[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 2634, THE JUBILEE ACT FOR
RESPONSIBLE LENDING AND EXPANDED
DEBT CANCELLATION OF 2007
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 8, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-80
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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 STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire TOM PRICE, Georgia
KEITH ELLISON, Minnesota GEOFF DAVIS, Kentucky
RON KLEIN, Florida PATRICK T. McHENRY, North Carolina
TIM MAHONEY, Florida JOHN CAMPBELL, California
CHARLES WILSON, Ohio ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana KENNY MARCHANT, Texas
ROBERT WEXLER, Florida THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia KEVIN McCARTHY, California
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:
November 8, 2007............................................. 1
Appendix:
November 8, 2007............................................. 23
WITNESSES
Thursday, November 8, 2007
Caliari, Aldo, Director, Rethinking Bretton Woods Project, Center
for Concern.................................................... 10
Flood, Gerald F., Counselor, Office of International Justice and
Peace, United States Conference of Catholic Bishops............ 8
Watkins, Neil, National Coordinator, Jubilee USA Network......... 4
Woods, Emira, Co-Director, Foreign Policy in Focus, Institute for
Policy Studies................................................. 6
APPENDIX
Prepared statements:
Waters, Hon. Maxine.......................................... 24
Caliari, Aldo................................................ 26
Flood, Gerald F.............................................. 38
Watkins, Neil................................................ 46
Woods, Emira................................................. 61
H.R. 2634, THE JUBILEE ACT FOR
RESPONSIBLE LENDING AND EXPANDED
DEBT CANCELLATION OF 2007
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Thursday, November 8, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Waters, Moore of
Kansas, Green, Cleaver, Bean, Moore of Wisconsin, Sires; Bachus
and Bachmann.
The Chairman. We will begin. Our senior Republican, who is
of course one of the major sponsors of this program both in the
past and today, will be joining us shortly. We are returning to
a subject in which this committee has played a leading role,
and it is time to resume that role.
It was members of this committee--our former chairman, Mr.
Leach, whose picture is appropriately there to my left in the
rear; the current ranking member, Mr. Bachus; the gentlewoman
from California, the chairwoman of the Housing Subcommittee;
and myself--who pushed for this to happen in the first place
over the objection of many, including people in the Clinton
Administration, and it was frankly one of the rare times in
recent years when both the Republican House leadership and the
Clinton Administration were overruled by a vote on the Floor of
the House. The religious communities also participated
strongly, and the four of us worked on this, and we are back at
it.
Let me say that I think the moral case for debt relief is
almost self-evident. No matter what you think about past
practices, and in many cases, past practices were wrong on the
part of the borrowing countries, on the part of the lending
institutions in countries, whatever you think, sadly today,
overwhelmingly the victims are innocent people, residents of
these countries, and our job is to alleviate their misery.
There is a great deal of talk about how we go forward with
economic development, and there are legitimate concerns about
that. But there is no room for any intellectual doubt that
getting rid of this overhang of debt is an essential
precondition to any progress.
And so the committee is resuming this. We take a good deal
of heart from the fact that--well, let me put it this way. It
is a common lie for people to say that they do not like to say,
``I told you so.'' In my experience, everybody likes to say,
``I told you so,'' and in fact, personally, I can say--and
people have heard me say this before--that it is one of the few
pleasures that improves with age. And those of us on the
committee, and I'm joined by the gentleman from Alabama who is
one of the leading advocates of it, those of us who were in the
lead on the debt relief previously can say, ``We told you so.''
It has worked well. It has been very helpful. It has been one
of the most--given the situation in Africa and some other
places, it's hard to say it was a positive thing, but it did
more to diminish the negatives that we confront than any other
single thing I can think of.
So, we think it worked well enough for us to do it again,
and we will be pushing the governments, the international
financial institutions, to move forward with that. I very much
welcome this panel, and it is the beginning of a serious
legislative effort, once again, in a bipartisan way, and you
will see this committee, I believe, pushing forward with this.
With that, I will recognize the gentleman from Alabama, the
ranking member, who as I said--when we did this the first
time--was one of the leading sponsors and advocates, and he
continues to be in that category. Mr. Bachus.
Mr. Bachus. I thank the chairman. I thank you for holding
this important hearing on the Jubilee Act, and for your
leadership, as well as the leadership of Subcommittee
Chairwoman Waters. I welcome the witnesses. Many of you, we've
worked together, worked with our colleagues on debt reduction
and poverty alleviation legislation for the poor countries of
the world, for nearly a decade now. And I'm happy to say that
those efforts have been remarkably successful.
Mr. Chairman, as you know, myself and many of my colleagues
on this committee took part last month in a fast in support of
the Jubilee Act. The momentary hunger that I felt was nothing
like the courageous weeks-long fast of Reverend David Duncan,
of course. But fasting for one day cannot begin to compare with
the constant hardships and the pangs of hunger experienced
daily by millions of little boys and girls and even their
parents and their families, who were born into what seems to be
perpetual poverty, disease, and hunger in dozens of countries
around the world.
Congress can be a tough environment, and we say on occasion
that we had a really bad day, a tough day. But we ought to be
reminded that for billions of people throughout the world, that
even on our worst days, we have more food, more shelter, more
clothes, more security, more healthcare, and more of everything
than our poor brothers and sisters have on their best days.
In debating debt relief, I've often quoted Sister Rebecca
Trujillo, a nun in Nicaragua. She was asked, ``How do the poor
get through the day? How do they survive?'' Her answer was,
``Often they do not.''
Mr. Chairman, we started something big with the Jubilee
movement. NGOs, our witnesses, millions of people around the
world joining together to make a historic commitment to debt
relief in the year 2000. Since then, there has been even more
or further debt forgiveness on the part of the G-8 nations. In
countries where debt relief has been implemented, debt is down
by two-thirds, and spending on reducing hunger and improving
health, education, and social services is now 4 times the size
of the previous debt payments.
Since the start of the new millennium, the poverty rate in
sub-Saharan Africa is down 6 percent. There are more children
receiving healthcare and medical treatment, in fact, over a
million more children in that area alone. Vaccinations are up,
and throughout Africa, the percentage of students enrolled in
primary school has gone up significantly.
The Jubilee Act will build on those successes by making it
possible to cancel the debts of up to 25 countries that are not
now eligible for debt relief. Debt relief has improved the
lives of millions of people at almost no monetary cost to the
United States. If the Jubilee Act is successful, the U.S. share
of debt reduction for the nine or so countries that would be
eligible immediately would be $100 million. That's less than 50
cents apiece for every man, woman, and child in this country.
Surely the most generous country in the world can afford a
commitment of 50 cents.
Doing the right thing is the imperative here. But even if
we consider cost, let us realize that the cost of not acting is
not only hopelessness and unrest throughout the world, but also
an increased threat of terrorism. Poverty breeds unrest and
instability and creates the types of conditions that allow
dictators and terrorists to survive and thrive. So, combatting
global poverty is clearly in our own economic and national
security interest.
Debt relief is not the total solution to poverty, hunger,
and disease, but it is a necessary first step. It is where the
journey should begin to free these countries of the burden of
debt, the chains of poverty, and the shackles of despair and
enable them to minister to the economic and social needs of
their citizens. Accordingly, I will continue to work with my
colleagues to advocate this legislation both in the committee
and in the House as a whole.
I yield back the balance of my time, and I again welcome
our witnesses.
Ms. Waters. [presiding] Are there any other members who
wish to make an opening statement? If not, I will recognize
myself for 5 minutes. First, I'd like to begin by thanking
Chairman Barney Frank and Ranking Member Spencer Bachus for
organizing this hearing and for their support of the Jubilee
Act. I also would like to thank the Jubilee Movement for all of
their efforts over the past 10 years to cancel the debts of the
world's poorest countries.
The Jubilee Movement is one of the most outstanding
humanitarian efforts I have seen in my entire career. Over the
past 10 years, Jubilee has convinced Members of Congress,
officials of the Clinton and Bush Administrations, and
political leaders from around the world to cancel poor country
debts. I'm so proud of my affiliation with the Jubilee Movement
because it brought the needs of the world's poorest people to
the attention of the world's most powerful leaders.
I introduced the Jubilee Act to cancel the debts of
additional needy and deserving poor countries and to ensure
that the benefits of debt cancellation will not be eroded by
vulture funds and irresponsible lending. Because of the
tireless efforts of Jubilee Movement activists, the Jubilee Act
now has 86 cosponsors. I look forward to hearing the views of
the witnesses on how the Jubilee Act can be effectively
implemented and how it will benefit the world's poorest
countries and their people. I'm not going to get into the
details of the Jubilee Act, because I know that is what the
witnesses are here to do, but I request unanimous consent to
have my complete statement included in the hearing record. And
so without objection, it is so ordered.
Without further delay, I will yield back the balance of my
time, and we will now hear from our witnesses: Mr. Neil
Watkins, national coordinator, Jubilee USA Network; Ms. Emira
Woods, co-director, Foreign Policy in Focus, Institute for
Policy Studies; Mr. Gerald F. Flood, counselor, Office of
International Justice and Peace, U.S. Conference of Catholic
Bishops; and Mr. Aldo Caliari, director, Rethinking Bretton
Woods Project, Center of Concern. Thank you for being here, and
we will start with Mr. Watkins.
STATEMENT OF NEIL WATKINS, NATIONAL COORDINATOR, JUBILEE USA
NETWORK
Mr. Watkins. Well, thank you, Congresswoman Waters. And
before I begin, I would just like to offer a profuse thank you
on behalf of the entire Jubilee Network to Chairman Frank,
Ranking Member Bachus, and Congresswoman Waters. Your tireless
leadership and support on debt cancellation has truly been a
blessing, and you have all been long-time champions. We are
really grateful for your leadership and all of this committee's
leadership in addressing the crisis of international debt.
I want to begin my testimony with a story about how debt
cancellation works in Zambia. Earlier this year I had the
opportunity to see the impact of debt cancellation firsthand
when a Jubilee delegation visited the Siavonga Rural Health
Clinic in the Zambian countryside. As we toured the clinic,
Grace Chibanda, a pharmacist, showed us the pharmacy, which was
full of anti-retroviral drugs for HIV/AIDS. Debt relief is a
good thing, Grace told us. It is getting medicines for people
who didn't have it before.
Zambia is using its debt cancellation savings of $23.8
million in 2006 in part to eliminate user fees for healthcare
for impoverished people in rural areas. This means that an
unpayable fee no longer stands between Zambia's poorest people
and basic health services. Nurses and doctors we talked with
confirmed that they had seen an increase in patients after the
user fees were removed. It was truly inspiring to see the
impacts of debt relief firsthand and to know that the relief is
getting to Zambians who need it.
In another example, Tanzania is also putting its debt
savings to work, sending two million children to primary
school. Since 1996, more than 30 countries have received some
form of debt relief. Twenty-two nations have reached what is
called completion point in the IMF and World Bank's Heavily
Indebted Poor Country or HIPC initiative, and they have
received now 100 percent cancellation of eligible debt stock.
Debt cancellation committed under these programs to date is
expected to reduce the debt stock of the 32 HIPCs, eventually
canceling a total of $96 billion in debt under the Multilateral
Debt Relief Initiative. This year alone, annual debt service
savings from the MDRI will amount to $1.3 billion, almost all
of which will go directly to fighting extreme poverty around
the world. Congress and the Administration have each played
important roles in achieving a bipartisan consensus for debt
cancellation and should be proud of what has been accomplished
so far.
As supporters and advocates of debt cancellation, we must
continue to be vigilant, to ensure that proceeds from debt
cancellation reach the most impoverished people, but we are
encouraged by the positive impacts of debt relief on the
ground.
Debt cancellation now has a 10-year record of success, and
it is a proven tool to fight global poverty. But even after the
debt cancellation provided to date, the world's most
impoverished nations continue sending $100 million each day to
the United States, the IMF, the World Bank, and other
creditors. A majority of the world's impoverished countries
remain mired in a debt crisis. A 2007 study of 41 poor
countries that had not reached completion point in the HIPC
initiative found that most of these countries were actually
paying more on debt servicing today than they were in 1996.
These are funds and payments that could be going towards
meeting the millennium development goals.
That is why we are saying that it is time to extend the
promise of debt cancellation. The UK government has already
begun to extend debt relief to impoverished countries who don't
qualify for the HIPC initiative but who have proven that they
can spend the money well and who need the relief to meet the
MDGs.
The Jubilee Act is modeled after this initiative and would
extend debt cancellation to well-governed countries that need
it to fight poverty. The Act could initially expand debt
cancellation to nine more countries and ultimately could add 15
beyond that.
One of the countries that could benefit is Kenya. When I
traveled to Kenya earlier this year, I saw crushing poverty
similar to what I saw in Zambia. In Kibera, Africa's largest
slum, we met children, parents, and community leaders. One of
the people I will never forget was a 13-year-old girl named
Mary, who was orphaned by AIDS. She dramatized and recited two
poems for us while we were there, one about the devastation of
AIDS for her and the people of Africa, and the other about AIDS
leaving her and her other young friends without parents. Her
strong spirit and resilience shone through as she spoke and
moved to the rhythm of her powerful words. I didn't see the
progress in Kenya, however, that I had seen in Zambia. Why? In
part, because Kenya does not qualify for the current debt
relief initiative, despite its strong need and improving public
financial management. They don't qualify despite the fact that
Kenya spends more servicing debt than on healthcare or water.
Expanded debt cancellation can make a real difference for
people in countries like Kenya and elsewhere. As we expand debt
cancellation, however, we must be careful to learn the lessons
of the past 11 years. We need to work for more responsible
lending practices in the future and make reforms in the way
debt cancellation is delivered by removing harmful conditions
that are undermining the promise of debt cancellation.
To conclude, the Jubilee Act is the smart thing to do. Debt
cancellation is an effective and tested strategy for fighting
poverty, and it is a good investment in our security and our
image abroad. It is also the right thing to do.
Thank you.
[The prepared statement of Mr. Watkins can be found on page
46 of the appendix.]
The Chairman. Next, Ms. Woods.
STATEMENT OF EMIRA WOODS, CO-DIRECTOR, FOREIGN POLICY IN FOCUS,
INSTITUTE FOR POLICY STUDIES
Ms. Woods. Good morning, Chairman Frank, Ranking Member
Bachus, and Subcommittee Chairwoman Waters. It is an honor to
be here with you today. I really want to begin, as Neil began,
by thanking you for your steady, sustained, and moral
leadership on this issue. It is your bipartisan leadership that
has brought already such tremendous strides on debt relief.
My primary focus today will be to explain how I feel so
strongly that debt cancellation should be granted without
harmful conditions of past debt initiatives. My testimony is
based on both my professional and personal experiences. I'm
originally from Liberia and have seen firsthand the painful
burdens of debt not only throughout the continent, but even in
my own family.
Congress and the President, together with your leadership,
took a huge step forward 10 years ago when they stated that it
was a moral imperative to give poor people in poor countries
debt relief. Through your leadership, the burden of repaying
debts incurred by rich and often irresponsible leaders began to
be lifted. Yet today, we recognize that the bold steps forward
from a decade ago did not go far enough. Previous schemes left
out many eligible countries and also had onerous strings
attached, conditionalities.
The Jubilee Act before you today will extend debt
cancellation to all impoverished countries that need relief to
meet their millennium development goals. On average, low-income
countries spend about $100 million a day just to pay interest
on their debts, vital resources that could be spent on
essential services. The Jubilee Act will bring relief where
debts incurred by dictators and also debts that have been paid
many times over through high interest payments can be relieved.
I'd love to begin by sharing with you the story--it's a
very difficult story--of my cousin, now 22 years old. For the
sake of this testimony, and to protect her identity, I'll call
her Anna. Anna and I met 2 years ago when I went home to
Liberia after the decades of war. Anna had also just returned
home after living much of her life in a refugee camp in Ghana
called Bujumbura. At 20 years old, Anna had already experienced
more of the direct impact of debt and conditionalities than a
roomful of economists. My aunt and uncle had left Liberia for
Ghana on foot when the war started in 1990. Anna was just 5
years old. The ruthless dictator, Samuel Doe, accrued debt as
he used U.S. taxpayer monies from the Reagan era as ``loans''
to train and equip an army that he then unleashed against
primarily innocent civilians. Charles Taylor unseated Doe and
continued the ruthlessness until over 250,000 Liberians had
been killed and Does' debt had ballooned to $3 billion.
Ghana, where the camp was, had approved its first Economic
Structural Adjustment Facility loan in May of 1995. In that
year, the agreement led Ghana to begin selling off--
privatizing--14 state-owned enterprises. Massive job losses in
Ghana airways, Ghana railways, and the Electricity Company of
Ghana, among many others, were the result. With Ghanaians
forced out of jobs, the job market for Liberian refugees was of
course much worse. My aunt and uncle could not find work in
spite of their graduate degrees. Little Anna, then barely 10
years old, could no longer go to school. This was because of
the conditions of the international financial institutes which
actually imposed user fees on the students at community-level
schools in Ghana at that time.
At the age of 13, my cousin practically lived in the
streets. On Sunday afternoons, as my aunt went to church, Anna
and other teenage girls would parade around the camp, scantily
clothed, waiting for older men, many of whom did not live in
the camp, to solicit them. This was their employment since
school was no longer an option. When we met 2 years ago, Anna
had two children, the eldest born when she was just 15 years
old. Anna returned to Liberia, ready to start her life anew.
But as Liberia repays its debt to the international financial
institutions, there are no functioning hospitals. I fear that
Anna may be one of the many undiagnosed yet living with HIV/
AIDS, and the same conditionalities that denied her an
education may now keep her from treatment, unless Liberia and
many other countries in Africa and throughout the developing
world can spend their scare resources on health, education, and
basic services for their citizens, Anna's children, and many
other children throughout the continent will continue to pay
the heaviest price for the debt of dictators and the
conditionalities of the international financial institutions.
We know that this story is repeated throughout the
continent. We recognize also the harmful impact of conditions
throughout the continent. Many claim that the international
financial institutions no longer impose these conditionalities.
We have clear evidence from countries throughout the continent
that in fact privatization of core industries, as well as
liberalization of opening up of markets, particularly financial
and banking sectors, continues today.
We are incredibly concerned that unless the conditions, the
harmful macroeconomic conditions attached to these initiatives
are removed, there will continue to be disastrous implications
even as we advance debt relief.
There are many instances that we would love to share; I
wanted to talk in particular about Mali. Mali, which had
conditions tied to its poverty reduction strategy papers and
its PRGF, the Poverty Reduction Growth Facility arrangement
with the IMF, those conditions included water, banking,
telecommunications, and agriculture, especially in companies
dealing with cotton, Mali's biggest export earner. Mali sold
off its rights to the French company SAUR in 2000. The process
forced impoverished communities to pay for the first time for
access to clean water.
In a few short years, there were numerous complaints about
mismanagement and claims by the Malian government that the
companies had failed to run the water services according to
contract. By 2005, the Malian government re-nationalized water
and yet was seen as ``off track'' by the IMF.
Countries that go a different path from the IMF are
actually threatened not only from being tossed out of debt
relief schemes but also from accessing other core financing
from the development community. It is this stranglehold of the
IMF through conditionalities that we must end.
I urge this committee to support the Jubilee Act to fix the
flawed debt relief by canceling odious debt, by eliminating
harmful conditionalities, and by advancing steadfastly towards
an Africa, Latin America, Asia, a developing world where people
can pursue, health communities can pursue education for their
children, can live lives of dignity.
I believe this is what you all as members of this committee
intended when you advanced debt relief a decade ago. If we take
the necessary steps now to remove harmful conditionalities, we
can meet your moral imperative of lifting the burden of debt
for Africa and for much of the world.
Debt has kept Africa in bondage long after the end of
slavery and colonialism. This legislation could help break
those chains. It won't solve all the problems of the world's
poorest country, and it won't give my cousin back her
childhood, but it will give these struggling nations a better
chance of building strong, secure, and healthy societies.
Thank you.
[The prepared statement of Ms. Woods can be found on page
61 of the appendix.]
The Chairman. Next, we have Gerald Flood.
Mr. Flood.
STATEMENT OF GERALD F. FLOOD, COUNSELOR, OFFICE OF
INTERNATIONAL JUSTICE AND PEACE, UNITED STATES CONFERENCE OF
CATHOLIC BISHOPS
Mr. Flood. Thank you, Mr. Chairman. Mr. Chairman, and
members of the committee, I would like to thank you for the
opportunity to testify here today. Debt relief for poor
countries has been a high priority for our Bishops Conference
for many years. In my testimony I will be focusing on a number
of issues at a level of technical detail which the Bishops
would not normally address and on which therefore they would
not have a position. Thus I offer my testimony primarily as a
former development agency official who has worked on debt and
related issues with both the World Bank and the Bishops
Conference over quite a few years.
I would like to begin by reiterating the expressions of
thanks and appreciation which have already been mentioned by
the previous witnesses, especially to Chairman Frank and
Representatives Bachus and Waters for their strong and
untiring, faithful--I don't know how many adjectives one could
find to adequately express the leadership which they have
exercised over many years in an effort to bring debt relief to
millions of poor people in low-income countries around the
world.
Before getting to some of the issues, I had wanted to
mention one specific case showing how the HIPC program is
enabling Catholic Relief Services and a broad group of allies
in Cameroon to lead a path-breaking effort to unite sustainable
forestry management with rural community development throughout
the country, but time won't permit, so I refer you to my
written testimony on this.
In looking at H.R. 2634, some members of the committee may
be wondering why additional debt cancellation is necessary when
so much debt relief is already being provided under HIPC and
the more recent Multilateral Debt Relief Initiative. The
problem is that there are a substantial number of poor
countries that are not eligible for the HIPC program, let alone
the MDRI.
The disparity of treatment between HIPC countries and non-
HIPC countries became clear when the World Bank and IMF
conducted an examination of so-called ``debt sustainability''
in the poorest countries, the so-called IDA-only countries, the
countries that are only allowed to receive from the World Bank
funds from their most concessionary arm. The primary objective
of the exercise was to determine which countries should receive
their future IDA financing either wholly or partially in the
form of grants. When the exercise was conducted in 2005, it
showed that 42 countries were at sufficiently high risk of debt
distress to be eligible for grant financing, instead of the
usual loans. The list included 29 HIPC countries plus 18 other
countries. This meant that there were 18 non-HIPC countries
rated as having a risk of debt distress equal to or greater
than the HIPC countries. Like the HIPC countries, now they were
going to get some grants going forward. But unlike the HIPCs,
they would get no debt relief.
One of the 18 non-HIPCs in this list is Lesotho, which
reminds me of a remark made by the country's finance minister
when he learned about the MDRI debt cancellation agreement. He
told Reuters that one of the reasons Lesotho was not classified
as an MDRI country was it had never defaulted on its debt. It
is important, he said, that those who have paid their debts
well, who run their mega-finances well, should be rewarded with
debt forgiveness.
The debt cancellation provisions of H.R. 2634 would address
the concern expressed by the minister and bring deep debt
relief within the reach of virtually all of the world's poorest
countries. Some will note that the IDA-only criterion for
eligibility under the bill will capture some countries with
relatively low levels of external debt. Assuming one accepts
the debt sustainability analysis as fully valid, and there are
some questions about it, in determining really whether these
countries who are so-called not at high risk of debt distress
really are in bad shape as far as their debt, the fact is that
however you slice it, the countries, all of these countries are
ones with very high levels of poverty, and thus they need to
maximize the amount of resources that they can marshal to
promote human development and move toward the millennium
development goals for reducing poverty.
We believe that the IDA-only requirement is a reasonable
standard for determining which countries should be eligible for
debt cancellation. I would also like to address briefly the
cost of the debt cancellation. I have made a rough estimate of
the amount of funds the United States needs to commit through
the next three IDA replenishment periods--Fiscal Year 2008
through Fiscal Year 2017--in order to finance the cost of the
debt cancellation. I'm unable to provide a firm estimate
because much of the information required for an accurate
estimate is not publicly available. My rough estimate then is
that the cost to the United States would be roughly $1.5
billion for the 3-year IDA 15 period, from Fiscal Year 2008 to
Fiscal Year 2010, and that would mean an average of about $500
million a year. In the next IDA replenishment period, the
figure would rise to $3.5 billion. The reason for that is the
assumption that Bangladesh would come in during that period to
debt cancellation and they have a very high level of
multilateral debt. And then in the following 3 years, it would
drop to $2.4 billion, and the figure for future years would
drop still further.
Just a reminder that we're talking about debt that is going
to become payable over the next 30 to 40 years, because these
are very long-term debts. And what we're talking about is the
cost of reducing or eliminating the need for these countries to
pay their debt service each year over these 40 years. This is
why the cost has to be calculated over a long period of time.
An important assumption is that IDA and the other
international financial institutions would be replenished
dollar-for-dollar for the foregone principal and interest
payments of the debt canceled. This is the principle adopted
for the MDRI and would be in line with the requirement of
additionality contained in Section 3 of H.R. 2634.
Other assumptions are explained in my written testimony,
which also explains that the cancellation schedule I have
assumed may slip substantially, resulting in lower initial
costs and lower overall costs. And if, as likely, Vietnam does
not apply for cancellation, this would also reduce costs
considerably. There's much reason, therefore, for expecting
that the estimate could be revised downward as more information
becomes available.
Thank you for your attention.
[The prepared statement of Mr. Flood can be found on page
38 of the appendix.]
The Chairman. Mr. Caliari?
STATEMENT OF ALDO CALIARI, DIRECTOR, RETHINKING BRETTON WOODS
PROJECT, CENTER FOR CONCERN
Mr. Caliari. Thank you very much, Mr. Chairman. It is an
honor for me to have the opportunity to testify today before
this committee. I am going to be focusing on the provisions of
the Jubilee bill that address responsible lending and
borrowing. I am going to talk about the rationale for those
provisions, some of the futures of the currency system, which I
would argue discourages responsible lending, and I am going to
talk about how the provisions in the bill will improve over the
current system in different ways that I am going to explain.
Mr. Chairman, members of the committee, the unfinished
agenda on debt that the Jubilee Act addresses involves an
expansion of debt cancellation, but we are also aware that if
we want these, as well as the recent round of debt
cancellation, to have lasting effects, we also need to look at
the way ahead. That is why provisions in the bill to ensure
responsible lending and borrowing are an inseparable part of
this unfinished agenda on debt.
Why is this important? Because the promotion of debt
cancellation in impoverished countries comes from the belief
that debt cancellation can free resources currently spent in
servicing debt for productive and social spending that are
required in those countries. However, if after the
cancellation, debtor countries engage again in excessive
borrowing, we will soon be back in the same situation where
social and productive spending is curtailed by large amounts of
debt service. Jubilee is also concerned with ensuring that the
affected population has a say in the process of public debt
generation. In the past, too many debts were taken on via
mechanisms that were non-transparent, non-accountable, and,
ultimately, of little benefit to the population in the indebted
country.
Today, the gains that a number of low-income countries
expected to achieve through recent debt cancellation are
starting to be eroded. There are two main concerns I want to
raise in this regard.
The first is that the debt levels of countries benefitting
from debt cancellation are rapidly rising again because of new
borrowing on a non-concessional basis. This concern has been
underscored by the G-8 and the international financial
institutions. There are a number of creditors that have not
participated in debt cancellation that may actually free-ride
on the cancellation, that is take advantage of the newly
attractive debt profile of countries receiving debt
cancellation for providing financing on a non-concessional
basis.
This dynamic is especially acute in beneficiaries of the
Multilateral Debt Relief Initiative. The lower debt ratios of
the beneficiaries in this initiative put them back in a
position where they represent an attractive debt profile. After
the MDRI, this is, excluding new lending after the MDRI, the
debt stock ratios in most recipient countries will be
significantly lower. In this situation, creditors that may not
have participated in the debt relief effort may seek to profit
by lending on a non-concessional basis.
This non-concessional financing comes mostly from bilateral
creditors not in the Paris Club, or emerging creditors, such as
China, Brazil, India, Korea, Kuwait, etc., but there is also
considerable non-concessional financing that comes from export
credit agencies that are ironically in OECD countries. These
are the same countries that are providing, on the other hand,
the relief.
Also, there are, of course, commercial credits and bonds.
Some of these countries are now able to issue instruments in
the international capital markets, something they were not able
to do before.
Second, the threat to the gains from debt relief comes from
litigating creditors, such as ``vulture funds.'' These are
creditors who profit by buying cheap sovereign debt in
secondary markets and then maximize recovery via litigation and
other pressure mechanisms. And it is a key reason why the debt
these vulture funds bought cheaply now has become something
that they can sue for in a higher amount, the reason to this is
the debt cancellation received by some of the debtor countries
on the other side of these contracts.
So what about the current system? Do we have a current
system to stop unsustainable, irresponsible debt? Well, to
prevent countries receiving debt relief from falling back into
debt due to non-concessional borrowing is that the
international financial institutions adopted 2 years ago
something called the Debt Sustainability Framework. And in
Annex 1 of my statement, you will find a summary of how the
framework works. The framework has as a purpose to determine
how much new borrowing on a non-concessional basis low-income
countries can incur. And based on a number of factors, it
assigns a debt threshold to each country and it is assumed that
the financial needs of those countries that go beyond that
threshold need to be satisfied via grants. This framework is
what we can say the current system is doing to discourage
unsustainable lending, and it is quite ineffective and unfair,
especially to the debtor but also, and I have to say this, for
many of the creditors, for a number of reasons.
What the system does is, with regard to the creditors, the
international financial institutions are doing outreach to
foster a culture of coordination around the framework. It is no
surprise that this is proving quite difficult. In fact, the
rate of success of the HIPC initiative to bring onboard non-
Paris Club creditors was very low. Why would anybody think that
the creditors would suddenly put their heart into joining an
initiative where they have to match even more debt relief? If
anything, the incentives out there for them to do that are
exactly the opposite. There is more debt forgiveness at stake,
so creditors that are not part of the initiative can profit
even more from staying out of it and even lending on a
profitable basis to countries whose debts have been wiped out.
At the same time, international financial institutions would
sanction the debtor. Either reduce the grant allocations or
give assistance in harder terms to countries that are found to
be borrowing beyond their acceptable debt ceilings.
Now how effective is this? Everybody knew at the time of
establishing the Debt Sustainability Framework that in order
for it to work, countries were going to need a significantly
higher volume of grants than before. Now, if you know what has
been happening with grant assistance, it has been going down.
So discretionary grants is why countries go around to get
funding on a non-concessional basis and the solution to this is
that they say, ``Okay, if you do that, we will cut your grant
allocation further.'' Well, of course, this is only going to
worsen the problem and the creditors know it, and I quote in my
testimony documents from IDA that leave no doubt that this is
known by the creditors.
So what we are proposing is a package of measures that we
believe will significantly improve the current situation. Chief
among these measures is that the bill calls on the executive to
seek the international adoption of a binding legal framework
that guarantees that no creditor can take or expect to take
financial advantage of acquired or newly awarded debt relief
through the terms and rates of their new lending to beneficiary
countries. The way these measures will stop irresponsible
lending is of a striking simplicity: It is based on setting the
incentives right for new lending and borrowing. This is why it
needs to be a binding framework; a mere code of conduct would
not realign the incentives. If unsustainable lending occurs and
the debtor needs debt forgiveness in the future, the creditor
that engaged in unsustainable lending will have to take an
equitable share in the burden of the losses. So every creditor
lending to a country has an incentive to make sure its lending
is not above what the borrower can safely undertake, which is
exactly the opposite of today where creditors that typically do
not provide debt relief have every incentive to lend above safe
levels, knowing that they will be protected in the event debt
forgiveness is required.
The hope, of course, is that no new debt forgiveness will
be necessary. This is the beauty of this measure, that it is
first and foremost a preventive measure.
Mr. Chairman, the bill also contains measures on
transparency, the availability of grants, and measures dealing
with vulture funds. I will be happy to address them in a
question and answer session. With that, I will finish.
[The prepared statement of Mr. Caliari can be found on page
26 of the appendix.]
The Chairman. Thank you. I neglected to ask unanimous
consent that all the written statements be put into the record
in their entirety, along with any other material the members
might like. I will begin the questioning with our colleague
from California who has been a consistent leader on this issue.
Ms. Waters. Thank you very much, Mr. Chairman. And I would
like to thank all of our witnesses who are here today helping
us to understand more and more about debt relief. I would like
to address a question to Ms. Woods. The Jubilee Act would
eliminate harmful economic conditions for debt cancellation in
the future, but this will not undo the harmful effects of IMF
conditions on countries that have already received debt
cancellation, countries like Mali and Ghana, which you
described in your testimony. And I have to share with you that
many of our members are very proud of complete debt relief, but
they do not understand how it could be that a country could
receive debt relief and find themselves worse off after they
have gotten the debt relief than before. You talked about the
conditions that are placed on getting this debt relief. Could
you describe a little bit more how some of these conditions
create more poverty, and would you describe how this Act could
help with that problem?
Ms. Woods. Thank you so much for that brilliant question. I
think it goes to the heart of the matter. The issue is that the
conditions attached to the Debt Relief Initiative actually
first take away the space for developing countries to choose
their path to development. That is the first problem. It is
inherently undemocratic because essentially you have
institutions based in Washington telling countries what they
should prioritize in their spending, so it all sounds like
tossing words around, ``privatization,'' and
``liberalization,'' but essentially what is happening is that
countries around the continent have their citizens paying
taxes. So if you take for example Mali, citizens may be paying
taxes and may assume that key services like water which have
been provided in the past would continue to be provided through
their taxes, but instead the IMF says, ``No, sell off your key
industries to the highest bidder.'' And it is often the
multinational corporations that are swooping in and saying we
can manage those services better.
It is based in a political argument that says government
should be shrunk, that services should be provided by
corporations, and so what is happening is corporations are
coming in but as we see in example after example, corporations
are not necessarily doing it better. We do not have to go to
Mali, we can look right here in D.C. at healthcare as one
example to see that it is not always the private sector that
does the best job, right? So that is a broader argument but in
the African continent, it impacts people's lives in a more
desperate manner because people are already after decades of
resources being extracted, even in wealthy countries,
relatively wealthier countries like Nigeria, oil is flowing out
of communities that have no schools, no hospitals, not even
decent housing. So as corporations are coming in with their
search for profits, ignoring communities, the services are not
necessarily being provided better, and yet it is almost as if
people are being asked to pay more. So the intent in seeking
out the moral imperative of debt relief was to actually lift
the burden off of poor communities but in fact what you have is
the selling off of core services, which means people are forced
out of their jobs as those services shrink, and also people
have to then pay for those services to be provided. So whether
it is telecommunications or water or healthcare or education,
it is people already at the brink who are paying the heaviest
price.
Ms. Waters. Thank you very much.
Ms. Woods. Thank you.
The Chairman. I would just interject briefly that there is
a lot of debate about the place of morality in politics, today
we are talking about morality in politics, and I think we
should in the deepest sense. The gentleman from Alabama?
Mr. Bachus. I would like the panel to just comment if you
would on the ``vulture funds,'' and what would be the most
effective way to counter their negative activities? One thing I
am concerned about is in the bill we propose to give the
countries that are subject to suit or are targeted by the
vulture funds to make legal counsel available to them or legal
advice in combating these things, I am wondering about is that
the most effective? I think that is obviously one of the things
we should do. And are we going to be successful in court or are
they going to be successful in court in fending these funds
off, and that there are contracts, as much as we hate that
fact? But any comments you would like to make just to inform
us?
Mr. Watkins. Yes, thank you for that important question.
The vulture fund issue is not new. The original vulture cases
actually happened in the 1990's. But, unfortunately, in the
past year, actually we have seen an up-tick in the number of
cases, perversely because the countries that have gotten debt
relief now have money, more resources, and so the creditors are
saying, well, this is a good opportunity to swoop in. It is a
really perverse system.
A couple of things, you mentioned the language in the bill,
which would basically ask the U.S. Treasury Department to
provide greater legal and technical assistance to countries. I
think that is an important first step, just so that countries
know what their options are when they are faced with these sort
of suits. Another approach, which could help in the short term,
would be the World Bank actually has something called the Debt
Reduction Facility, which buys back at-risk private debt from
poor countries. So what that can do is, and it has done, is
actually take debts, which are not yet the subject of lawsuits,
and actually buy them back from the private sector so that it
sort of takes that off the market. So there are a couple of--
basically that fund could be increased.
There are a couple of policy changes that could happen. The
fund could be made available to pre-decision point countries.
One of the countries right now that we are very concerned about
with the vulture fund issue is Liberia, and we think that
Liberia should have access to this sort of support. And
basically countries should be able to go back more than once to
this fund if they again see that future debts are threatened by
these lawsuits. So those are I think what is in the bill and
some work around the Debt Reduction Facility could help in the
short term. Ultimately though the reality is that two-thirds of
these suits, these lawsuits that have happened, have been
brought in either the United States or the United Kingdom. So
if we are going to address the problem at its root, we need to
look at I think legal changes in the United States and look at
a way to address the problem of U.S. courts, that a lot of
these cases in fact are happening right now in courts in the
United States.
Mr. Bachus. Mr. Caliari?
Mr. Caliari. Thank you very much for that question. Just to
complement what Neil was saying, just to emphasize, some of the
measures that are in the bill, as Neil has said, are short
term, not only short term but in fact when you are talking
about for example providing financing for countries to be able
to buy back the debt from these vulture funds, what you are
basically doing is also subsidizing an activity that in the
first place is morally questionable--for example, just take the
case of Zambia, when they bought debt at $308 million and then
sued for $55 million and the court then did award them $15
million. So probably in a case like that, what you would have
had if the country had been able to buy that debt, it is buying
the debt for the $55 million, right, just to stop the threat.
And that is not ultimately what we want to do, although in the
short term it is necessary. But in the long term, I just want
to emphasize there is no really way around having a framework,
a legally binding framework that will ensure that all creditors
have to share equitably on the losses when a country needs debt
relief, and this really requires that the bill calls on the
executive to pursue, to seek the adoption of this
multilaterally binding framework. It is a long-term solution
but it is ultimately the only one that is really going to solve
the problem.
The Chairman. We will take the gentleman from Missouri
next, and then we will break. There is only the one vote and if
the panel--this is a very important issue, so I assume you
would not mind waiting? I will come back, and the gentlewoman
from Wisconsin, and maybe some others, so we will have time for
the gentleman from Missouri to ask his questions. We will be
back probably in about 20 minutes. Mr. Cleaver?
Mr. Bachus. Mr. Chairman?
The gentleman from Missouri went on a fast as part of this
effort, and I would like to commend him and he has spoken out
very forcefully on debt relief. I would like to compliment him.
The Chairman. I thank the gentleman for that. The gentleman
is recognized.
Mr. Cleaver. Thank you, Mr. Chairman, and I thank the
ranking member. As I read through your testimony, it was,
``Damned if you do and a damned if you do.'' If you do not
request financial assistance from the World Bank and other
institutions, you are not going to be able to address the
mammoth problems you face. And then if you do receive it and if
you repay it, you are going to deepen the mammoth problems that
you face. I am not so sure that we should not make corrections
on the other end when the loans are being made. The question is
this, would it be in the best interest of those nations
receiving the largesse from richer nations or the World Bank,
if on the receiving end, the repayment period is stretched out
years and years and years and years as opposed to trying to
repay the loan over a short period of time or the beginning of
the repayment of the loan over a short period of time. What we
do sometimes in municipal government is that we will lease land
to some entity that has a government purpose for one dollar for
75 years, and everybody knows and understands when you do that,
that there is a public purpose and so you do not want to burden
this entity. So I am wondering, I support debt relief
obviously, but I am wondering if maybe we should not do
something on the front end to even remove the psychological
trauma of wondering how you are going to make it when you have
to begin to repay the loan, am I clear? Okay.
Mr. Flood. Well, that is a very important question. I think
that is a question actually which a lot of these--many of the
shareholders of the multi-lateral development institutions have
been concerned about in recent years, and I give credit to the
Administration; they were concerned about the kind of issue you
are talking about. If you take a look at most of this multi-
lateral debt, which is the kind of debt we are talking about
trying to get canceled, most of it is already on very long term
and very low interest. The IDA loans, for example, are 40 years
long, and they have a 10-year grace period where you do not
have to pay any principal and you only pay a small service
charge. The problem is that in spite of those easy terms, these
countries still managed over time to accumulate an awful lot of
debt and get themselves in an unsustainable position so that
they needed debt relief. That was one of the reasons for of
course the HIPC program and the subsequent debt relief programs
that were developed. But even then, a couple of years ago, the
Treasury Department, our Treasury Department, said it is
obvious that a country like Niger cannot pay back anything. Why
are we kidding ourselves? They are so poor, they are not in a
position to be repaying debt. And what happens is you have kind
of a lend-and-forgive cycle. The World Bank would make a loan
to Niger and then after a few years, Niger would have trouble
paying it back, so the World Bank would make another loan so
that they would have the funds with which to repay the earlier
loan. This is a kind of a never-ending cycle of lend and then
not getting paid, so you have to lend again so they can have
the money that they can use to pay you back. The money is just
revolving in a circle. So they said you have to give them
grants, this is what is going to happen. So a lot of these
countries now are receiving grant funds, not loans at all from
IDA for example, but getting the money without having to pay
any of it back. And this is a new feature. The question though
is whether the criteria that are used for determining which
countries should receive grants are adequate, and this is a
debate that goes on. But it is an advance, they are making an
advance in that respect. But there is still the question, for
all the countries we are talking about, is even though a lot of
them, most of them, are going to be in a position to get some
grants going forward, they still have this large overhang of
debt from the past, which is hanging over them and which they
really need to get rid of.
Ms. Woods. So we are all here as member of the Jubilee
Network and strong supporters of debt cancellation, 100
percent, no strings. We will keep telling you that daily. I
think we are also, and you see it in much of our testimony,
recognizing that debt relief is just a small part, an important
part, but a part of the picture. Debt relief must be
accompanied by changes in trade in particular. If you think
about Africa, you should think richness, you should think
resources, right? But those resources, whether it is the oil or
the uranium, I could go on and on in terms of the richness of
the continent.
The Chairman. Well, you could if we did not have a vote.
Ms. Woods. Sorry, you have a vote. The point is that debt
cancellation is a critical first step. But in looking at the
big picture, which your question goes to, we have to also look
at changes that will bring a fair trade opportunity so that
African countries do not have to continuously go asking for
loans but that the richness of the continent can actually
benefit the citizens of the continents themselves.
The Chairman. We are going to have to break now for the
vote, but we will come back. There could be a second round.
This is a very important subject, and I will be back. The
gentlewoman from Wisconsin and other members may also come back
and have some further questions. We should be back in about 20
minutes or less.
Ms. Woods. Thank you.
[Recess]
The Chairman. We will reconvene. Other members may be back
but, as I listened, there are obviously a number of things we
want to deal with here, but the vulture fund issue is obviously
a tough one for us to get a handle on legally. And I remembered
and I checked with my staff, which has been doing such good
work, I remembered the proposal that had been forwarded by Ann
Krueger at the IMF for some international bankruptcy regime.
Would someone get that door, please, and close it? And it does
seem to me that if that had been in place, we would be a lot
better off. I would be interested in your views about whether
you think an international bankruptcy regime would be useful
and, if so, what could we do? Obviously, we cannot simply
legislate it, but how would we go about pushing for that,
should that be part of what we are trying to do in this? Let me
start with Mr. Caliari.
Mr. Caliari. Thank you very much. I think you are
absolutely right, ideally an international bankruptcy system
would be the way to replicate. I was talking about incentives.
What you have at a domestic level in every country is the
domestic bankruptcy system where the creditors know that if a
debtor goes bad, they are going to have to take some losses,
right? There is a system for that. We do not have that system
at an international level. What we de facto have is the
combined work of different systems that have been created, one
on top of the other, to try to develop a solution and the
solution is driven by the creditors alone, so there you have
already a significant difference with what happens at the
domestic level where there is an independent authority usually
issuing judgment. So in the bill we do not go into the details
of--we do not say actually it needs to be a bankruptcy system--
The Chairman. That is why I asked you.
Mr. Caliari. Yes, okay, we are saying that there is a need
to actually address this incentive problem and the only way to
address the incentive problem is with a binding legal
framework. What you have here is the problem of collective
action, where no individual country and no individual creditor
would have a willingness to take action on its own.
The Chairman. No, in fact, they are afraid that they will
then be disadvantaged.
Mr. Caliari. Right.
The Chairman. It will be a ``beggar thy neighbor''
situation.
Mr. Caliari. Exactly.
The Chairman. Let me go on--
Mr. Caliari. But just let me say one thing about the SDRM
proposal, which you referred to, which actually I am not sure
we will be necessarily in a better place because the problem
with the SDRM is that it did put the IMF, which is--
The Chairman. Well, it does not have to be that one.
Mr. Caliari. Right, exactly.
The Chairman. That would be the question I would ask people
to think about, when we come back, for us in February, let me
put it this way: In some cases, if you are afraid bad things
are going to happen, you can condition what you are doing and
say to people, ``Well, do not do that.'' But you really cannot
say to the poor countries, ``We are not going to give you the
relief,'' because they are being driven to this. So it did seem
to me that is one that we should be thinking out and then how
to do it. Mr. Flood, on the bankruptcy issue?
Mr. Flood. I guess I have not thought about this for a
while, so I am not going to be able to give you a very good
answer.
The Chairman. Okay.
Mr. Flood. But I do remember one of the problems with it,
the idea floated around for an international bankruptcy system,
was that the debtors did not like it. They were afraid that
they were going to be thrown into bankruptcy against their
will. This would cause them more problems than it would solve.
So you had that sort of lack of interest on the part of many of
the debtors to get involved with that kind of a thing.
The Chairman. But would that be curable if it was drafted
properly?
Mr. Flood. I think it would have to be drafted as a
voluntary system.
The Chairman. Okay. Ms. Woods?
Ms. Woods. I think the critical thing here is a fair and a
transparent process. And, yes, I think there are a lot of us
that will quibble with the process that was already presented,
the sovereign debt restructuring mechanism,--
The Chairman. Forget that.
Ms. Woods. --and we can debate that. But, overall, a
process that brings open, transparent discussion so that there
are not backdoor deals with hedge funds and other type funds, I
think brings up a bit more openness. So what we need is a
process where parliaments, where citizens and really everyone
can see what is the actual debt and have a more open process.
The Chairman. I really urge you to start working on that.
Frankly, conceptually and intellectually, debt relief is kind
of easy, and I think we will put that bill through, but we want
to do some of the other things. And also when we do debt
relief, we are going to be told about moral hazard, and it does
seem to me that the greatest moral hazard here is the absence
of a bankruptcy system. That is the license for not worrying
about whether people can repay, the absence of a bankruptcy
system is probably one of the major ones.
Mr. Watkins?
Mr. Watkins. I would agree with what other panelists have
said, that I think it is a missing feature in the international
system right now, that such a system--we are seeing all these
problems with vulture funds, with creditors not participating,
and that is fundamentally, there needs to be put in place less
of a patchwork of these initiatives involving certain creditors
here and there and more of an over-arching framework.
The Chairman. Well, I appreciate that and I really urge
you, there is a great deal of expertise here, and I think again
some of these questions are relatively easy, although they can
become difficult politically. I was struck as I listened, it
just occurred to me as my staff briefed me and I listened, that
the vulture fund is a very significant issue, and we need to be
able to deal with it.
The other question is similar in the sense that we have the
people who are willing to discharge their debts may be feeling
they are being taken advantage of and that is additional third
country lending. So Country A forgives the debt of Country B,
and then Country C, as in China, then decides to make more
loans. Is there any way we can deal with that or should we? Mr.
Caliari?
Mr. Caliari. Yes, certainly the only way a system like this
can work is if it includes all public and private creditors, so
in public creditors you have to include a country's lending
through different windows also, which is important.
The Chairman. What is the likelihood of their agreeing, do
people have any sense of it?
Mr. Caliari. Yes, for any measure like this, a request for
collective action, you always need a leader, a champion, to
start, and so it may take some years. Of course, this is not
something that is going to happen tomorrow, but you do need
somebody who is going to start. If you wait until everybody
agrees to start the process, then it is never going to happen.
The Chairman. Yes.
Mr. Caliari. Sorry, and I do not think that has deterred
the U.S. Government in the past when there are things that the
government feels strongly that need to be pushed at an
international level, taking the leadership, finding allies to
go ahead and do it, I do not think that has been a deterrent.
And so I think it is important that the Congress calls on the
Executive Branch to pursue this at the international level.
The Chairman. Mr. Flood?
Mr. Flood. Yes, well, I think that this gets into
geopolitical issues, a lot will depend on what China thinks is
in its own interest here. If you are talking about China, that
is the big player here, but India to some extent as well. But
one thought that had occurred to me is that why not try to get
them more to the table where they are discussing these issues
in a forum where they would be willing to listen and be willing
think that perhaps their point of view about how some of these
development issues should be addressed would be taken into
account, like giving a bigger voice to the board of the World
Bank, something like that. That might help, get them sort of--I
hate to use the word ``co-opt,'' but get them into the dialogue
on all these issues with the others instead of operating
independently.
The Chairman. Ms. Woods?
Ms. Woods. I think the principle that you are recommending
is a good one, and that is for donors to coordinate a bit
better and that you do not have the United States coming in, or
the United Kingdom coming in with all their protocols and
essentially adding demands on the developing countries
independently, so some type of better coordination I think is a
good principle to move forward. But I think it goes a step
further, I think there is also a need for the debtor countries
to have sort of a cartel, so to speak, and to be able to come
together to kind of map out their plan. And it may be that they
are wanting to go to China or Malaysia or a number of other
countries that are offering development finance without
conditions.
The Chairman. One of the things I was reminded of by Mr.
Caliari is that we, the United States, are in significant
arrears to IDA, and so that may be one of the factors driving
countries to do this. One of the ways we should deal with this
is--and I think we may be writing, some of us, this is our
fault, this is not a campaign of the President, this is a
congressional problem, we need to do better on the IDA thing.
Mr. Watkins?
Mr. Watkins. Yes, just a bit on that. One of the problems
is, as Aldo Caliari mentioned earlier, that countries do not
have access to concessional finance, so they are turning to
China.
The Chairman. So the IDA thing would be--
Mr. Watkins. IDA is a source, more grant-based finance is
critical for this move forward. I think the other thing, as we
talk about bankruptcy or arbitration processes, the importance
of thinking about responsible lending, what does responsible
lending practice look like, what sort of standards should be in
place so that we do not again accumulate new odious debt.
The Chairman. Well, I agree but the problem is to deal with
responsible lending, you need sort of unanimous consent of the
lenders because one irresponsible lender can in fact profit
from the others. Let me add this, and then I am going to call
on the gentlewoman from Wisconsin, who has been one of our
active members who has an interest in this. The governmental
responsibilities, that is why we are here, but it does seem to
me with some of the lending, when we think about some of the
countries, that the non-governmental organizations of civil
society can be relevant. It does seem that here is a case where
it is a moral persuasion. There are countries doing the lending
that do not want to be thought ill of, that have a self-image
that I think you can affect, so we are not abdicating, it is
our part too. But I think this is an important thing for us to
be able to do together.
The gentlewoman from Wisconsin is recognized for 5 minutes.
Ms. Moore of Wisconsin. Thank you, Mr. Chairman. I guess I
want to start out by asking, I believe it is Mr. Watkins, a
question. You had with respect to the vulture funds, you say
that the World Bank should buy back some of the debt and
increase this fund and that countries ought to be able to come
back more than once. What do you see as the under-riding
obstacles or conditions that exist within the World Bank
structure to prevent countries from doing that? I know that
president certainly is very worried about vulture funds at this
time. If this were so easy, why would not she just do it, what
are the barriers?
Mr. Watkins. As I understand it, it is simply World Bank
policy that countries cannot access the fund prior to reaching
decision point on the Debt Reduction Facility. So it should be
a matter of being able to change that policy, and that would
make it possible for countries like Liberia to move forward. I
think another point that is interesting on the vulture fund
piece, it is just a question of information and disclosure.
One, progressive reform that we could, just building on what I
suggested earlier, that we could--we do not know a lot about
who these vulture funds are, even if they are U.S. citizens who
are involved. So could we somehow find a way to disclose what
are these funds paid, who are they, what actions are they
taking? That sort of basic information on the if you in essence
by debt on the secondary market and you are distressed debt
fund or U.S. individual, should we not have access to that sort
of information in addition to the World Bank level work?
Ms. Moore of Wisconsin. Right, well, they will say that
they are private funds and so that is why this disclosure is
very difficult. It is a challenge that this committee deals
with all the time.
Let me ask another question that is perhaps is a very
theoretical and macroeconomic, and perhaps, Ms. Woods, you
would like to weigh in on this as well with Mr. Watkins or
other members of the panel, would it be useful to try to have
the United Nations, I understand that most of these cases have
been brought in the United Kingdom and the United States'
courts, but would it be useful to have the G-8 countries or the
United Nations define odious debt so that it would be a
preemptive strike and discourage investors from in fact lending
and having financial transactions with countries where there
are dictators, where they are financing these wars? I think the
story of Africa is a story of these criminals, I think that are
in charge of government, and so if we were to define odious
debt at the level of the United Nations, do you think that that
would be something that we can pursue at the United Nations
level that would discourage these investors and in fact prevent
these folks from winning in court?
Ms. Woods. Well, Aldo spends a lot of time on UN issues, so
I am sure he will want to comment on this as well, but
essentially yes, I think it is critical to begin to have
international law that says that dictator debt essentially is
illegitimate. And we have a practice from 1898 set forward by
the United States when they essentially took over Cuba and said
that the debt owed to Spain was odious debt and took steps to
have that debt canceled. You had the Bush Administration again
with Iraq use that same principle of odious debt, and so you do
have established practice. I think it would be extraordinary
and extremely timely for this committee to encourage the
administration at the United Nations and elsewhere to advance
an international convention or some type of international legal
binding mechanism that actually--
Ms. Moore of Wisconsin. Vulture funds did not even come up
at the last UN meeting, Mr. Chairman and Ms. Waters.
Mr. Watkins. Right.
Ms. Moore of Wisconsin. It did not even come up.
Mr. Watkins. Right.
Ms. Moore of Wisconsin. So that is why I asked that
question.
Mr. Watkins. Now, I do think there is an opportunity
because the UN in 2008 is going to be advancing the Financing
for Development Conference that was held in Monterrey, Mexico
is re-convening, and so you will have an international
conference looking at development finance issues, and clearly
issues of debt are on that agenda, so there is an opportunity.
What would be needed is leadership from the United States.
Ms. Moore of Wisconsin. Well, Ms. Waters, for example, is
on the Judiciary Committee, I do not know which jurisdiction,
which committee has that, but she is also on this committee
too, so I am so happy that she is here to hear this. Mr.
Chairman, will you yield me just 30 more seconds?
The Chairman. Yes.
Ms. Moore of Wisconsin. Thank you because I would like Mr.
Caliari to be able to respond at the suggestion of Ms. Woods.
Mr. Caliari. I really think she has covered it quite well.
I totally agree with her opinion. You need a convention that is
going to be binding on domestic courts because at some point
the place where these debts is enforced is in court. So if
there is a convention like that, that is multilaterally agreed,
then as you say you can prevent these folks from winning in
court, and I think that will be very important progress.
Ms. Moore of Wisconsin. Thank you so much. I yield back.
Ms. Woods. Thank you.
The Chairman. I want to thank you. And we really do want to
keep working with you on how to--we are going to move on this,
this committee will be voting on this bill next year, and
designing a bankruptcy system will be part of the other
safeguards we can put in. We will also be urging that we pay up
our IDA debt because that reduces the push factor there. I
appreciate this, and the members of our staff, myself, the
gentlewoman from California, and others will remain in contact.
The hearing is adjourned.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
A P P E N D I X
November 8, 2007
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