at the top of
the Fund--those institutions have been able to mobilize money
to do things for poor countries, whereas other institutions
that are governed in a different way sometimes don't have money
or power to do anything. They may have more democratice
processes, but they are not sufficiently ground in the
political realities.
The Chairman. Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman. First off, I
want to extend an extra welcome to Mr. Eizenstat. We both share
the Atlanta connection, going back to the early days when we
both had more hair and it certainly wasn't as white as both of
ours are, and in our starting out with then-Congressman Andrew
Young. And you moved on up and served President Jimmy Carter
and President Bill Clinton, and I followed your career.
I just want to take a moment to welcome you. It is a
pleasure to have this opportunity to interchange with a long-
time friend, and to all of you, certainly this has been a very,
very informative hearing.
Let me start by taking a look at the situation that I think
presents an opening for us here with the situation involving
the resignation of Mr. Wolfowitz, because I think, in the
course of accountability and transparency, here lies an
opportunity.
I noticed when, I think Mr. Watt asked a question relative
to this, you, I think--someone, I think it was you, Mr.
Stiglitz; I hope I pronounced that right--referred to the
reason we have an American at the helm is because normally you
have an American at the helm of the World Bank and we have a
European at the helm of the IMF, and that--but it is a little
bit more than that, I think, in--a little in addition to that.
And, in fact, when it was first started, it was because of the
fact that the United States was a key guarantor of the bonds
and put the World Bank in a much more reliable financial
position.
Now we have an opportunity. There is some discussion that
it is not democratic to have that there and that maybe there
would be added transparency if we chose not to have an American
there for the first time.
What would we lose in terms of that financial stability to
move forward on--that having an American at the helm of the
World Bank presents, compared to any added transparency or
accountability one might achieve by not having an American at
the helm?
Anyone up here, I would like to have your comments on that.
Would we lose anything? Gain anything?
Mr. Stiglitz. In financial terms, it would make absolutely
no difference. The Bank has built up what might be viewed as a
large endowment. Dr. Wade referred to that.
It has a very conservative financial model that lies behind
it, and it would likely continue that. So long as it continued
that, the so-called ``backing'' that might come, extra backing
that would come from having the President come from the United
States, has no significant value.
You also have to remember that much of the money that the
World Bank gets today is raised from the markets in a real
sense, and it is based on that endowment and a track record.
To give you just one other example, some of the regional
development banks, like CAF, which is an Andean bank, are able
to borrow at very low interest rates because they are well
managed. So as long as the Bank is well managed, then I think
it will not have any real trouble raising money. The democratic
advantages that we can talk about, and the ability for it to
convey effectively the message that it can be trusted, will
actually enhance its effectiveness.
Mr. Scott. Do you think this is an opportunity we should
seize and that it would be in the best interests of the Bank,
going forward on some of these issues, that we not have an
American at the helm?
Mr. Stiglitz. Very much so. I think it is in the interest
of the Bank; I think it is also in the interest of the United
States that the way presidents are chosen is changed.
Mr. Scott. Is that the consensus? Does anyone have a
different opinion?
Mr. Eizenstat. I think it is. This was an essential feature
of our Atlantic Council report.
May I just add one caveat to that? I agree with everything.
This was in our report. I think it should be based on merit
without nationality. It would be good for the Bank, good for
the United States, but--the only ``but'' is the congressional
reaction. That is, you would need to have a leader in addition
to all the other attributes that we mentioned, who could come
up to Capitol Hill and convincingly argue when there needed to
be an IDA replenishment when the United States needed to be
goaded into paying its fair share. There is a question of
whether Congress would receive a non-American in the same way
that they would an American.
Now, I have to say that since we are behind on a lot of our
payments anyway, that may not be the most major factor. But in
a serious vein, it would be important that whomever is chosen--
and I do think it is on the basis of not nationality, but
merit--be able to relate to the Congress and deal with the
Congress and not just be Secretary General of the U.N., who has
sort of a Third World agenda and is not sensitive to the major
stakeholders and payers of the system.
Mr. Scott. Thank you.
Another line of questioning, if I may continue: Does the
World Bank plan to implement improved strategies to reduce
poverty in countries by aiming strategies only on boosting
overall growth, as it is evident that this strategy may miss
opportunities to reduce poverty?
For example, I understand the reasoning behind focusing on
sectors with growth potential, allowing for relatively quick
payoffs. However, my question is, do these strategies impact
poverty reduction in the most efficient way?
While you are thinking about that, there is a recent report
in the Washington Post which is entitled ``The Persistently
Poor,'' and a report has come out where it really strikes a
mixed message. If I may share, Mr. Chairman, just so you, as
you are thinking about this, this is where this question comes
from. It is written by Mr. Peter S. Goodman, and it came out
late last year, in case you read it.
It says, an internal report criticizes the World Bank's
efforts on poverty despite an intensified campaign against
poverty. World Bank programs have failed to lift incomes in
many poor countries over the past decade, leaving tens of
millions of people suffering, stagnating or declining living
standards, according to a report that was released by the
Bank's autonomous assessment arm.
Are you familiar with that report? It says among 25--
The Chairman. Get to the answers now, Mr. Scott.
Mr. Beckmann, do you want to start in the middle this time?
Mr. Beckmann. The Bank doesn't just support growth. The
Bank is also heavily investing in primary education, and in
improving health systems.
Now, in general what they are trying to do is to promote
the productivity of poor people, so this is not a Mother Teresa
kind of operation. What they are trying to do, even in the
social sectors, is to help kids get a decent education so they
can be more productive, and in very poor countries, there
really is no other option. You need to have growth among the
poor.
But it would be a caricature of the Bank to say that it is
driven by a growth-only model; I don't think that has been the
case for a long time.
I didn't read the article that you are quoting, but the
Bank has had limited success in many of the poorest countries,
especially in Africa. There has been a clear case where the
Bank had a cookie-cutter liberalism approach--open markets, cut
government--and for many African countries, that was just not--
The Chairman. Mr. Beckmann, I assume you are talking about
a kind of 19th century liberalism, not the way--
Mr. Beckmann. No. Maybe 1980's liberalism.
The Chairman. But in the 1980's, most people called it
conservatism.
Mr. Beckmann. That's right. And I think it is clear that
some of the Bank's structural adjustment lending worked for
countries like Turkey fairly well, but it didn't work at all
for low-income countries, partly because you eliminate
government programs. And the idea was that the private sector
was going to spring out of the closet and take care of the
problems, and there was no private sector capacity to replace
public programs that were being dismantled. A lot of the
poorest countries in the world have not succeeded in getting
onto a growth path, and the Bank has been there and has been
unable to change that.
On the other hand, there have been improvements in
governance and economic productivity in some of the poorest
countries in the would: 15 African countries have reduced
undernutrition in this decade; and 19 African countries have
had elections this decade. The Bank is not in the business of
promoting elections, but it is in the business of promoting
transparency and good governance. And so some good things are
happening also among the poorest countries, and I think the
Bank has been part of that mix, too.
Mr. Scott. Let me ask you this--if I may, Mr. Chairman--on
that point, because I wanted to get at Africa because I
believe, when you look at many of these other countries where
you have had some success--but in Africa there has been a
stubborn problem there.
To what degree is the political instability, the violent
regimes--I am reminded of scenes where even with food being
dropped at an airport, the regimes were going to blow up the
food, people coming in, trying to help the communities, were
unacceptable.
Sort of reminds me of that scene in the ``Apocalypse
Now''--I don't know if you have seen that scene where Marlon
Brando says, well, you know I remember this time--and they came
and they had inoculated all these children against a vaccine,
and then they left the village, and they came back, and he said
he saw a very pathetic sight, he saw all of these inoculated
arms cut off in a heap.
And in some places within Africa, I am wondering what role,
what impact does the violence and the instability of the
political situation and the dictators in the regimes have in
being a hindrance to your--
The Chairman. Dr. Wade.
Mr. Wade. I want to be a contrarian for a moment and to say
that the World Bank has focused too much on poverty reduction,
specifically poverty reduction, and on the social sectors like
primary education, primary healthcare, and governance agenda.
You will see almost nothing in World Bank publications for
the past 20 or more years on how to develop manufacturing, how
to develop industry, or how to improve technology. These kinds
of things should be central in any discussion of how to get
countries onto a growth path.
As you suggested, many African countries are not on growth
paths. Any discussion of how to improve rates of growth should
be placed at the center of that discussion--how to improve
manufacturing, industry, how to upgrade technology and the
like--the Bank is almost silent. And it is silent even on
university education as distinct from primary schools. The Bank
only deals with primary schools; it won't touch universities. I
think this is incredibly short-sighted.
The Chairman. Thank you. And we thought there was an
interesting article in the New York Times a couple of days ago,
making just that point about African universities.
Mr. Stiglitz and then Mr. Cleaver.
Mr. Stiglitz. Both agree with the sentiment that Dr. Wade
has put forward, but also note that there was, during the time
I was there, a recognition of that. It was the beginning of a
move, but it was very difficult, and it was moving against the
prevalent thought, so--
The Chairman. Internal resistance in the Bank?
Mr. Stiglitz. Yes, and some from the outside.
One of the reports of WDR that came out in 1998 was on
knowledge for development. One of the points that we made was
that we needed to move from just focusing on elementary
education to focusing on secondary and universities. For a
report like that, it had to get a consensus.
In terms of the actual operations, there wasn't really the
kind of change that should have followed upon that.
The Chairman. Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. I want to follow
along with this kind of discussion. The World Bank came into
existence in the post-World War II era to try to make sure that
Europe was rebuilt and that many of the countries that had been
devastated in the war were rebuilt.
We are now in the post-9/11 world. And I know that the
World Bank is not a political agency; it has no responsibility
for dealing with the major political issues, at least not in
the sense that we would traditionally view it. However, my
concern is that in the post-9/11 world, when we look at the
amount of the loans made in sub-Saharan Africa compared to what
we are doing in other parts of the globe, it leads me to have
some concern that poverty, just as it does in the United
States, breeds all kinds of possibilities for tragedy. And my
concern is that if we continue to spend the GDP at such a low
level in sub-Saharan Africa, that we are in fact tilling the
soil for some despot and for possible terrorism to spread. It
is like opening a door, saying, please, you know, why don't you
make overtures to Osama bin Laden or whomever.
And so, is that the kind of thinking that goes on? And if
not, don't you think maybe we need to think in terms of what is
going on, or rather what is not going on, in sub-Saharan Africa
with the World Bank? Anyone.
Mr. Eizenstat. First of all, in this fiscal year, half of
the IDA lending, about $5.5 billion, will go to Africa. So it
is not an insignificant amount.
Second, in answer to the previous question of Congressman
Scott, you can't have economic development and growth when you
have violence and political instability.
Third, I fully agree with you. And I chaired another
commission for the Center for Global Development on failed
states and U.S. national security. If you have failed states--
Sudan and others, Somalia--they become a haven for terrorist
groups, narcotraffickers, and others that directly affect our
national security. So trying to invest in preventing those
countries from becoming failed states is something that
directly relates, in my estimation, to the issue of terrorism
and may make it politically easier to try to convince Members
of Congress and others to support Bank efforts in these kind of
countries. Because I think, if they fail, they do become havens
for the very groups that you are talking about that are a
direct threat to the United States and their own security.
Mr. Cleaver. Well, $5 billion is no small amount of money;
I agree with that. Most of us would not have that in our
checking account. But $5 billion compared to what is being
spent even in the Middle East means it is dwarfed.
Mr. Eizenstat. Yes, sir. But if I can give you the 2005
figure, private debt flows to sub-Saharan Africa in 2005 were
$3.8 billion; private equity flows in sub-Saharan Africa were
$24.7 billion, dwarfing what the World Bank did.
So there is a increasing amount of private-sector
investment in sub-Saharan Africa, and what needs to be done is,
the Bank needs to create the conditions in which those
investments pay off and more private sector investments can be
encouraged.
So there is a lot of capital going in not just from the
World Bank, not just from IDA, but from the private sector into
sub-Saharan Africa.
Mr. Stiglitz. I still feel that if you look very carefully
at where the money is going in the countries, there are
countries that have good macroeconomic policies and good
overall frameworks that are not getting as much private-sector
investment as they need. Many of the countries have a shortage
of funds in education, health, and other social sectors where
the private sector isn't going. One area where the lack of
money has a very big, direct impact is, for instance, in those
parts of Africa where there is a strong Islamic community. If
we don't provide good schools, children will go to schools
organized by others who will not give them a good education in
terms of modern society; they may get indoctrinated into views
that most of us would say are probably antithetical to the ones
in which we would like for them to be indoctrinated.
That is an example of where there is a strong imperative
for us to be much more supportive of funds in Africa and
elsewhere in the developing world.
Mr. Cleaver. Mr. Beckmann.
Mr. Beckmann. More money is going to reduce poverty. More
U.S. Government and European government money is going to
poverty reduction and going to Africa than, say, in 1999. In
the late 1990's, we were fighting every year to keep Congress
from cutting money for Africa. It was just brutal. If there
were cuts in the foreign operations budget, it came out of
Africa.
Since 1999, that trend has been reduced. Bread for the
World keeps a list of poverty-focused development assistance
programs, including IDA, the Bank's concessional affiliate, but
then also the Millennium Challenge Account and certain accounts
at AID and so forth. The funding from that set of programs from
the U.S. Government was $4 billion in 1999. It is up to $12-
$13 billion for the current fiscal year.
And the Europeans and the Japanese have also increased
their funding for Africa and other poor parts of the world.
That has happened partly because 9/11 made everyone aware that
it is not smart to neglect misery in far-off places.
We know exactly what you are saying. There needs to be
further increases in funding. There also needs to be
improvements in the quality of funding. Now that we have
substantially more money focused on trying to reduce poverty in
the world, we need to have substantially more attention to the
institutions that are channeling that money, including the
World Bank, and also including the agencies of the U.S.
Government that are charged with this purpose.
Mr. Cleaver. Thank you. I yield back.
The Chairman. The gentlewoman from Wisconsin has been very
patient, but I know has a very strong interest in this area,
particularly in Africa.
Ms. Moore. Thank you so very much, Mr. Chairman, and I
thank the panel. I will get right to my questions. I want to
start with Dr. Stiglitz.
You indicated in your written testimony, you talked briefly
about the extractive industries' transparency initiatives. And
I believe that the ambassador gave us an example of something
that Tony Blair did by requiring that payments to governments
be published as a reform that had some legs.
And I was disappointed in your paper that you didn't sort
of delve into this extractive industries' transparency
initiatives, what we can do, as policymakers, to stop some of
the offshore banking, the--you know, the Swiss bank accounts,
the secret investments.
Can you just share some of your ideas, and perhaps others
will have something to say on this point as well?
Mr. Stiglitz. Yes. It is a good question and I spend a lot
of time talking about that in my book, ``Making Globalization
Work.''
Ms. Moore. Yes. I am going to read that.
Mr. Stiglitz. For instance, one of the suggestions in terms
of the Extractive Industry Transparency Initiative is very
simple. It used to be that companies got a tax deduction for
bribes; governments were paying effectively half of the bribe.
We could use the power of the tax system and say, you don't get
any tax deduction if you don't publish what you pay.
You have to make payments to governments transparent. If
American companies or those from any of the other G8 countries
give a check to a developing country for an extractive industry
and they don't make it public, they should not get a tax
deduction. That, overnight, could change things.
Ms. Moore. Could it just be a part of the cost of doing
business, that you don't get a tax deduction? The value of a
tax deduction may just be the cost of doing business?
I guess the point that I want you to confirm, the whole
panel, is that part of the reason in a lot of our aid and
assistance, the billions that we have given to some of the
poorest countries in the world, is because the money never
makes it into the mouths and hands, quite frankly, of the
people because we are enriching the leadership at the top. And
if they are getting paid billion-dollar bribes, or half-
billion-dollar bribes, and if the benefit of extracting oil and
gold and so on and gaining mineral rights forever is the loss
of a tax deduction, they may see it as a cost of doing
business.
But I love the idea of some transparency, which leads me to
the following question--
Mr. Eizenstat. Can I just intervene?
If I may, Joe was right. Before the OECD convention, which
I helped negotiate, Germany and France, for example, allowed
tax deductions for bribes. The World Bank itself estimates that
there are a trillion dollars in bribes paid each year to
developing countries, so it is a major problem.
We have an Antibribery Act that I also negotiated in the
Carter Administration which applied to U.S. companies. The OECD
Convention bans the extension of bribes by all OECD countries
to developing countries. Our Antibribery Act is quite well
enforced; the OECD Convention is not as well enforced by
European countries. There is still a lot of bribery going on by
European companies in the developing world. So one thing is to
put more pressure on those countries to live up to the very
convention that they have signed on to.
And second, as I mentioned earlier, is extending the EITI
so that it not only captures what is publicly paid into the
fund, but gets the governments to publish what they used those
funds for.
Mr. Stiglitz. One more thing you allude to is the secret
bank accounts. We could stop those secret bank accounts
overnight. If we said, our banks can't deal with other banks in
territories that don't conform to certain basic standards, they
would shut down. In the Cayman Islands, this bank secrecy
survives because of our tolerance. We have shut it down for
terrorism; we have chosen not to shut it down for corruption.
This committee could make legislation that would shut that
down.
Ms. Moore. Did you hear that, Mr. Chairman?
The Chairman. Funny you should mention that, because that
is very much under consideration.
Ms. Moore. Thank you very much, Mr. Chairman.
My next question relates to the--Dr. Wade, I think you
really elucidated this point that the Bank, the World Bank's
market has changed in the last decade, and indeed other
countries are going to China and other places for financing;
that very few companies or corporations will participate,
private investment just will not participate where the World
Bank or the International Monetary Fund is not involved; and we
just have been sort of asleep at the switch, and that--really,
that China and Brazil and other places are now getting that
business. In fact, you talked about the African Development
Bank meeting occurring in Shanghai.
What are you proposing that we--you know, the World Bank
does have the IDA. Are you proposing a change in underwriting
criteria? What exactly are you suggesting for--and also,
perhaps, we are lending to middle-class countries and not
lending to the poorest of the poor countries.
I think there has been a healthy discussion about
conditionality and other sorts of impediments. So what--and I
am asking others on the panel, too--but, Dr. Wade, I was really
interested in hearing from you first since you spent a lot of
time in your written testimony talking about the change in the
market.
Mr. Wade. Well, on the middle countries, this is the
subject of a lot of discussion inside the Bank at the moment,
and some people who take the Bank's poverty reduction plan, who
take the Bank's poverty reduction mandate in a very narrow and
literal way say, the Bank should simply pull out of middle-
income countries.
But that is, I think, quite wrong, and especially when you
consider that within 4 to 5 years, China will probably be a
middle-income country, even though it has hundreds of millions
of people who are poor by South Asian standards.
The question, though, is how the Bank can be relevant in
those countries which don't need so much cheap finance, because
they can get access just to finance from world capital markets.
But they have a strong interest in getting access to
knowledge, and the question is, can the Bank do much more by
way of developing new revenue streams in fee-for-service
activities in middle-income countries where the Bank asks the
government of China or Brazil or Russia what kind of studies
those governments are interested in?
For example, studies of railway organization, let us say,
that might be a subject that these governments would want
disinterested advice, not necessarily advice from McKinsey,
because McKinsey or some other private consulting firm is not
necessarily disinterested because it has various kinds of tie-
ups. But the Bank does have a reputation for being
disinterested.
And then the Bank's question is, how it is going to charge
for that kind of knowledge? That is a very relevant question in
middle-income countries. But it does lead to the further
question of how, if the Bank does develop in this way of
charging fee-for-service for bringing knowledge to bear from
around the world on the problems or the tasks of specific
countries, how will it differentiate itself from the private
consulting firms? That is a very real issue that the Bank has
to deal with.
Ms. Moore. I appreciate that. I don't want you to stray too
far from it, because I want others to be able to answer it.
Because I guess the ultimate question that I have is, if we are
not reaching the poorest of the poor, with the current World
Bank problems, with our current underwriting criteria, what can
we do to create products that will attract investment and
change the World Bank products so that we can lend to more
needy countries than we do presently?
The Chairman. I have to make this the last answer. We
have--the hearing room is going to be used at 6:30, and
everybody has had over 10 minutes, so I don't think we have
cheated anybody.
Let me just take these last answers.
Mr. Beckmann. I think what the Bank is doing is helping a
lot of the poorest of the poor. And specifically, in Africa, I
think there is a set of 15 or 20 countries that have really
benefited from some trade liberalization and from more
development assistance. They are working with the World Bank.
Countries like Ghana, for example, are making progress both in
terms of economic growth and for poor people.
There is another set of countries in Africa. Many of them
are plagued by violence, and where there is violence, the Bank
has not had good instruments. One of the main initiatives that
the Bank is pursuing is how can it be effectively involved in
those countries, like the Democratic Republic of Congo, where
there is violence.
As you said, the poverty contributes to the violence and
then, as Mr. Scott said, the violence contributes to more
poverty. In those countries, the Bank is not doing very well.
Chairman Frank, may I offer advice in terms of what the
committee might do?
The Chairman. Sure. I assume beyond letting you go home,
which is what we are about to do.
Mr. Beckmann. I think it is a tremendous advantage that you
have, Mr. Bachus, as the ranking member. The combination of Mr.
Frank and Mr. Bachus is extraordinary. Global poverty reduction
is one of the only areas where there can really be bipartisan
collaboration in this Congress.
President Bush's record is a good record on development
assistance, overall. So if this committee does something
related to the World Bank, doing it in a bipartisan way would
be good. I think you can encourage the Administration to send
over a qualified nominee. I think hearings on debt relief, this
committee--
The Chairman. We have planned them, yes.
Mr. Beckmann. --would be great, because I think it is a big
success story and we ought to know what made it work.
You are not going to like this, maybe, but I think you
ought to give the Bank some space. There has been a mess and
they have to repair that mess, so I would give them a little
space.
You are going to authorize the next IDA, so you can make it
clear that you will want to see certain improvements in the
quality of the Bank or they are not going to get the
authorization of the next IDA.
I would hesitate a bit to actually pass legislation that is
going to bind the Bank and the Treasury in new ways at a time
when there have been some obvious mistakes made. We need to let
the new management of the Bank try to get people working
together.
The Chairman. We will take a look at it. We have tended to
work in a bipartisan way here in a number of things, including
not just the World Bank, but some of the other IFIs we have
worked with.
Our colleagues in the Appropriations Committee, I think
made some real improvements in transparency. And I do want to
reiterate the statement I made talking with Mr. Eizenstat.
There is a genuine consensus. I don't know about procedural
stuff, but it is deeply procedural; it is the basic rules of
the game, and we have pushed towards that. Where we have held
off are some things that I think are more ideological in the
liberal/conservative sense.
I will say this in terms of the Administration, and you
mentioned it, I think; it is a good news/bad news story. Within
the budget constraints, the Administration has been generous.
But they created those budget constraints, and the budget
constraints are a $500 billion war; and in my judgment,
excessive tax cuts for very wealthy people, I think, do more
harm than the relative improvement within that constraint to do
good. But, yes, it has been bipartisan, and we intend to
continue that.
I will close by saying that I am going to be looking for a
president, but I am generally reinforced in my view now that
insisting that the next president of the Bank be an American
expends a lot of American influence for no measurable gain.
That is, we want a good president; we want a president who
shares the values that are widespread in America; and we want a
president who wants to do what America thinks is in the
interest of the world. Whether or not he or she is an American
is irrelevant.
What I fear is that we will give up too much in terms of
nationality; we will bind nationality by trading off policy.
And so I am encouraged by what you said today, and I intend to
ask some of my colleagues to join me in sending precisely that
message to our colleagues.
We want a good World Bank president. We want someone who
will do the things we think most Americans would want that
president to do, but that person doesn't necessarily have to be
an American.
With that, I really am very appreciative. This is making a
very serious impression on matters where we intend to act. I
thank my colleagues for staying. And usually we have seven or
eight members who stayed after the last votes, which is what we
have had. But we now do have a staff caucus, a staff briefing,
that claims the room, and so I thank you all very much.
Thank you.
[Whereupon, at 6:30 p.m., the hearing was adjourned.]
A P P E N D I X
May 22, 2007
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