[Senate Hearing 110-659]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-659
 
           BUILDING ON INTERNATIONAL DEBT RELIEF INITIATIVES

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


                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED TENTH CONGRESS



                             SECOND SESSION



                               __________

                             APRIL 24, 2008

                               __________



       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey          JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
                   Antony J. Blinken, Staff Director
            Kenneth A. Myers, Jr., Republican Staff Director

                                  (ii)

  
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                            C O N T E N T S

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                                                                   Page

Birdsall, Dr. Nancy, president, Center for Global Development, 
  Washington, DC.................................................    19
    Prepared statement...........................................    21
    Response to question submitted for the record from Senator 
      Richard Lugar..............................................    60
Casey, Hon. Robert P., Jr., U.S. Senator from Pennsylvania, 
  opening statement..............................................     1
Flood, Gerald F., counselor, Office of International Justice and 
  Peace, U.S. Conference of Catholic Bishops, Washington, DC.....    25
    Prepared statement...........................................    27
    Response to question submitted for the record by Senator 
      Richard Lugar..............................................    61
Henry, Dr. Peter B., Konosuke Matsushita Professor of 
  International Economics and Gunn Faculty Scholar, Graduate 
  School of Business, Stanford University, Stanford, CA..........    34
    Prepared statement...........................................    36
    Responses to questions submitted for the record by Senator 
      Richard Lugar..............................................    64
Lowery, Hon. Clay, Assistant Secretary for International Affairs, 
  Department of the Treasury, Washington, DC.....................     4
    Prepared statement...........................................     6
    Responses to questions submitted for the record by Senator 
      Richard Lugar..............................................    64

              Additional Material Submitted for the Record

Lugar, Hon. Richard G., U.S. Senator from Indiana, prepared 
  statement......................................................    51
McCormick, David H., Under Secretary for International Affairs, 
  Department of the Treasury, letter to Representatives Barney 
  Frank and Spencer Bachus.......................................    58
Sitali, Muyatwa, coordinator, Debt, Aid and Trade Programme, 
  Jesuit Centre for Theological Reflection, Lusaka, Zambia, 
  prepared statement.............................................    51

                                 (iii)




           BUILDING ON INTERNATIONAL DEBT RELIEF INITIATIVES

                              ----------                              


                        THURSDAY, APRIL 24, 2008

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 1:59 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Robert P. 
Casey, Jr., presiding.
    Present: Senator Casey.

        OPENING STATEMENT OF HON. ROBERT P. CASEY, JR.,
                 U.S. SENATOR FROM PENNSYLVANIA

    Senator Casey. The hearing of the Committee on Foreign 
Relations will now come to order.
    We are starting as close to exactly on time as possible. 
There is a vote at 2:15. So I do not know what that will do to 
our proceedings here, but I wanted to get started so we could 
move forward.
    Today the committee meets to assess the utility provided by 
international debt relief initiatives in alleviating poverty 
and promoting development in the world's poorest nations. A 
primary purpose of this hearing is to assess the lessons 
learned from recent debt relief initiatives, including the 
heavily indebted poor countries known as HIPC and multilateral 
debt relief initiative known as MDRI. Both of those initiatives 
have been undertaken in the past dozen years.
    These two broad debt relief initiatives, when combined and 
completed, are expected to reduce the debt stock of those 32 
nations that are eligible under these initiatives by a total of 
$96 billion. In 2007 alone, these nations included in the MDRI 
initiative benefited from $1.3 billion of annual reductions in 
debt service payments or approximately 1 percent of their 
overall gross domestic product. The Bush administration should 
be congratulated for having provided strong leadership in 
initiating the MDRI effort and promoting a greater awareness of 
the real benefits afforded by comprehensive debt relief.
    I recognize the numbers that I just provided are abstract, 
but it is essential to recognize the real savings for 
impoverished nations that can now use scarce resources for the 
benefit of their people. The Government of Zambia, for example, 
benefited from the forgiveness of almost $24 million in 
outstanding debt in 2006 under the MDRI initiative. Using 
proceeds from that debt relief, the Zambian Government ended 
user fees for rural health clinics, ensuring that medical care 
and prescription drugs were free and available for all.
    Another example. Just listen to the former President of 
Tanzania who wrote in 2004, ``In 2001, Tanzania was granted 
significant debt relief. We have already witnessed tremendous 
successes. The primary school population has increased by 66 
percent, the greater part of an extra 2 million children, and 
the shortfall in the enrollment of girls has been eliminated. 
We have built 45,000 classrooms, 1,925 new primary schools, and 
over 7,500 homes for teachers in partnership with their 
communities.'' So that is another example of the success of 
these initiatives.
    The purpose of this retrospective look is to establish 
whether additional international debt relief today makes sense 
for nations not already included in the HIPC and MDRI 
initiatives.
    Last week, the House of Representatives passed on a 
bipartisan basis H.R. 2634, the Jubilee Act for Responsible 
Lending and Expanded Debt Relief.
    Last October, I introduced S. 2166, the Senate version of 
this legislation, which differs in some respects from its House 
counterpart but retains the overall goal of expanding debt 
cancellation to an additional 24 nations. These new nations, 
which range from Georgia to Moldova in the former Soviet Union 
to Kenya and Lesotho in Africa, qualify on the basis of their 
low per capita income levels and their subsequent eligibility 
to receive special assistance from the World Bank. I am proud 
to be joined by 25 other Senators who have agreed to cosponsor 
the legislation, including a majority of Senators who sit on 
the Foreign Relations Committee.
    In recent years, the world has witnessed a coming together 
of a diverse coalition of groups on behalf of the cause of 
forgiving the debts of those nations at the lowest rungs of the 
world's economic ladder. A grassroots religious coalition has 
organized itself under the Jubilee Network to provide for 
greater debt relief and has been joined by academics, 
entertainers, and world leaders.
    Jeffrey Sachs of Columbia University and a former adviser 
to the U.N. Secretary General has declared, ``No civilized 
nation should try to collect the debts of people who are dying 
of hunger and disease and poverty.''
    The late Pope John Paul II, whose successor, Pope Benedict, 
visited the United States last week, made international debt 
relief a key priority for his papacy, calling on the 
international community to ``reduce substantially, if not 
cancel outright, the international debt which seriously 
threatens the future of many nations.'' So said the Pope.
    Finally, we have seen the United Kingdom, under the 
leadership of Prime Minister Gordon Brown, maintain a sustained 
focus on expanding the benefits of debt relief for all worthy 
recipients.
    I recognize that the Jubilee Act bill before the committee 
is not perfect and can be improved. One of my purposes in 
calling this hearing was to solicit the views of the 
administration and outside experts for just that purpose.
    However, I do want to take this opportunity to briefly 
address some of the critiques of expanded debt relief, and I 
look forward to a fuller exchange on these issues with our 
witnesses on both panels during the time for questions.
    Critique No. 1. Debt relief has already been made available 
to these nations with ``unsustainable debt levels'' and we 
should not squander scarce resources on those nations that are 
able to manage their debt flows. That is the critique.
    Just a little bit of rebuttal here. A recent analysis 
undertaken for the United Nations Development Programme 
demonstrated that of the 24 nations that would be made newly 
eligible for debt relief under the Jubilee Act, 14 of those 
nations are actually poorer in terms of human poverty levels 
and carry more debt as a percentage of gross national income 
than nations already eligible for debt relief under the HIPC 
initiative. The 24 new nations that would receive debt relief 
under the Jubilee Act are designated only because they are 
eligible to receive special assistance from the World Bank on 
account of their deep poverty levels.
    More to the point, nations judged to have ``sustainable 
debt levels'' means that those nations have borrowed 
responsibly and have not been in danger of defaulting on their 
debt. Yet, these nations, which remain poor and economically 
struggling, may also be sending valuable payments every year to 
foreign creditors that can be spent more effectively at home 
for the benefit of their people. It is a curious approach to 
cite moral hazard in arguing that nations that have borrowed 
heavily and irresponsibly should be eligible for debt relief, 
but not those nations with more responsible debt burdens.
    Critique No. 2. Expanded debt relief will only serve to 
crowd out other valuable development assistance.
    Some observers have expressed concern that the resources 
required to fund expanded debt relief initiatives for as many 
as 24 new nations will put at risk existing development 
assistance programs. That is the attack--the critique I should 
say. In other words, there is a fixed pool for development 
assistance, and a new debt relief initiative will only take 
funds away from other good programs.
    I do not believe this is a valid concern. Indeed, we in the 
Congress have been guilty at times of not fully funding the 
U.S. share of debt forgiveness initiatives approved by the 
United States. We must commit to ensure that debt relief 
initiatives are additive to existing programs and provide a 
real benefit to struggling nations and not simply substitute 
for other efforts.
    That said, continuing debt payments by nations that in turn 
receive grants and other assistance from the international 
community is also a form of ``robbing Peter to pay Paul.'' It 
is strange common sense to send foreign assistance to 
impoverished nations on the one hand and on the other hand see 
an exodus of valuable foreign exchange reserves from those very 
same nations in the form of debt payments.
    Critique No. 3. Debt relief by itself is meaningless 
without accompanying policy reforms.
    First of all, let me make clear that I do not believe debt 
relief alone is a complete panacea for the ills that beset the 
world's poorest nations. Instead, only when combined with other 
effective policy instruments can debt relief succeed. Greater 
transparency and accountability in national budgets, 
investments in the rule of law, strengthening educational 
systems, and other measures are often necessary prerequisites 
if debt relief initiatives are to promote real economic growth 
and alleviate poverty in developing nations. Debt relief is an 
important piece of the puzzle, but only one piece of the 
puzzle.
    That is why the Jubilee Act legislation is so promising. It 
imposes rigorous requirements on recipient states before they 
are granted complete relief. Those nations eligible for debt 
relief under the Jubilee Act provisions must allocate all 
savings from debt cancellation toward poverty-reducing 
expenditures. Next, they must commit to future borrowing in a 
responsible fashion. They must develop transparent and 
effective budget mechanisms and refrain from excessive military 
expenditures. In other words, these nations must undertake the 
type of policy initiatives that will help ensure that debt 
relief proceeds are used in the most effective fashion and are 
not wasted or diverted to other purposes. This legislation 
ensures there is no free ride--no free ride--for those 
governments benefiting from a new debt relief initiative.
    Today we are honored to be joined by an illustrious group 
of witnesses. On our first panel, the Honorable Clay Lowery, 
the Assistant Secretary for International Affairs at the 
Department of the Treasury, will testify on behalf of the 
executive branch. Mr. Lowery will offer the administration's 
overall perspective on the utility of debt relief initiatives 
and provide specific views on the provisions of the Jubilee 
Act.
    On our second panel, we will have a group of three 
nongovernmental witnesses, all of whom have devoted much of 
their careers to better understanding the role of debt relief 
in promoting international development. I will make their 
introductions when we are ready for their testimony in the 
second panel.
    For now, I think we might move to testimony unless and 
until one of my colleagues shows up. I know that we may have at 
least several who might want to offer opening remarks or 
comments. So I think, Mr. Lowery, if we could just skip ahead a 
little bit and allow you to present your testimony.
    Thank you very much.

    STATEMENT OF HON. CLAY LOWERY, ASSISTANT SECRETARY FOR 
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY, WASHINGTON, 
                               DC

    Mr. Lowery. Thank you, Senator Casey, and thank you very 
much for the opportunity to discuss the administration's views 
of international debt relief and the new proposals contained in 
the Jubilee bill.
    I also want to personally thank you for your very 
thoughtful statement. I think you are right about the critiques 
and you will hear some of them in my statement. And I thought 
you made some very good points as to how to take them on.
    We are in full agreement that debt relief can be a valuable 
tool to help the poorest, most heavily indebted countries. It 
helps them reestablish a sound economic footing and can support 
their efforts to lift people out of poverty. Debt relief can 
remove a significant barrier to economic growth when external 
debt levels become so high that they interfere with the 
country's basic economic sustainability.
    This administration, as you pointed out, as well as the 
previous administration and the Congress, have been ardent 
advocates and critical leaders in major international 
initiatives to maximize the potential of debt relief as a 
responsible and effective tool of development. In fact, the two 
major international debt relief initiatives that you mentioned 
have, over the last 10 years, provided over $100 billion in 
debt relief to 33 heavily indebted countries. It is slightly 
different than the number you used mainly because Liberia just 
became eligible.
    Given this track record, it is not surprising that we find 
many of the goals that you have proposed in your act to be 
laudable. The administration shares the goals of increasing 
economic growth, reducing poverty, and obtaining greater 
financial stability in these poor countries. However, we cannot 
support this bill, and I will try to make clear by positing 
three different questions.
    First, is this bill sound policy? In countries where debts 
are sustainable, other development tools should take precedence 
over debt relief. The aim of the HIPC initiative was to remove 
unsustainable debt levels for the most heavily indebted poor 
countries so that these countries could stabilize their 
economies and focus on growth and poverty reduction. It 
included requirements for sound economic policies so that debt 
relief was not simply throwing good money after bad. For 
countries that are already able to successfully manage and 
service their debts, sound debt management can help them to 
transition gradually toward access to private capital markets. 
In short, debt relief makes the most sense when debt itself is 
a major barrier to development.
    However, of the eight countries that some supporters of 
this bill have suggested would be immediately eligible, none 
face a high risk of debt distress. This means that the 
immediate impact of the bill, if agreed to internationally and 
if funded by the Congress, would be to forgive the debts of the 
countries that are able to service their debts, countries for 
which debt is a minor issue compared to the challenges they 
face in tackling issues such as promoting growth.
    My second question is how will expanded debt relief be 
financed? Debt relief has a U.S. budgetary cost, just as new 
development assistance has a U.S. budgetary cost. While it is 
difficult to estimate, the potential U.S. share of the cost of 
the Jubilee bill could easily be in the range of $7-$10 billion 
over time. One could argue that the international financial 
institutes should finance this type of debt reduction with 
internal resources. However, as we learned during the financing 
of the MDRI initiative, it is unlikely that we could garner the 
necessary support for use of the institutions' resources, 
meaning the United States would need to be prepared to make a 
significant contribution.
    Moreover, the United States is not meeting its commitments 
on current debt relief initiatives, and is far behind on 
financing the multilateral development banks, which are the 
institutions that finance most of the world's development 
assistance. When every other country has basically paid all of 
its bills to the MDBs and the United States is the only 
country--the only country--with substantial arrears, over $800 
million, including almost $400 million to the IDA alone, it 
leaves our credibility somewhat in question.
    Third, and maybe most importantly, is the expansion of debt 
relief really the right priority? Secretary Paulson and other 
senior Treasury officials meet regularly with the finance 
ministers, central bank governors, private sector and civil 
society leaders from many of these countries. The priority they 
most often highlight is the need to spur long-term growth and 
reduce poverty by attracting investment, building core 
infrastructure, and strengthening their financial sectors. Debt 
relief is hardly ever mentioned, if at all.
    Less than 2 weeks ago, Secretary Paulson had a meeting with 
officials from six African countries. One minister stressed his 
priority was for assistance to increase electricity generation, 
while another was worried about the costs of transportation in 
his country.
    There has been significant success over the last few years 
in many of these countries in establishing sounder economic 
policies, achieving greater headline growth, and reducing 
poverty. What we think that we should be trying to now shine a 
light on is their attractiveness as investment destinations to 
help spur greater productivity and greater economic growth.
    Mr. Chairman, in our opinion, rather than embark on 
expanded debt relief, the United States should focus on three 
things. First, it should fulfill its commitments to current 
debt relief initiatives and meet our other multilateral 
commitments. Second, it should continue to provide direct 
development assistance to poor countries through bilateral and 
multilateral mechanisms aimed at increasing economic growth and 
reducing poverty. And third, we need to find ways to work with 
countries to build their capacity so they can handle more open 
trade and investment.
    Thanks for your consideration of these issues, and I 
welcome your questions.
    [The prepared statement of Mr. Lowery follows:]

    Prepared Statement of Hon. Clay Lowery, Assistant Secretary for 
   International Affairs, Department of the Treasury, Washington, DC

    Thank you for the opportunity to discuss the administration's 
strong leadership on international debt relief and the new proposals 
contained in the Jubilee bill
(S. 2166).
    Debt relief can be a valuable tool to help the poorest, most 
heavily indebted countries. It helps them reestablish a sound economic 
footing and reengage with the international community, supporting their 
efforts to lift people out of poverty. Debt relief can remove a 
significant barrier to economic growth when external debt levels become 
so high that they interfere with a country's basic economic 
sustainability. This is something that plagued many poor countries 
throughout the 1980s and 1990s. Recognizing the need for strong action, 
this administration has been an ardent advocate of and critical leader 
in international initiatives to maximize the potential of debt relief 
as a responsible and effective tool of development. The two major debt 
relief initiatives that this administration has supported, the Heavily 
Indebted Poor Country (HIPC) Initiative and the Multilateral Debt 
Relief Initiative (MDRI), are expected to provide over $110 billion in 
debt relief to 33 heavily indebted poor countries. Further, we 
anticipate that seven additional countries could still qualify under 
these initiatives.
    Many of the goals of the proposed Jubilee Act (S. 2166) are 
laudable. It is clear that all of the countries which are potentially 
eligible under this bill, the so called ``IDA-only countries,'' face 
significant development challenges. The administration shares the goal 
of increasing economic growth and obtaining greater financial stability 
in these countries. However, we cannot support this bill based on the 
answers to the following three key questions.
    Is this bill sound policy? In countries where debts are 
sustainable, other development tools should take precedence over debt 
relief. We believe that debt relief is not the best development tool 
for the countries targeted in this bill. The aim of the HIPC initiative 
was to remove unsustainable debt levels for the most heavily indebted 
poor countries, so that these countries could stabilize their economies 
and focus on growth and poverty reduction. It included requirements for 
sound economic policies so that debt relief was not simply ``throwing 
good money after bad.'' For countries that are already able to 
successfully manage and service their debts, sound debt management can 
help them to transition gradually toward access to private capital 
markets. Furthermore, increased private investment and targeted 
development assistance are more focused ways to address the challenges 
these low-income countries face.
    How will expanded debt relief be financed? Debt relief has a U.S. 
budgetary cost, just as new development assistance has a U.S. budgetary 
cost. We continue to face challenges in financing our commitments to 
existing debt relief initiatives, including in the multilateral 
development banks, which is why it is so important that Congress enact 
the President's full request for these programs. The Jubilee bill 
represents an unfunded international mandate to fully cancel roughly 75 
billion dollars' worth of debts owed by the potentially eligible 
countries to official bilateral and multilateral creditors. As we 
learned during the financing of MDRI, it is unlikely that we could 
garner the necessary international support to finance multilateral debt 
relief with the internal resources of the international financial 
institutions (IFIs), meaning the U.S. would need to be prepared to make 
a significant contribution.
    Is expansion of debt relief the right priority? Secretary Paulson 
and other senior Treasury officials meet regularly with the Finance 
Ministers, central bank governors, and private sector and civil society 
leaders from many of these countries. The priority they most often 
highlight is the need to spur long-term growth and reduce poverty by 
attracting investment, building core infrastructure, and strengthening 
their financial sectors. I would welcome closer collaboration with the 
Congress on ways in which the United States can support these 
countries' private sector development agendas.
                      current debt relief efforts
    This administration has led international debt relief efforts for 
the world's most heavily indebted poor countries. Building on the work 
of the previous administration and with strong congressional support, 
we have deepened and broadened the Heavily Indebted Poor Countries 
(HIPC) debt reduction initiative.
    In 2005, the administration, with bipartisan congressional support, 
initiated and negotiated the landmark Multilateral Debt Relief 
Initiative (MDRI). MDRI provides 100 percent cancellation of eligible 
debt obligations owed to the World Bank's International Development 
Association (IDA), the African Development Bank's African Development 
Fund, and the IMF, for poor, heavily indebted countries that complete 
the HIPC initiative. We have also continued this work, designing an 
initiative and leading negotiations in cooperation with Brazil to 
forgive 100 percent of HIPC debts to the Inter-American Development 
Bank.
    As I mentioned earlier, these debt relief initiatives are expected 
to provide over $110 billion in debt reduction to 33 countries that 
have already qualified under the HIPC initiative. Further, we 
anticipate another seven countries could qualify under these 
initiatives. These two initiatives continue to provide benefits to 
countries such as Afghanistan, Liberia, and Haiti. In 2007, Afghanistan 
became the 31st country to qualify for debt relief under the HIPC 
initiative. After years of conflict, Liberia is now rejoining the 
international community. Debt relief for Liberia under HIPC and MDRI, 
with eventual cancellation of over $4 billion in debts, is an important 
part of this transition. However, even under these well-established 
initiatives, the process is not always easy and international support 
is not always firm. In the case of Liberia--a country whose debts were 
clearly unsustainable and for which the U.S. provided strong leadership 
and intense engagement--the international effort to clear its $1.4 
billion in arrears to the international financial institutions took 
over 18 months and almost failed on a number of occasions.
                          debt sustainability
    To help ensure that gains from debt relief are not wasted, the 
administration has worked through the international financial 
institutions, such as the World Bank and IMF, to put in place an 
internationally agreed debt sustainability framework to help guide 
future lending and borrowing. We are also working through the OECD to 
operationalize that framework with a set of principles and guidelines 
that commit export credit agencies to follow sustainable lending 
practices and consider IMF and World Bank recommendations when 
extending new export credits to low-income countries. This 
administration also led efforts in the multilateral development banks 
to increase the level of grants for the poorest countries. In 2001, IDA 
provided less than 1 percent of its financing for the poorest countries 
in the form of grants. Today, as a result of U.S.-led efforts, over 40 
percent of funds from IDA to these countries are in grants. For 
instance, the World Bank is providing $82 million in grants to Haiti 
through the first half of this year. These efforts will help ensure 
that poor countries will not reaccumulate unsustainable debts in the 
future.
                    mismatch of tools and objectives
    Debt relief is a valuable tool, but it must be balanced against 
other policy instruments, such as direct development assistance. It is 
not always the right response to address a country's development needs. 
The Jubilee bill (S. 2166) targets a group of countries that face 
tremendous development challenges. However, debt relief is most 
appropriate when the debt itself is a barrier to development, as is the 
case with the countries eligible for the HIPC initiative. This is not 
the case for the countries targeted in this bill, many of which are 
experiencing robust growth and reductions in poverty levels. In fact, 
many of these countries have such manageable debt positions that they 
are either seeking access to private capital markets--as in the case of 
Vietnam--or are repaying their debts early--as with Angola and Nigeria.
    Of the eight countries that some supporters of the bill have 
suggested would be immediately eligible, none faces a high risk of debt 
distress. This means that the immediate impact of the bill, if agreed 
to internationally and if funded by the U.S. Congress, would be to 
forgive the debts of countries that are able to service their debts--
countries for which debt is a minor issue compared to the challenges 
they face in tackling issues such as promoting growth. For such 
countries, targeted development aid and our support for efforts to 
attract investment are more immediate.
    Our experience with HIPC and MDRI has shown that debt relief alone 
is not enough to address these countries' long-term challenges. For 
example, Rwanda benefited from $1.8 billion in debt relief under these 
initiatives, but it is still considered to be at high risk of financial 
distress. The reason is not that it has borrowed irresponsibly--its 
debt levels are still low. The reason is that it has a small and 
vulnerable export base that cannot provide a consistent source of 
government revenue. The key to supporting a sustainable path for 
countries such as Rwanda is assistance to directly improve their 
economic growth potential, not more debt relief.
    Countries must also develop and implement effective policy reforms 
to ensure that savings from debt cancellation--and in fact all 
development assistance--can be used effectively for poverty reduction 
efforts. This is why international debt relief initiatives have been 
conditioned on the adoption of sound macroeconomic policies. Debt 
relief simply will not have the intended benefits if it is delivered in 
an environment of macroeconomic instability. Placing blanket 
restrictions on the types of economic reforms that are appropriate can 
make it difficult to implement policies tailored to a given country's 
situation.
                potential costs of expanded debt relief
    There is also the issue of cost. Debt relief must be financed, just 
as development assistance must be financed, and we should not enter 
into negotiations without a sense of the costs that could be incurred. 
The budget impact of pursuing the program described in the bill (S. 
2166) would be substantial. Expanded debt relief would be a commitment 
to replace costs over 30 to 40 years, and we need to consider the 
total, long-term U.S. Government exposure to such an initiative.
    The Treasury Department estimates that the budget cost to forgive 
the nominal debt owed to the United States alone, including loan 
guarantees, by all of the IDA-only countries that do not currently 
qualify under the HIPC Initiative would be approximately $1 billion. 
This cost estimate assumes that all IDA countries qualify in FY 2008 
and would change depending on the year each country qualified for debt 
relief. These countries also owe approximately $32 billion in nominal 
debt to the World Bank and IMF and roughly $15 billion to the major 
regional development banks. While the bill is not explicit about 
whether negotiations on expanded debt relief should include comparable 
debt relief from other bilateral creditors, I note that the total 
official bilateral debt owed by potentially eligible countries under 
this bill is approximately $30 billion.
    While the bill calls for international financial institutions to 
fund debt relief from internal resources to the extent possible, the 
availability of such resources is very likely to be limited. Our recent 
experience with funding for debt relief under MDRI is a good example of 
what we are likely to encounter. We began those negotiations in 2004 
with a similar goal of seeking no additional donor resources, while 
providing increased debt relief to HIPC initiative countries from 
finances of the international financial institutions. However, there 
was no international support for this proposal. In the end, donors were 
required to compensate, dollar for dollar, for MDRI debt relief at the 
World Bank and African Development Bank. The U.S. is bearing about 20 
percent of the costs of MDRI at the World Bank and about 12 percent at 
the African Development Bank.
    It is uncertain, at best, whether other creditor governments would 
be willing to agree to additional debt relief of this magnitude, 
particularly if we are unwilling to provide additional funds. If 
negotiations for expanded debt relief were to follow our experience 
with MDRI, the U.S. would need to be prepared to make a significant 
contribution, likely at the expense of other development assistance 
priorities.
           continued financing needs for current initiatives
    The United States is far from making good on its commitments to the 
current debt reduction initiatives--which seek to help the poorest, 
most heavily indebted countries. The administration has continued to 
request, but has still not received, sufficient appropriations to fully 
fund U.S. bilateral HIPC debt relief to the Democratic Republic of the 
Congo. The U.S. also has an outstanding pledge of $75 million to the 
HIPC Trust Fund, which is needed to support HIPC debt relief at the 
regional development banks. U.S. support for debt relief under MDRI is 
funded through our contributions to the IDA and African Development 
Fund replenishments. However, we have consistently received less than 
our full request for these replenishments. The result is that, in 
fiscal year 2008, we anticipate the U.S. Government will have over $870 
million in arrears to the multilateral development banks, including 
$385 million to IDA alone. In fact, our arrears request this year is 
specifically targeted at fulfilling our commitment to MDRI.
                    targeting the correct priorities
    When we meet with developing countries, debt relief appears to be 
far down the list of their priorities. Indeed many of these countries 
see strengthening the environment in which the private sector can 
flourish and drive economic growth as their primary development 
challenge. This means improving the business climate, meeting 
infrastructure needs, integrating into the global economy, and 
strengthening financial sectors.
    To underscore what we at Treasury hear from our counterparts in 
many low-income countries, let me share with you a recent discussion 
that Secretary Paulson had with the Finance Ministers from six African 
countries. One minister noted that his President's top priority was 
increasing electricity generation. Another spoke eloquently about the 
costs that poor energy and transport infrastructure impose upon his 
country's ability to grow and create jobs. And all of the ministers and 
central bank governors asked Secretary Paulson to work with them to 
find additional ways to attract foreign investment to their countries. 
Secretary Paulson wants to find ways to shine a light on this core 
challenge in these countries. We believe that these issues, rather than 
debt relief, are the real priorities for spurring growth and poverty 
reduction in these countries.
                               conclusion
    Rather than embark on expanded debt relief, the United States 
should focus on three things. First, it should fulfill its commitments 
to current debt relief initiatives and meet our other multilateral 
commitments. Second, it should continue to provide direct development 
assistance to poor countries through bilateral and multilateral 
mechanisms aimed at increasing economic growth and reducing poverty. 
Finally, we need to find ways to work with countries to build their 
capacity to handle more open trade and investment.
    Thank you for your consideration of these issues. I look forward to 
working with you further to support our current debt relief efforts and 
to develop the best possible policies in this area. I welcome your 
questions.

    Senator Casey. Thank you very much. I know you will submit 
your whole statement for the record. I appreciate the summary 
you gave us.
    At this time, my problem is we have a vote that just 
started. What we will do is we will just adjourn. I will run 
over and vote. It should not take more than 8 to 10 minutes at 
the most I hope. So we will come back very shortly.
    Thank you.
    [Recess.]
    Senator Casey. Well, thank you very much. We are back. I 
was moving pretty quickly.
    First of all, Mr. Assistant Secretary, I wanted to review 
some of what you just spoke to us about. Could you just recite 
again what you think the three U.S. priorities should be? There 
were three. Fulfilling our commitments was the first one. If 
you can just walk through those again, I wanted to ask you 
about that in terms of this discussion.
    Mr. Lowery. Well, they were basically, first, to fulfill 
the commitments that we have already made in, frankly, the 
bills that we need to pay. Second is to focus our attention on 
other types of development assistance programs that we have, 
both bilateral and multilateral ones, to help spur economic 
growth. And third is basically work with countries to find 
better ways to build capacity so that they can actually attract 
more investment and open up greater trade routes.
    Senator Casey. And in terms of our current commitments, 
give me that number again.
    Mr. Lowery. To the multilateral development banks--the 
biggest one is the World Bank, but it is also the Inter-
American Development Bank, the African Development Bank--the 
number is roughly--by the end of this year, it will probably be 
about $870 million. And we also do have some requests in for 
other debt--part of that goes toward debt relief and part of 
that goes toward new assistance, new financial flows.
    Senator Casey. One of the arguments that is made in support 
of this legislation and, obviously, in support of the concept 
of further debt relief is that the so-called HIPC qualification 
criteria are unfair to a lot of countries. Would you respond to 
that?
    Mr. Lowery. When HIPC was begun, which was actually around 
1995 or 1996, there had been a number of debt relief 
initiatives over time that had been tried to try to get rid of 
this problem, and they frankly had failed. HIPC was a way to 
expand on that. The idea was to try to actually take the 
indebtedness of countries and take it down to a level that was 
considered sustainable by economists and so forth. No one is 
exactly sure, but it was based on a number of criteria about 
indebtedness levels. And the idea was that the debt was so high 
that you could do almost anything, if you were these 
countries--you could have great economic policies--you will 
never get out of it because you have this huge debt overhang. 
So HIPC basically reduced this down to a level which became a 
much more sustainable level.
    The MDRI initiative took it down even further to basically 
get rid of the debt for good, so to speak, and try to get the 
countries back on a path where they can get new assistance 
through grants and they would not get back into this kind of 
lend-and-forgive cycle. That is kind of what had happened for 
the HIPCs.
    The poor countries that were not HIPCs, which this bill is 
trying to address, basically had not gotten into these 
indebtedness problems, maybe from good policies on their part. 
Maybe nobody wanted to lend to them. I am not sure. But 
indebtedness is not their problem. That is not creating the 
overhang for them. What is their problem is they just have 
other areas that they need to address, and that is where we 
think that more direct development assistance--if you want to 
provide them money, give them a grant or work with them on 
building a better investment capacity.
    So a country like Bangladesh, which is a very poor 
country--the World Bank is going to provide Bangladesh 
something like $1 billion this year in new financial 
assistance, some in grants, some in very low concessional debt. 
But the idea is to give it financial flows so that they can 
address some of the problems that they have in that country.
    Senator Casey. I am going to speak kind of generally about 
this and get your reaction. As you look at the legislation as 
it is currently drafted, is it your position on behalf of the 
administration that the administration is unalterably opposed 
to it?
    For the sake of argument, let us just say the 
administration would support a new debt relief initiative. How 
would you construct it or how would you change what we have or 
what recommendations would you make? Or is it just the position 
that you do not think this initiative is worthy of legislation?
    Mr. Lowery. I guess with all due respect, in general we do 
not think that this is the right way to go. And we have thought 
about this a lot. Could we make some changes or tweaks or what 
have you? We think if Congress wants to focus on some of these 
countries, then let us focus on them and let us look at it 
through the different types of assistance vehicles that are out 
there that we could utilize. But the debt relief does not seem, 
to us, to be the best way to approach it.
    There are debt relief issues that we can work on and work 
with the Congress together that we can get at. Part of it is 
financing what we have already agreed to, as I have stated, but 
part of it is also there are ways that we can help with--there 
are facilities out there to help countries that have 
indebtedness problems to private creditors instead of to 
official creditors. There is something called the IDA buy-back 
program that we could actually get involved in, and I am happy 
to explain that program.
    Basically I think ``unalterable'' is probably a little bit 
strong, but I think that our view is that this bill is not the 
way that we should be going.
    Senator Casey. Now, if you look at--this is playing devil's 
advocate on my side. Even if you use the World Bank's debt 
sustainability framework, from what I know, 11 of the 24 
potential recipients of this aid under the Jubilee Act would 
have unsustainable debts even at the World Bank rather limited 
terms. I do not understand why those countries should not be 
eligible for some kind of debt cancellation.
    Mr. Lowery. Well, I guess a couple things. One is that we 
are actually kind of proud of the debt sustainability 
framework. At the start of this administration, when we started 
at that time candidate Bush or Governor Bush had supported 
President Clinton's initiative on doing debt relief for the 
poorest and most indebted countries. When he came into office, 
he said we should go beyond even what the Clinton 
administration did, and we did that through a couple means: 
One, deepen the debt relief, which we have seen, but also 
establishing a grants program. If you go back to 2001, the 
World Bank provided almost none of its assistance--actually it 
is less than 1 percent of all of its assistance was provided in 
grants form. Today it is around 40 percent. So that was 
something that really was a Bush administration lead.
    The other thing we did was actually set up the debt 
sustainability framework. How do you avoid this problem from 
happening again? We do not want to continue to do this every 10 
years. And so the debt sustainability framework is based on 
basically stress-testing. How do you stress-test an economy so 
you can see if it is going to get into indebtedness problems?
    If you look at the countries that are in the Jubilee bill, 
they basically, in some respects, have a green light, yellow 
light, red light system. The red light is like you could have 
some indebtedness problems. Of the countries that we have seen, 
if you dismiss the small island nations, there are four 
countries that are actually heavily indebted: Kyrgyz, 
Tajikistan, Burma, and Zimbabwe. Our view is look, how indebted 
are they really? The only one of them in ``debt distress'' 
through the debt sustainability is Burma. We are obviously not 
going to be giving debt relief to Burma, or at least to this 
government. So is this really what we want to be doing?
    So our view is that given the scarce resources that are 
there, basically we should be doing this through new 
assistance, making sure that countries do not get into 
indebtedness problems--that is for debt sustainability--and 
really working on how do you diversify and work on these 
economies so that they do not have these problems in the 
future.
    And let me just give one example. I have gone on too long, 
but let me give one example.
    The country of Rwanda actually has gotten debt relief, 
significant debt relief. It is possible that they are going to 
get back into indebtedness problems if people are not very 
careful. It is not because they are taking on a lot more new 
debt. It is because their economy is so undiversified that 
their export base is tiny. So they do not have any revenues. So 
basically they are not going to be able to pay off even the 
small amount of debt that they do have. So basically debt 
relief can be helpful, but it is usually helpful when countries 
have real indebtedness problems.
    Senator Casey. And if you look at this issue from the 
perspective of the United States, one of your concerns is that 
we are going to be shouldering too much of the burden.
    Mr. Lowery. It is not that we will be shouldering too much 
of the burden. I mean, we should shoulder a lot of the burden. 
We are the wealthiest country in the world. We are the biggest 
country in the world. And we do shoulder a lot of the burden in 
the indebtedness issues.
    What my worry is that we are not doing it. We have stepped 
up and put these policies in place, but we are continuing to 
run arrears and they have grown over a long period of time. So 
it is not something that is recent. And if we do not address 
that, we are not going to make good on our commitments in debt 
relief, let alone on providing development assistance to the 
poorest.
    Senator Casey. From my point of view, I think that in terms 
of the concern about countries falling back into a cycle of 
indebtedness or kind of returning to where they were, I think 
the provisions of the Jubilee Act try to address that concern 
by requiring--in terms of basic requirements, we require the 
country to allocate the savings from debt cancellation toward 
poverty-reducing expenditures. We require that policy reforms 
be developed to ensure that the savings from debt cancellation 
are redirected to poverty reduction initiatives. We also 
require that an annual report is produced. So I think that a 
lot of the concerns about a country kind of turning back around 
in the wrong direction, so to speak, as it pertains to debt, 
are contemplated.
    But what is your sense of that?
    Mr. Lowery. No. I think that those parts of the bill we 
have general support for. One of the really sound things of the 
debt relief initiatives has basically been to work on making 
sure that there is sound economic policy, so a macroeconomic 
framework, and then that they use the resources largely for 
poverty reduction programs. And if you look at 2000 to 2006, I 
think, on the countries that receive debt relief, their poverty 
reduction expenditures have gone from roughly 6.5 percent of 
GDP to about 9.5 percent GDP, so about a 3-percent increase. At 
the same time, debt service has gone from about 4.5 percent of 
GDP down to a little less than 2 percent of GDP. So it is not 1 
for 1, but it has actually been a little bit better than that, 
which is a good thing. So I think that that part of the bill we 
basically roughly agree with.
    The issue, again, is can you do the same thing by just 
providing it through a grant as opposed to getting into debt 
reduction problems for some countries that are actually trying 
to actually be good payors and be good debtors so that they can 
get other types of credit. I mean, that is kind of our issue.
    But I think that part of the bill is probably a very sound 
part of the bill.
    Senator Casey. Would it be unfair to say that your--not 
you, but the administration's--perspective or approach to this 
challenge would be grow your way out of the problem as opposed 
to dedicating dollars to debt reduction? Is that an unfair 
characterization?
    Mr. Lowery. I think that is a little unfair. I think that 
this administration has stood up not only for debt relief for 
the countries that are poorest and most indebted, but we have 
also stood up and put in place good programs to help fight 
against HIV/AIDS, to help fight against malaria, to help fight 
against hunger. And actually the Millennium Challenge 
Corporation, which I know probably the most about, is to help 
fight for economic growth and development. And those are 
programs to provide grant assistance to sometimes specific 
activities and sometimes to help increase economic growth. So 
we are not against aid as a catalyst. We are saying that debt 
relief does not necessarily have to be the only catalyst out 
there. And that is one of our worries about the bill.
    Senator Casey. I would not ask you to walk through all 24 
of these countries in terms of our support or help for them. 
And this is I guess more along the lines of amplifying the 
written record, which I hope you would do on this question. But 
tell me what the administration is currently doing as it 
pertains to these 24 identified countries and tell me also what 
the administration plans to do. In other words, if you are 
saying that this particular strategy for debt relief or any 
kind of support is not the way to go, what do we say to these 
countries as it pertains to what this administration is doing, 
or what do we say to the world in terms of why a debt relief 
initiative does not make sense for these 24 countries? And some 
of that I know you have to amplify the record.
    Mr. Lowery. Sure. Well, in terms of the countries--by our 
calculations, from 2001 to 2006, the United States has provided 
this group of countries nearly $5 billion in official 
development assistance. Some of that comes from the MCC. Some 
of that comes from USAID. Just real quick just looking, five of 
these countries are eligible for MCC and are scheduled to get 
over $1 billion of new financial assistance.
    So it is not that we have anything against these countries. 
I mean, we want to work with these countries. The MCC is, 
obviously, about working with the countries that are putting in 
place the best policies and rewarding them for that. Some of 
the USAID money goes toward countries because they have big 
pockets of poverty, big problems of poverty, and so how do you 
help work with those countries.
    So we are not against working with these countries. I mean, 
in fact, the United States is the biggest supporter of the 
World Bank. The World Bank is providing these countries--I have 
a figure here--basically about $4 billion this year to these 
countries. So it is not that there are not development 
assistance flows going to them, and the United States is one of 
the big supporters of those flows.
    Senator Casey. What were the years you cited?
    Mr. Lowery. 2001 to 2006.
    Senator Casey. So you are saying from 2001 to 2006, the 
United States gave $5 billion to these 24 countries in total 
and that 5 of the 24 are currently eligible for MCC?
    Mr. Lowery. That is correct. In other words, MCC money 
really has not started being disbursed. It is just starting 
now. So that money would not be counted in what we were talking 
about.
    Senator Casey. I wanted to move to another aspect of this 
using the United Kingdom as an example. I mentioned this before 
about Prime Minister Gordon Brown. Prime Minister Brown and his 
government have, obviously, long supported debt relief. He 
stated that in 2006 that all 67 of the world's poorest nations 
should secure debt relief. The U.K. has already begun to 
deliver debt service relief for the U.K.'s share of the debt 
payments made by nine qualifying, non-HIPC poor nations in the 
World Bank.
    Here is the question. How does Treasury view the U.K. 
initiative to expand debt relief beyond HIPC to well-governed 
countries that need it to meet the U.N. Millennium Development 
goals? What is your sense of that?
    Mr. Lowery. I do not know a lot about their initiative, but 
I think that it is just a different way of providing financial 
flows. I mean, there are two ways you could look at it. One is 
you could say, OK, we are going to forgive these debts that are 
coming due to us and so is that in addition or are you going to 
provide them new financial assistance or what? Because it is 
just basically just reversing the cash flow effect. You just do 
not pay. So instead of getting a grant, you basically just do 
not pay. So that is one way of looking at it, and that is, I 
think, a good way of looking at it.
    A bad way of looking at it is basically they provided that 
debt relief and now that country pays a different creditor. I 
mean, one of the reasons you try to do debt relief together is 
because you are all taking the pain together. Right? You are 
all the creditors, and everybody takes the pain of not being 
paid back. But that is so one creditor is not in a better 
position than another creditor. So that is why you do it 
together. But it is obviously difficult to do that when 
countries do not have indebtedness problems.
    Senator Casey. To go back to the U.K. example--and I really 
may not have the opportunity to fully address it today, but for 
the purposes of this record, if you can go back and analyze the 
U.K. strategy on this as it contrasts with the 
administration's, I think that would help the record.
    Mr. Lowery. OK.
    Senator Casey. Just a couple more because I know we want to 
keep moving. This relates to conditionality in debt relief.
    The current debt relief program requires nations to meet a 
strict series of economic policy requirements before receiving 
debt cancellation. Now, everyone agrees that debt cancellation 
should be provided in ways that ensure that funds released get 
to the poorest people with full transparency and 
accountability. But many of the other conditions the IMF and 
the World Bank insist on attaching to debt relief are more 
controversial, as you know.
    A growing number of analysts, including a recent study by 
the Center for Global Development, have criticized the IMF in 
particular for being overly stringent in the requirements that 
poor countries have low inflation; No. 2, that they pay down 
domestic debt; No. 3, that they limit public spending, 
including public sector salaries for doctors and teachers; and 
finally, that they maintain high currency reserves.
    The impact of these policies in several countries meant 
that countries have been unable to spend aid or debt relief 
money on poverty reduction. In nations where robust public 
sector spending is needed to ramp up investments in schools, 
hospitals, and clinics, these policies are obviously of great 
concern.
    A question about Treasury. Does Treasury have concern about 
the impact of overly restrictive IMF policies on indebted 
nations' ability to allocate aid and debt relief for poverty 
reduction?
    Mr. Lowery. I mean, this is an important question and 
debate that has been going on for a while I think.
    I do not know the Center for Global Development's study. So 
I cannot comment on that.
    I will comment on if they are saying that inflation is a 
good thing, then they are wrong. Inflation is one of the worst 
taxes on poor people that there is in the world. I assume they 
are not saying that, but inflation is a bad problem for poor 
people because they have no way to address it.
    What economic conditionality gets into is a couple 
different things. One is trying to establish a sound 
macroeconomic framework, which is basically about putting in 
place decent monetary policies and good fiscal policies. Now, 
there are times where the IMF or the countries in question or 
maybe even the United States sometimes go too far, and they are 
being too restrictive. But most of the time, I think the idea 
is establish a good macroeconomic framework. This will help 
provide the basis for greater economic growth so that you have 
a sound fiscal position and you are able to spend your money 
where you need to spend it.
    So the IMF is worried about the fiscal envelope, the 
overall envelope of what you can spend your money on. And the 
IMF needs to be careful. It cannot get too down in the details 
and the weeds about where countries should be spending their 
money. The countries need to make some of those decisions 
themselves. But the IMF has to be worried about the overall 
envelope because it has to be financed, and finance will come 
through a variety of different means for poor countries, 
usually from a development assistance perspective. So I think 
that that is what the IMF tries to get at.
    So it is probably important to have good economic 
conditionality and sound macroeconomic frameworks. There are 
criticisms and I think that the IMF and others that do this 
need to pay attention to those criticisms. But that does not 
mean that they are wrong to try to work with countries on those 
types of frameworks.
    Senator Casey. We are having a philosophical difference 
here. I am trying to see it from both vantage points.
    When you said before that inflation is not good for poor 
people, I would agree that inflation is not good for anyone, 
but I do not think debt is either. I just do not see how an 
initiative that helps almost 25 countries deal with the burden 
of debt--I just do not understand how the administration does 
not think that is a good idea. But we have a basic difference I 
guess.
    Mr. Lowery. Well, let me just say that, first of all, I 
will respectfully disagree with you on one thing. Debt is not 
evil. We all have to find ways of financing things, whether it 
is an individual getting a mortgage or you are in a poor 
country and you are trying to finance an infrastructure project 
or what have you. So debt can be a good thing. It is a way of 
getting finance. Where debt becomes a problem is when countries 
have bad debt management from a borrower's perspective or 
people are overlending.
    So those are things that we have been trying to address 
through a variety of means. Besides getting rid of the debt, 
also let us make sure that countries do put in place good 
economic policies, they actually have debt management programs. 
The Treasury Department works in 11 or 12 of these countries 
basically on debt management capacity-building. We have worked 
with the export credit agencies to try to basically put 
guidelines down so that they do not continue to lend riskily, 
so to speak, or frankly, ridiculously to these countries so 
that they get back into these indebtedness problems.
    But debt itself is not a bad thing. It is just that it has 
to be handled correctly and managed correctly, and that is why 
it is very important to have debt management shops in most 
countries. We have one, obviously, in the United States. Most 
countries have them. Unfortunately, a lot of them got into 
trouble and we have tried to get rid of that problem. And I 
think largely we have gotten rid of that problem.
    Senator Casey. I do not think anyone would make the case 
that debt is intrinsically evil, but it can lead to other 
problems.
    Let me ask you this. This is more of a comparative 
question. You may have an example; you may not. If you can 
summarize one for the record, it would help.
    Do you have an example of a poor country with heavy 
indebtedness, say, in the last decade or maybe more than that? 
Let us say the last 25 years where kind of both strategies were 
tried or something close to the strategy you are outlining the 
administration favors versus the strategy contemplated by the 
Jubilee Act where a debt relief strategy failed and your 
approach to it was successful. Do you have any particular 
examples of that?
    Mr. Lowery. That is a good question, I guess. A lot of the 
countries that we have focused on over time have shown success, 
were very well indebted. I guess one country that has been 
successful and has not gotten any debt relief is a country like 
Vietnam. I am just looking at the list of countries. Vietnam 
has basically gotten provided to it new assistance and some 
capacity-building, but it has never received any debt relief to 
my knowledge. And it has actually been largely successful at 
attracting investment and actually growing its economy.
    A lot of the countries, the poorest countries--many of 
them--as I mentioned in my testimony, 33 countries have gotten 
that debt relief. Some of them have been successful. We see 
good success with countries like Mozambique, but we also see 
countries like Cote d'Ivoire which have not been successful. So 
debt relief, as you stated very clearly, is not a panacea.
    So debt relief can be a good tool to work with with some 
countries. So we are not against debt relief by any stretch of 
the imagination. What we are saying is, is this the right tool 
at this time for these countries? And that is where we 
disagree. We just do not think that that is the case. But 
overall, we think debt relief can be a very valuable tool.
    Senator Casey. In your experience--you can generalize in 
doing this, but it is helpful. Tell me how most of these 
countries end up in the kind of debt we are seeing. I mean, 
some of them have the antecedents--or the predicate for this 
debt is you might have a dictator who has total control and 
does not manage the economy very well, does not manage the 
government very well, but has no opposition, no accountability. 
But describe for me the antecedents for the kind of debt we are 
talking about with regard to these 23 countries or the others 
we have talked about. I mean, kind of the textbook case.
    Mr. Lowery. Sure. Our view is for these 23 countries, most 
of them do not indebtedness problems. They actually can pay 
what they have. They are not actually in high numbers. If you 
look at most of the numbers, they have 50 percent, 60 percent, 
or something like that of exports, whereas in the HIPC 
countries, we were talking about countries that had literally 
1,000 percent of exports was their debt stock, 500 percent of 
exports was their debt stock. We are talking about now 
countries that have 50 to 100 percent, and the 100-percent ones 
are the ones that at least somewhat have troubles.
    The way that I have noticed it was that there was a lot of 
lending that was done in the 1970s and the 1980s. Some of it 
was petrodollar recycling and some of it was the aid agencies 
had not moved to a grants basis. They were still doing things 
on a loans basis. The international financial institutions were 
doing things on a loan basis. So these countries kind of 
stacked up a lot of debt. Then so what would happen is 
basically they said, oh-oh, we cannot handle this, so let us 
reschedule that debt, not reduce it, reschedule it. Well, 
basically when you reschedule debt, it is like a snow plow. You 
are basically just pushing out the debt, and so it grows.
    And that kind of happened through the eighties and a little 
bit into the nineties, and that is when everybody just said 
this is crazy. We have got to get rid of this. So that is where 
you saw a series of initiatives over time in the nineties to 
start getting rid of the debt reduction. And it started really 
reducing all the bilateral official sector credits down, a lot 
of export credit agencies and things like that. And that still 
was not good enough, and that is when HIPC came in and that was 
to actually get at the multilateral development banks, the IMF, 
et cetera. So that is kind of how it has worked over time.
    But remember, there is a big difference between having huge 
amounts of debt that is completely unsustainable and then 
countries that basically just have a little bit of debt that 
they are dealing with. And that is kind of the difference, we 
think, between the debt relief initiatives we have seen over 
the last 10 years and this bill.
    Senator Casey. Thank you very much. We are going to move to 
our second panel, but I appreciate your testimony.
    Mr. Lowery. Thank you very much, Senator.
    Senator Casey. Thank you.
    We will go to our second panel. Our second panel of 
distinguished witnesses, all of whom have spent a significant 
portion of their careers working to better understand the 
proper role of debt relief in helping the world's poorest 
nations reach their development goals. As will become quickly 
evident, our witnesses hold divergent perspectives on the value 
of debt relief, and so I look forward to a robust and healthy 
debate.
    I am also interested in your specific views on the Jubilee 
Act legislation which is before the Senate, your 
recommendations on how we can improve this bill, and anything 
else you think is relevant to this discussion.
    I will introduce all of our witnesses at one time, and then 
we will go back for testimony. First of all, Dr. Nancy Birdsall 
is president of the Center for Global Development, an 
organization she helped found at the beginning of this decade. 
She has previously held senior positions at the Inter-American 
Development Bank, the World Bank, and the Carnegie Endowment. 
Dr. Birdsall is considered one of the world's leading experts 
on debt relief and we are honored to have you here with us 
today, Doctor. Thank you.
    Next, Mr. Gerald Flood is the counselor for the Office of 
International Justice and Peace for the United States 
Conference of Catholic Bishops. Mr. Flood previously served 
with the World Bank and has played an instrumental role in 
helping move forward the goals of the Jubilee debt relief 
movement, and we appreciate your presence here today, sir. 
Thank you.
    And finally, Dr. Peter Henry is a distinguished professor 
of international economics at Stanford University's Graduate 
School of Business. Dr. Henry, a former Rhodes scholar--I guess 
you are always a Rhodes scholar. [Laughter.]
    Has done extensive academic research on debt relief and its 
connection to economic growth and development. And we look 
forward to hearing your views on this topic this afternoon.
    For the interest of time and for a real dialogue with our 
witnesses, I would ask each of you to limit your oral statement 
to 5 minutes each. The remainder of your prepared statements 
will be formally entered into the record.
    So we will begin with you, Dr. Birdsall. Thank you very 
much.

 STATEMENT OF DR. NANCY BIRDSALL, PRESIDENT, CENTER FOR GLOBAL 
                  DEVELOPMENT, WASHINGTON, DC

    Dr. Birdsall. Thank you very much, Senator Casey. It is a 
privilege to have this opportunity.
    I would like to make four points, and these points are set 
out in the written testimony.
    First, debt relief is a highly efficient form of aid and 
has clearly helped foster social progress and economic growth 
in low-income countries. I think we have heard a lot about the 
latter point already today, that debt relief is associated with 
an increase in health and education spending as a percentage of 
GDP. So that increased spending cannot be associated solely 
with growth, although we cannot be sure it was debt relief per 
se.
    But more important in my view are two points. One is that 
debt relief also seems to be associated with an easing of the 
macroeconomic constraints that in the past pushed countries 
into difficulties in terms of their fiscal spending and so on. 
And it is that macroeconomic management that is better that can 
be attributed in part to the recent growth, especially in 
Africa.
    And even more important than that, why I think debt relief 
is a good thing to do in general is that it is the most 
efficient form of aid. And I would like to emphasize this 
point, that for poor countries that are capable of national 
planning and sound management, the direct support provided by 
debt relief offers a cheaper, quicker, and more effective 
alternative to traditional aid, including traditional aid from 
the U.S. Government which, as is the case with many donors, 
requires endless negotiations, requires implementing hundreds 
of different projects and programs, and has very high 
transactions costs for countries that are already managing 
their economies reasonably well.
    The second point I would like to make you have already made 
yourself, Senator Casey. Debt relief is not a panacea. It does 
not in itself generate growth or guarantee an escape from 
poverty. There is no question that the fundamental issue in 
these countries has to do with their own political and economic 
institutions. And debt relief, even the latest round which, of 
course, extended the initial rounds of HIPC in the mid-1990s, 
is still small and is no substitute for traditional aid.
    I have an example in the written testimony that struck me 
in the case of the 15 African HIPCs that benefited from the 
MDRI. For the World Bank, that saved them, as a group, $19 
million in debt service in 2004-05. That same year, they 
received almost $200 million in new aid or new grants from the 
World Bank and nearly $1 billion in total aid. So if we are 
talking about the relative value in dollar terms of debt 
relief, it has been and it will continue to be small.
    Third, the Jubilee Act under consideration, despite its 
merits, raises several concerns, and let me mention three very 
quickly. Some of them were raised in the testimony of Secretary 
Lowery.
    First, some countries that might be eligible are making 
good efforts through prudent borrowing and debt management to 
obtain access to private capital markets at home and abroad. 
This legislation, were it to become policy, might tempt them 
because of political pressure at home to opt in. There are, of 
course, a few countries like Bangladesh and Vietnam which would 
almost certainly not opt in, but there are others, including 
Mongolia, where this sort of approach does not strike me as the 
ideal way to help.
    A second concern is that raised particularly by Secretary 
Lowery that the legislation--well, let me put it a different 
way in terms of the problem of arrears. My view is that the 
legislation risks further undermining already weakened U.S. 
credibility with its traditional allies in the donor community. 
Why is that? It assumes and calls for internal financing of new 
debt relief obligations by the World Bank or through the World 
Bank and the other multilateral banks that are owned in common 
with our allies, other nations in Europe. And this it does at a 
time when the United States, as the Secretary pointed out, has 
not fulfilled its own commitments to those institutions. So you 
discussed with him some of the problem of arrears. What I would 
like to emphasize here is that it seems inappropriate for the 
United States at this point in time to be calling on our allies 
to join with us in reducing debt when we have not finished 
dealing with our own commitments to the institutions through 
which we are trying to do more debt relief.
    My third concern has to do with the point that you raised 
yourself, and I think you pointed out some of the 
counterarguments. But the bottom line is that in the case of 
the World Bank and the other banks, debt relief could end up 
robbing Peter to pay Paul, to use the expression you did. That 
is, financing debt relief for some poor countries on the backs 
of other poor countries.
    This is also a problem in the World Bank and the others 
because it may end up financing debt relief against the wishes 
of middle-income countries who are also members of those 
institutions who will object because of their view, which is 
reasonable, that the additional costs, if they are not covered 
by contributions from the United States and the Europeans and 
so on, will end up, because of the financial policies of the 
banks, leading to higher interest charges on their loans from 
the hard window. So this is a political problem in terms of our 
maintaining relations, being a credible member of these 
institutions, maintaining our good relations with countries 
like China, India, Brazil, Turkey, and so on who borrow from 
those banks.
    So I want to make quickly a fourth point. I am afraid I may 
have used my 5 minutes, but I would urge you----
    Senator Casey. You are OK.
    Dr. Birdsall [continuing]. And your committee to consider a 
better Jubilee bill that would help poor countries minimize 
debt in the medium term and help them better manage debt.
    The first thing I would say in this regard is the bill 
could call on the U.S. Treasury to work with the World Bank on 
improving and making more transparent the debt sustainability 
framework. It is correct that that framework is something for 
the United States to take pride in in terms of its leadership 
in moving it along, but it is still extremely opaque.
    And one step that would simplify matters is to simply say 
for very poor countries that clearly have not grown over 
several decades in any significant way because their per capita 
income is still very low, just give them grants in the future 
from now on, and that will help address the problem otherwise 
of a buildup in debt.
    Second, the legislation could encourage the Treasury to 
work with its counterparts in the World Bank and the 
International Monetary Fund to develop a facility to help poor 
countries cope with shocks to their economies. We see right now 
the cost to oil importing and food importing countries 
associated with the sudden price hikes in food in the secular 
movement upward in the oil price.
    These countries also tend to be extremely vulnerable to 
natural disasters. A mechanism to help them cope with that kind 
of volatility in the debt area would be to have a facility that 
covered their debt service, their cash flow problem in the 
aftermath of these disasters for at least limited periods of 
time. This would make it possible for countries, which are 
borrowing in a prudent way and which should be able to borrow 
in order to make investments in order to grow, given that they 
are well-managed economies, this would make it possible for 
them at the margin to borrow a little bit more a little bit 
more reasonably without the risk of falling into the debt trap 
that we see happened in the past for many countries.
    Third, I would suggest that the bill might be set up to 
clarify that the United States could unilaterally write off the 
U.S. bilateral debt of eligible IDA countries, or such a 
provision should be triggered only when the United States has 
fulfilled its existing international commitments.
    Let me conclude by urging the committee and the Congress in 
general to help translate what is this, I think, great interest 
of the public, the energy and passion of the public in this 
country, that supports debt relief--let that be channeled into 
more ambitious legislation and not only for debt relief itself, 
but for a complete overhaul of the U.S. foreign assistance and 
development programs along the lines that were outlined by my 
colleague, Steve Radelet, yesterday in testimony before the 
House Foreign Affairs Committee.
    Thank you very much, Senator Casey.
    [The prepared statement of Dr. Birdsall follows:]

Prepared Statement of Dr. Nancy Birdsall, President, Center for Global 
                      Development, Washington, DC

                              introduction
    Senator Casey, Senator Lugar, and distinguished members of the 
committee, I am delighted to have the opportunity to share with you my 
perspectives on international debt relief initiatives.
    As many of you know, the Center for Global Development was founded 
in 2001 as an independent, nonpartisan think tank dedicated to 
improving the policies of the rich countries as they relate to the 
world's poor countries and poorest people. What you may not know is 
that it was a film growing out of the Jubilee debt movement, which 
portrayed the burden of debt in the world's poorest countries, that 
inspired my cofounder and the Center's principal benefactor, Edward W. 
Scott, Jr., that the rich world could do better for the poor--including 
through better U.S. debt and aid policy. One result is that U.S. debt 
policy has been a core issue for CGD since its inception.\1\
---------------------------------------------------------------------------
    \1\ CGD's first book, ``Delivering on Debt Relief: From IMF Gold to 
a New Aid Architecture'' by president Nancy Birdsall and John 
Williamson, a senior fellow at the International Institute for 
International Economics, helped to frame the discussions on the future 
of the Heavily Indebted Poor Countries Initiative and how it is 
financed (see http://www.cgdev.org/content/publications/detail/2922/). 
The Center's work played a catalytic role in the historic debt relief 
deal between Nigeria and the Paris Club of creditors in October 2005, 
resulting in Africa's biggest ever debt reduction.
---------------------------------------------------------------------------
    I would like to make four points.
First: Debt relief is a highly efficient form of aid and has clearly 
        helped foster social progress and economic growth in low-income 
        countries
    The U.S. and other donor countries have supported debt relief for 
low-income countries because lower debt burdens create fiscal space to 
raise spending on social programs and public infrastructure, improving 
lives while investing in long-term sustainable growth.
    Debt relief, moreover, is a hyperefficient way to deliver aid. For 
poor countries that are reasonably capable of national planning and 
sound economic management, the direct support provided by debt relief 
offers a cheaper, quicker, and more effective alternative to 
traditional aid, which in many poor countries requires negotiating and 
implementing hundreds of different projects and programs with 50-plus 
donors, each with its own standards and reporting requirements. Debt 
relief encourages poor country ownership of development strategies and 
makes poor country governments directly accountable to citizens for 
their budget priorities and program implementation, instead of to 
international creditors.\2\
---------------------------------------------------------------------------
    \2\ See Nancy Birdsall and Brian Deese, ``Delivering on Debt 
Relief,'' Center for Global Development, April 2002, available at 
http://www.cgdev.org/content/publications/detail/2862/.
---------------------------------------------------------------------------
    The results of past debt relief have been encouraging. Resources 
freed up from annual debt payments in the group of heavily indebted 
poor countries, or HIPCs, are associated with substantial increases in 
recipient governments' own spending on health, education, water, roads 
and other public infrastructure.\3\ Also noteworthy though less 
remarked, the increased fiscal space due to debt relief (along with 
recent faster growth and recent stability in HIPC countries) has 
clearly played a role in helping low-income countries sustain sound 
macroeconomic programs, by permitting reductions in fiscal deficits and 
accumulation in some cases of reserves.\4\ It is the resulting price 
stability and investor confidence that underline recent growth of more 
than 5 percent in many countries, including in sub-Saharan African 
countries that have benefited from debt relief programs.
---------------------------------------------------------------------------
    \3\ See ``Highly Indebted Poor Countries (HIPC) Initiative and 
Multilateral Debt Relief Initiative (MDRI)--Status of Implementation,'' 
prepared by International Development Association and International 
Monetary Fund staff, September 2007, available at http://
siteresources.world
bank.org/INTDEBTDEPT/ProgressReports/21656521/
HIPCProgressReport20070927.pdf.
    \4\ Reductions in debt service from 10 to 5 percent of GDP have 
been associated with increases in public investments by as much as 1 
percent of GDP (see Benedict Clements, Rina Bhattacharya, and Toan 
Nguyen, ``External Debt, Public Investment and Growth in Low-Income 
Countries,'' IMF Working Paper 03/249, 2003).
---------------------------------------------------------------------------
Second: Debt relief itself is not a panacea
    Debt relief alone does not generate growth or guarantee an escape 
from poverty.\5\ Debt relief and aid can help support countries 
struggling to develop their own more accountable political and economic 
institutions--but it is those institutions and a country's own policies 
that ultimately matter for generating sustained private sector-driven 
growth and shared development.
---------------------------------------------------------------------------
    \5\ See Todd Moss, ``Will Debt Relief Make a Difference? Impact and 
Expectations of the Multilateral Debt Relief Initiative,'' Center for 
Global Development Working Paper Number 88, May 2006, available at 
http://www.cgdev.org/content/publications/detail/7912/.
---------------------------------------------------------------------------
    Nor has, or should, debt relief be considered a substitute for 
traditional aid programs. New aid has and will continue to be the main 
vehicle for assistance. In 2004, for example, under the Multilateral 
Debt Relief Initiative, 15 African HIPCs paid on average $19 million in 
debt service to the World Bank. That same year, they received $197 
million in new World Bank aid and nearly $1 billion in total aid.\6\
---------------------------------------------------------------------------
    \6\ See Todd Moss, ``Will Debt Relief Make a Difference? Impact and 
Expectations of the Multilateral Debt Relief Initiative,'' Center for 
Global Development Working Paper Number 88, May 2006, available at 
http://www.cgdev.org/content/publications/detail/7912/.
---------------------------------------------------------------------------
Third: The Jubilee Act under consideration, despite its merits, raises 
        several concerns
    The latest Jubilee Act for Expanded Debt Relief and Responsible 
Lending has good language and the right overall intent regarding odious 
debt, vulture funds, and prudent post-debt relief lending. However, I 
have several concerns about the latest legislation.
    First, some countries who might be eligible are making good efforts 
through prudent borrowing and debt management to obtain access to 
private capital markets at home and abroad. Were this legislation to 
become policy at the international level as it is now structured, it 
could create political pressure within those countries to opt in 
against their own long-term interests. Bangladesh and Vietnam would 
almost certainly not opt in anyway, for this reason. Mongolia and other 
countries in the future might. I am not confident this kind of ``help'' 
is ideal.
    Second, the legislation risks further undermining already weakened 
U.S. credibility with its traditional allies in the donor community. It 
assumes and calls for internal financing of new debt relief obligations 
by the multilateral banks that are owned in common with other nations 
at a time when the U.S. has not fulfilled its own commitments on 
existing debt relief programs and to the multilateral development banks 
themselves. (As committee members will know, the FY08 budget cuts 
slashed our current debt relief obligations from $200 million to $30 
million to offset other accounts, and the U.S. still has close to $1 
billion in outstanding arrears to the World Bank and other multilateral 
development banks ($385 million to the International Development 
Association of the World Bank and a total of $872 million to the 
multilateral development banks).
    Finally, the current language in the bill, because it relies on 
internal financing by the World Bank and multilateral development banks 
of any new debt writeoffs, appears and could end up robbing Peter to 
pay Paul--that is financing debt relief for some poor countries on the 
backs of other poor and relatively poor countries. As in the case of 
the Inter-American Development Bank (IDB) financing of the Multilateral 
Debt Relief Initiative (MDRI), it may ultimately be other low-income 
countries that indirectly pay the cost in the form of reduced overall 
availability of concessional money. In the case of the multilateral 
banks in general, their internal financing without compensating 
contributions from the U.S. and other donors may mean that ultimately 
all developing country borrowers pay somewhat higher interest charges 
on standard loans to ensure prudential standards (which are admittedly 
highly conservative) are met.
Fourth: Consider a better Jubilee bill to help poor countries minimize 
        and better manage debt
    I urge the committee to continue to improve this legislation, with 
an eye to moving it forward only when the Congress has passed 
appropriations to fulfill the current arrears noted above. How might 
the bill be improved?
    First, the bill could call on the U.S. Treasury to work with the 
World Bank and the other multilateral development banks on development 
and application of a simplified and more transparent approach to 
judging the ability of poor countries to borrow in the future (the 
``debt sustainability framework''). For example, countries with per 
capita income of as little as $500 have clearly not managed sustained 
past growth for one reason or another. It would make sense to provide 
only grants, not loans, to these countries.\7\
---------------------------------------------------------------------------
    \7\ See Nancy Birdsall, Devesh Kapur et al., ``The Hardest Job in 
the World: Five Crucial Tasks for the New President of the World 
Bank,'' Center for Global Development, June 2005, available at http://
www.cgdev.org/content/publications/detail/2868.
---------------------------------------------------------------------------
    Second, the legislation could encourage the U.S. Treasury to work 
with its counterparts in the World Bank and International Monetary Fund 
to develop a facility, possibly at the IMF, that would provide 
temporary financing to relieve debt service burdens in the case of 
shocks to low-income countries' economies beyond their own control.\8\ 
Low-income countries face much higher risks of costly natural disasters 
and terms of trade and other shocks (recent price hikes for oil and 
food may be examples that apply to oil and food importers, though there 
is a question of whether the price increases are temporary or more 
permanent) than does the U.S. and other OECD countries.\9\ Such an 
insurance approach would help allow low-income countries with good 
growth prospects to borrow reasonable amounts on reasonable terms, 
while minimizing the risk of a new round of debt relief in the future 
due not to their own poor risk management but bad luck. If structured 
carefully, it would also contribute to the kind of confidence in the 
stability of poor countries that is vitally important to private sector 
development and growth.
---------------------------------------------------------------------------
    \8\ See Nancy Birdsall and Brian Deese, ``Delivering on Debt 
Relief,'' Center for Global Development, April 2002, available at 
http://www.cgdev.org/content/publications/detail/2862/.
    \9\ See Table 1: Volatility of GDP, by region, and Table 2: Terms 
of trade volatility and shock frequency, 1975-2005 for data on the 
heightened vulnerability of low-income countries to trade volatility 
and shock frequency (tables attached at end of document).
---------------------------------------------------------------------------
    Third, the bill could allow for the U.S. to unilaterally write off 
the U.S. bilateral debt of eligible IDA countries; such a provision 
could be triggered once the U.S. has fulfilled its existing 
international commitments.
    With these modifications, a Jubilee bill would be a mechanism to 
effectively channel the strong public support for debt relief into 
demand for a better structured, overall approach to debt relief and 
related initiatives that the U.S. and other donors could take to help 
low-income countries.
                               conclusion
    I am delighted to see the commitment of the U.S. Congress to debt 
relief and the robust support from American religious leaders and other 
advocates. I support debt relief from the U.S. in principle for good 
performing countries as an efficient and effective mechanism for 
helping countries create the fiscal space to increase spending on 
social programs and other investments necessary to improve lives and 
create long-term sustainable growth.
    However, I hesitate to endorse this bill as currently structured, 
and indeed any bill for new debt relief, until the existing arrears on 
U.S. commitments to debt relief and the international institutions have 
been fully funded.
    Finally, I urge the committee and other Members of Congress to help 
translate the public interest and support for debt relief into more 
ambitious legislation--not just for debt relief itself but for a 
complete overhaul of U.S. foreign assistance and development programs--
along the lines outlined by my colleague, Steve Radelet, in testimony 
before the House Foreign Affairs Committee yesterday.\10\ I hope that 
the next administration, together with the Congress, will find a way to 
reflect Americans' growing commitment to better lives in poor countries 
not only in debt relief programs, which are reaching their limits in 
any case, but via a broader set of development-friendly policies 
consistent with our national values and our interest in global as well 
as American security and prosperity.
---------------------------------------------------------------------------
    \10\ See Steve Radelet, ``Seizing the Moment for Modernizing U.S. 
Foreign Assistance Reforms: Testimony for the House Committee on 
Foreign Affairs,'' Center for Global Development, April 23, 2008, 
available at http://www.cgdev.org/content/opinion/detail/15863/.





    Senator Casey. Thank you very much.
    Mr. Flood.

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

    Mr. Flood. Thank you very much, Senator Casey, and I 
appreciate the opportunity to testify here today.
    Debt relief for poor countries has been a high priority for 
the United States Conference of Catholic Bishops for a very 
long time. It was inspired by those very words which you quoted 
earlier from Pope John Paul II, and some of us have been at it 
ever since.
    Just to, at the beginning, say that I will be focusing on a 
few issues at a level of technical detail that the bishops 
would not normally get into. Therefore, I am testifying 
primarily on the basis of my experience as a former World Bank 
official and somebody who has worked on these issues for a 
number of years at the Bishops' Conference.
    I would first like to thank you for introducing this 
important legislation and to Senators Biden and Lugar and other 
members of the committee for the strong leadership that they 
have provided over the years in support of debt relief for poor 
countries.
    Although I believe Mr. Lowery has left, I still would like 
to have the opportunity to express our appreciation for the 
very effective efforts of the Bush administration, particularly 
the Treasury Department, which worked with other countries to 
bring about the Multilateral Debt Relief Initiative. They 
subsequently worked hard to extend it to debt owed to the 
Inter-American Development Bank, and they also introduced the 
possibility of many poor countries gaining access to grant 
financing from the International Development Association.
    You have already mentioned some of the achievements of the 
debt relief program so far in terms of debt stock and debt 
service relief. So I am going to go quickly to one or two 
issues that I wanted to focus on.
    Now, you, or at least some of the members of the committee, 
might wonder why debt cancellation is necessary when so much 
debt relief is already being provided under HIPC and the more 
recent MDRI. The problem is that there is a substantial number 
of poor countries that are not eligible for the HIPC program, 
let alone the MDRI. The disparity of treatment between the HIPC 
countries and the non-HIPC countries became clear a few years 
ago when the World Bank and the IMF conducted an examination of 
debt sustainability in the poorest countries, the so-called 
IDA-only countries. 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.
    The conclusion was that 42 countries were at sufficiently 
high risk of debt distress to be eligible for grant financing. 
The list included 29 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 HIPCs, they would get grants going forward, 
but unlike the HIPCs, they would get no debt relief.
    Since there is a 10-year grace period on the repayment of 
IDA credits, the non-HIPCs would begin receiving the financial 
benefit of grants rather than loans only after 10 years. In the 
meantime, they would carry the full burden of existing debts 
and be unable to free up resources badly needed to move toward 
achieving human development and the Millennium Development 
goals.
    When the results of the debt sustainability analysis became 
available, some of us argued that the HIPC and MDRI programs 
should be expanded to include all countries qualifying for 
grant financing. S. 2166, we are happy to note, would address 
this concern by making IDA-only status the standard of 
eligibility for debt cancellation. This standard would make 
potentially eligible all non-HIPC countries that qualify for 
IDA grants. It would also make eligible six large- or medium-
sized countries that are not considered by the IMF and World 
Bank to be at high risk of debt distress.
    The rationale for including the grant-eligible countries is 
in my view quite strong. Whether or not one agrees with the 
World Bank's definition of sustainable debt, the rationale for 
including the additional six countries is also strong for 
several reasons.
    First and most important, the IDA-only standard means that 
all potential beneficiaries are among the poorest countries in 
the world and need to maximize their resources for promoting 
development and poverty reduction. And as Ms. Birdsall said--I 
have known her so long, I have a hard time calling her Ms. 
Birdsall, but I will continue to do so for the purposes of this 
hearing--it is a very efficient form of foreign assistance and 
something that these countries could badly use.
    Second, the IDA-only standard will assure equity of 
treatment among all the poorest countries. The IMF addressed 
this point in an issues paper prepared a few months before the 
MDRI was approved. The IMF said, ``Regarding country coverage, 
all low-income countries could potentially be made eligible. 
Earmarking debt relief to HIPCs only is difficult to justify 
because the HIPC initiative will have already sharply reduced 
previous cross-country differences in debt indicators.'' So 
they were, in effect, saying that a lot of the non-HIPCs were 
in similar situations to the HIPC countries, and it did not 
make sense, at least from an equity standpoint, to make this 
distinction.
    Third, making all IDA-only countries potentially eligible 
addresses concerns about redistribution of aid, that is, that 
an aid donor will finance the cost of giving debt cancellation 
to poor country A by reducing the amount of aid it grants to 
poor country B. Making all of the poorest countries eligible 
for debt cancellation obviates this problem.
    Fourth, there is a point made by Ms. Birdsall and John 
Williamson in their book, ``Delivering on Debt Relief,'' where 
they said, ``The danger of giving complete debt relief to a 
limited group of countries is that the countries that built up 
the deepest debt problems in the past are likely to include the 
countries that were most prone to waste external resources. We 
therefore believe that there is a strong case for making 
virtually all low-income countries eligible for inclusion in 
the HIPC initiative.''
    The last point reminds me of the statement made by Lesotho 
Finance Minister, Timothy Thahane, upon learning of the MDRI 
debt cancellation agreement. He told Reuters that one of the 
reasons Lesotho was not classified as a HIPC country was that 
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.''
    I was going to touch on some additional issues related to 
additionality and arrearages, and perhaps there will be time to 
do so during discussion.
    But let me just conclude by making one point. It will be 
very difficult for the United States to reach any kind of final 
agreement on a financing framework for new debt cancellation if 
it is not meeting existing commitments. Therefore, I very much 
support the inclusion in S. 2166 of the kind of sense of 
Congress provision included in the companion House bill that 
calls for the United States to pay off the outstanding 
arrearages to IDA and the regional banks. This is something 
that needs to be done quickly so that this initiative can move 
forward fully.
    And finally, I would like to join the chorus of those who 
say that debt relief is not a panacea. It is not at all. The 
problem of the poor countries is too big. It is too 
complicated. It is too deep-seated for debt relief to be 
considered as such. All the debts of all the poor countries 
could be canceled tomorrow and it would not end poverty. There 
is just a huge, big additional agenda out there that has to be 
met.
    [The prepared statement of Mr. Flood follows:]

      Prepared Statement of Gerald F. Flood, Counselor, Office of 
 International Justice and Peace, United States Conference of Catholic 
                        Bishops, Washington, DC

    Mr. Chairman, members of the committee, I would like to thank the 
Committee on Foreign Relations for the opportunity to testify here 
today. Debt relief for poor countries has been a high priority for the 
United States Catholic Bishops Conference (USCCB) for many years.
    In my testimony I will be focusing on a number of issues at a level 
of technical detail which the bishops would not normally address, and 
on which they, therefore, would not have a position. 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 
United States Catholic Bishops' Conference (USCCB) over quite a few 
years.
                             role of usccb
    But first let me briefly mention the active role which the United 
States Catholic Bishops Conference has played in poor country debt 
relief. The bishops have issued two major statements on the issue, the 
first as far back as 1989 and an updated version in 1999. In the mid-
1990s the USCCB intensified its work on debt, inspired particularly by 
the words of the late, revered Pope John Paul II in his message on the 
coming Millennium. He recalled the biblical tradition of the Jubilee 
Year. It was a time to restore social justice and equity between 
peoples, to give a fresh start to the poor. He called on all 
Christians, in the spirit of the Book of Leviticus, ``to raise their 
voice on behalf of all the poor of the world, proposing the jubilee as 
an appropriate time to give thought, among other things, to reducing 
substantially, if not canceling outright, the international debt which 
seriously threatens the future of many nations.''
    The USCCB and its relief and development agency, Catholic Relief 
Services (CRS), played an active role, along with many other U.S. 
faith-based organizations, in the worldwide Jubilee 2000 campaign. 
Senators Biden and Lugar and quite a few other Senators provided strong 
bipartisan leadership and support in urging the U.S. administration to 
respond to the call of many poor countries around the world for relief 
from the heavy burden of international debt.
    For the USCCB and CRS, support for poor country debt relief is part 
of a broader agenda that arises out of a conviction that the moral 
measure of our efforts is how we respond to ``the least among us'' (Mt. 
25), both at home and abroad, and whether we seek justice for all. 
While debt relief and investments in development more generally are, 
for USCCB and CRS, primarily matters of moral responsibility, we 
believe that they contribute to a safer and more peaceful world and 
thus, in an important way, to the peace and security of the United 
States.
                      the enhanced hipc initiative
    The Jubilee 2000 campaign led, in the latter part of 1999, to the 
adoption by the major creditor nations and international financial 
institutions of a new debt relief program called the Enhanced Heavily-
Indebted Poor Countries (HIPC) Initiative. It represented a major 
advance over the original HIPC program, promising much more debt 
relief, more rapidly, to many more countries. Also, the Enhanced HIPC 
program incorporated a new framework for the provision of debt relief 
and other external assistance to HIPC countries. This new approach, 
called the Poverty Reduction Strategy Process (PRSP), contained 
elements that Catholic Relief Services, the bishops conference and many 
other nongovernmental organizations had long advocated. The PRSP was 
intended to strengthen the poverty focus of development programs and to 
promote country ownership, transparency and civil society participation 
in their design and implementation. A major objective of these 
provisions, from our perspective, was to ensure participation of groups 
who could give voice to the needs of the poor, and who could help 
assure that the benefits of debt relief would reach the poor.
   hipc debt relief was uneven and not deep enough to give a ``fresh 
                       start'' to poor countries
    As implementation of the enhanced HIPC program progressed, some of 
us noted that while substantial debt reduction was being committed to 
about two dozen very poor countries, the amount of relief was uneven 
across these countries. Under the HIPC formula, the amount of the 
relief is determined, in most cases, by what is needed to bring the 
ratio of debt to exports down to a certain level. To us, what was most 
important, however, was the relation between debt service and 
government revenues. We wanted to know how much government revenue 
would be freed up for expenditures in education, health, clean water, 
rural roads and other investments that would create opportunities for 
the millions living on less than $2 a day to break out of the cycle of 
poverty and begin to achieve their human potential.
    Unfortunately, what we found was a wide variance in the amount of 
debt service reduction being granted. For one or two countries, the 
debt service obligation was being brought down to around 5 percent of 
government revenues. For most of the remaining countries, however, this 
ratio was substantially higher and in several cases remained above 20 
percent. This was disappointing news as, for us, what was important was 
to achieve the Jubilee objective of debt relief deep enough to give a 
``fresh start'' to the poor. Moreover, the results seemed inconsistent 
with the communique issued by the G-8 leaders at the 1999 summit in 
Cologne, Germany. In announcing the new program, they succinctly 
stated: ``The central objective of this initiative is to provide a 
greater focus on poverty reduction by releasing resources for 
investment in health, education, and social needs.''
    Subsequently, with Senator Biden and other members of this 
committee taking a lead role, the Congress incorporated into the Global 
Health Act of 2003 major new provisions that authorized and encouraged 
the administration to work to strengthen the HIPC program by tying the 
amount of the debt relief to the ratio between debt service to revenues 
and bringing that ratio down to a low level. Unfortunately, the 
administration did not implement these provisions.
                                the mdri
    By 2004, there was a growing consensus among the United States, the 
United Kingdom and other major creditor nations that the HIPC program 
was not providing debt relief deep enough to assure that HIPC countries 
would not soon return to a situation of ``unsustainable external 
debt.'' The U.S. Treasury referred to a never-ending ``lend and 
forgive'' cycle whereby institutions such as IDA would make loans to 
poor countries and then have to make new loans so that the country 
would have enough funds to repay the previous loans. These concerns led 
to the adoption by the international community in 2005 of a new 
Multilateral Debt Relief Initiative (MDRI).
    The essence of the MDRI is to provide qualifying HIPC countries 
with full cancellation of debts owed to the World Bank's International 
Development Association (IDA), the International Monetary Fund (IMF) 
and the African Development Fund (AFDF). The cancellation occurs once a 
country has reached its ``completion point'' under the HIPC program, 
that is, that it has fulfilled conditions related to economic 
management and progress under the country's poverty reduction strategy. 
So far 23 countries have received MDRI debt cancellation, with another 
17 countries potentially able to benefit from it.
    A notable omission from the MDRI agreement was the substantial debt 
owed by the five lowest income Latin American and Caribbean countries 
to the Inter-American Development Bank (IDB). This omission was 
rectified in 2007 when the IDB agreed to give MDRI treatment to its 
HIPC borrowers. Since four of these countries had reached their HIPC 
completion points, they received immediate debt cancellation. The fifth 
country, Haiti, is expected to reach its completion point this year, 
hopefully within the next few months. Together with earlier agreements 
to cancel most bilateral debts, including 100 percent of debts owed to 
the United States, these new agreements are providing the kind of deep 
debt relief the Catholic Church has advocated for poor countries.
    We were particularly pleased with the leadership of the Bush 
administration in bringing about the MDRI and in encouraging the IDB to 
give similar debt cancellation to the Latin American and Caribbean HIPC 
countries.
              what have debt relief programs accomplished?
    Twenty-three countries have reached the completion point, and thus 
have benefited from 100 percent cancellation of qualifying debts. These 
include Benin, Bolivia, Burkina Faso, Cameroon, Ethiopia, Gambia, 
Ghana, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, 
Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, 
Sierra Leone, Tanzania, Uganda, and Zambia. An additional 10 HIPC 
countries have reached their ``decision point,'' which has enabled them 
to begin receiving debt service relief. These countries are 
Afghanistan, Burundi, the Central African Republic, Chad, the 
Democratic Republic of the Congo, the Republic of Congo, Guinea, 
Guinea-Bissau, Haiti, and Liberia. Seven more countries remain 
potentially eligible for HIPC and MDRI relief: Comoros, Cote d'Ivoire, 
Eritrea, Nepal, Somalia, Sudan, and Togo.
    How much debt has been cancelled to date? According to the most 
recent updates from the IMF and World Bank, debt relief under the HIPC 
Initiative and the MDRI has reduced the debt stock of the 23 completion 
point HIPCs by a total of over $70 billion, in net present-value terms, 
and when the additional 10 post-decision point countries reach their 
completion point, which is expected over the next 2 years, the total 
debt stock reduction should reach approximately $100 billion (NPV).
    In 2007, annual debt service savings from the MDRI for the 22 post-
completion point counties were expected to be $1.3 billion, equivalent 
on average to 1 percent of these countries' GDP. And we are talking 
about savings on long-term debt, which means that similar amounts of 
savings will be realized every year for many years into the future. 
Moreover, the evidence is strong that the savings are being used to 
fight poverty. Total poverty-reducing expenditures in countries that 
have received debt relief have increased from $5.8 billion in 2000 to 
an estimated $17 billion in 2006, or from 7-9 percent of GDP, on 
average. This is actually much more than the debt relief savings, and 
the question arises whether, and to what extent, this increase--beyond 
what would have been possible from debt relief alone--is attributable 
to the fact that all countries receiving MDRI debt cancellation are 
implementing Poverty Reduction Strategies (PRSP).
    As I mentioned earlier, the PRSP was established as part of the 
1999 framework for the provision of HIPC debt relief. There have been 
criticisms of the PRSP, including that they reflect more the priorities 
of the international financial institutions rather than the countries, 
i.e., that they are not sufficiently ``country owned.'' While I have 
not seen an evaluation of the impact of the PRSP on expenditure 
patterns, the fact remains that the World Bank data shows a very large 
increase in poverty reducing expenditures in the HIPC countries. Citing 
2005 World Bank research, the nongovernmental organization DATA (Debt, 
AIDS, Trade, Africa) found that for every dollar freed up from debt 
service, African governments have increased social spending by $2.
    In 2006, The World Bank's Independent Evaluation Group did an 
update of an earlier evaluation of the HIPC program. It took a closer 
look at public expenditure patterns in countries benefiting from the 
HIPC program. It found that the majority of funds were allocated to 
expanding service delivery in the social sectors, and much less to 
investments to remove bottlenecks in economic or productive sectors. 
More specifically, based on data from five countries, it found that 
governments were increasing their expenditures for education, both as a 
share of total expenditures and as a share of GDP, but that spending 
for health, agriculture, and transportation had shown little change.
    Improving the quantity and quality of education is, of course, 
critical for poverty reduction, and the focus on education should not 
in any way be denigrated. Nevertheless, as more debt relief savings 
have become available in the past few years, both by more countries 
fulfilling the conditions for HIPC debt relief and by the 
implementation of the MDRI program beginning in 2006, it becomes 
particularly important to increase expenditures for the productive 
sectors and other social sectors, such as health. It is thus 
encouraging that countries are using the savings generated by the MDRI 
program in 2006 for a more diversified range of poverty reduction 
activities. For example, according to the World Bank as supplemented by
on-the-ground information provided by the Jubilee USA Network,

   Ghana is using the $57.9 million in 2006 savings in the 
        energy and water sectors, for the rehabilitation of essential 
        major highways and feeder roads in the main agricultural areas, 
        as well as in education, health, and development of information 
        and communication technology;
   Cameroon is using its savings of $29.8 million for 
        infrastructure, social sector and governance reforms;
   Mali is using its $27 million in 2006 savings for water 
        supply and roads;
   Uganda is using its $57.9 million on improving energy 
        infrastructure to ease acute electricity shortages, as well as 
        primary education, malaria control, health care and water 
        infrastructure (specifically targeting the poor and underserved 
        villages); and
   Zambia is using its savings of $23.8 million to increase 
        spending on agricultural projects, such as smallholder 
        irrigation and livestock disease control, as well as to 
        eliminate fees for health care in rural areas.

    But looking at the impact of debt relief programs at the ``macro'' 
level does not tell the whole story. There are examples of the use of 
debt relief savings at the local level, which, while they may not be 
reflected in national statistics, are improving the lives of thousands 
of poor people. Let me give you just one example from the experience of 
Catholic Relief Services.
                          a hipc success story
    Catholic Relief Services has been active for many years in 
Cameroon. Working closely with the local Catholic Church, it has 
financed health, education, and community development projects in 
various parts of the country. In recent years it had not partnered with 
the government in any of its projects. Then came the HIPC program. When 
Cameroon qualified for HIPC debt relief a few years ago, a HIPC funding 
committee was set up consisting of government, civil society, church 
and donor representatives, with observers from the World Bank, IMF, and 
the African Development Bank. The committee's job is to assure that the 
funds generated by HIPC debt relief are used to carry out the country's 
poverty reduction strategy (PRSP). It approves the allocation of HIPC 
funds to specific projects and monitors their implementation.
    CRS and other development agencies operating in Cameroon have long 
viewed community forestry as an important grassroots participatory 
strategy for fighting poverty. Uncontrolled exploitation of forestry 
resources by logging companies has been a longstanding problem in 
Cameroon. A 1994 law allows villages in and around large forest 
concessions to obtain authorization from the government for the 
sustainable management of forest resources for community benefit. Yet 
by 2003, very few community forestry projects had been approved. It was 
at this time that CRS developed and presented to the HIPC Committee a 
forestry project that would operate within a Catholic diocese that 
abounds in forestry resources. The project would mobilize 25 rural 
communities to manage their forests in a profitable and environmentally 
sustainable manner. Moreover, a portion of tax revenues owed by logging 
companies would be collected by the communities and reinvested in 
community development projects.
    The HIPC Committee was convinced of the technical merits of the CRS 
project and, in spite of opposition from the Minister of Forestry, 
approved it and arranged for project funds to be released directly from 
the Ministry of Finance to the project managers. This was an important 
breakthrough in the country, and CRS and a broad group of allies are 
now well-placed to lead the effort to expand community forestry 
projects throughout Cameroon.
                       the role of civil society
    There are other examples of organizational arrangements designed to 
assure that debt relief funds reach the poor. In Uganda, resources 
freed up by debt relief are channeled through the Poverty Action Fund, 
which is overseen by representatives from government, national NGOs, 
churches, unions and international organizations. In Nigeria, the new 
Virtual Poverty Fund plays a similar role. These models can and should 
be replicated in other nations. I agree with Neil Watkins, National 
Coordinator of the Jubilee USA Network, that Parliamentarians and civil 
society organizations, particular those local organizations that give 
voice to the needs of the poor, have an important role to play in 
assuring accountability from national governments regarding the use of 
funds released by debt relief, as well as government expenditures more 
broadly.
    While in Zambia recently, Neil saw firsthand the powerful role 
played by civil society groups such as Civil Society for Poverty 
Reduction, Jubilee Zambia, and others in pressuring the government to 
be more transparent and accountable for use of aid, debt relief, and 
new borrowing. Civil society is working in partnership with reform-
minded Parliamentarians in Zambia to put forward an agenda to make the 
budgeting process more transparent and participatory and to involve 
civil society in monitoring the implementation of poverty reduction 
programs financed by the national budget. These efforts and others like 
them should be embraced and promoted by all those who advocate debt 
cancellation and responsible lending and borrowing.
s. 2166's debt cancellation would fill an important gap in the hipc and 
                             mdri programs
    I would like now to turn to the rationale for the debt cancellation 
called for by the Jubilee Act for Responsible Lending and Expanded Debt 
Cancellation (S. 2166). It is clear that the debt reduction that has 
been granted to poor countries through successive debt relief 
initiatives represents a major accomplishment within the overall effort 
to address global poverty. However, we believe there is more to be 
done. There are a substantial number of poor countries that have not 
benefited from the HIPC program, let alone the MDRI. The disparity of 
treatment between HIPC poor countries and non-HIPC poor countries 
became clear in 2004 when the World Bank and IMF conducted an 
examination of ``debt sustainability'' in countries that, because of 
very low per capita incomes or other special circumstances, are 
eligible to receive only IDA funds from the World Bank. These are the 
so-called IDA-only countries. A 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.
    As a result of the debt sustainability analysis (DSA), it was 
concluded that that 47 countries were at sufficiently high risk of debt 
distress to be eligible for grant financing. 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's, they would get 
grants going forward, but unlike the HIPC's they would get no debt 
relief. Because of the 10-year grace period on the repayment of IDA 
credits, the non-HIPCs would begin receiving the financial benefit of 
grants (rather than loans) only after 10 years. In the meantime they 
would carry the full burden of existing debts and be unable to free up 
resources badly needed to move them toward achieving the Millennium 
Development Goal of reducing extreme poverty in half by 2015.
    When the results of the DSA became available, some of us argued 
that the HIPC and MDRI programs should be expanded to include all 
countries qualifying for grant financing. Objections were raised in 
some quarters that making additional countries eligible for debt 
cancellation on the basis of their level of debt distress would create 
moral hazard problems, i.e., encourage countries to borrow more so that 
they would qualify. S. 2166 would address this concern by making ``IDA-
only'' status the standard of eligibility for debt cancellation. Almost 
all IDA-only countries have per capita incomes below the historical 
standard for IDA eligibility, which is currently $1,065. (IDA-only 
countries above this limit are primarily small island economies.)
    The IDA-only standard captures all non-HIPC countries eligible for 
IDA grants. These currently include Lesotho, Djibouti, Angola, Kyrgyz 
Rep., Tajikistan, Mongolia, Cambodia, Samoa, Solomon Islands, Tonga, 
and Yemen. (It also includes Myanmar, which is not eligible for U.S. 
assistance.) The IDA-only standard would also bring in some countries 
with external debt that is considered ``sustainable'' by the World 
Bank. Excluding several highly vulnerable small island economies, there 
are six such countries (Bangladesh, Georgia, Kenya, Moldova, Nigeria, 
and Vietnam). Of the six, all but two (Moldova and Georgia) have per 
capita incomes lower than $2 a day. Of course, debt cancellation will 
only occur if countries apply for it, and I believe there is a strong 
likelihood that at least Vietnam will not apply. The government is in 
the process of gaining access to international capital markets and is 
not likely to want to send a signal that it needs debt relief.
    The rationale for including the grant eligible countries is, in my 
view, quite strong. Whether not one agrees with the World Bank's 
definition of ``sustainable'' debt, the rationale for including the six 
I just mentioned is also strong for a number of reasons:

   First, and most important, the IDA-only standard means that 
        all potential beneficiaries of the debt cancellation provisions 
        of S. 2166 are countries that have high levels of poverty and 
        thus need to maximize the amount of resources they can marshal 
        to promote human development, raise the living standards of 
        their people and achieve the Millennium Development Goal of 
        cutting extreme poverty and hunger in half by 2015.
   Second, the IDA-only standard will assure equity of 
        treatment among all the poorest countries. The International 
        Monetary Fund (IMF) addressed this point in an issues paper 
        prepared a few months before the MDRI was approved at the 
        Gleneagles summit in 2005. In commenting on eligibility 
        criteria for new debt relief, the IMF said: ``Regarding country 
        coverage, all low-income countries could potentially be made 
        eligible. (Emphasis added.) A main argument was: ``Earmarking 
        debt relief to HIPCS only, is difficult to justify, because the 
        HIPC Initiative will have already sharply reduced previous 
        cross-country differences in debt indicators.''
   Third, making all IDA-only countries eligible addresses 
        concerns about redistributing aid resources away from poor 
        countries that are not eligible for debt relief. The concern is 
        that an aid donor will finance the cost of giving debt 
        cancellation to poor country A by reducing the amount of aid it 
        grants to poor country B. Making all of the poorest countries 
        eligible for debt cancellation obviates this problem.
   Fourth, there is the point made in ``Delivering on Debt 
        Relief,'' by Nancy Birdsall and John Williamson (2002): ``The 
        danger of giving complete debt relief to a limited group of 
        countries is that the countries that built up the deepest debt 
        problems in the past are likely to include the countries that 
        were most prone to waste external resources. We therefore 
        believe that there is a strong case for making virtually all 
        low-income countries eligible for inclusion in the HIPC 
        Initiative.''

    This last point reminds me of the statement made by Lesotho Finance 
Minister Timothy Thahane upon learning of the MDRI debt cancellation 
agreement. He told Reuters that one of the reasons Lesotho was not 
classified as a HIPC country was that 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 companion bill to S. 2166 in the House is H.R. 2634. When this 
bill was introduced in the House a year ago, Bishop Thomas Wenski, 
chairman of the Committee on International Policy of the USCCB wrote 
Representavies Waters and Bachus to express support. He said that 
despite important progress in debt reduction, ``a substantial number of 
needy countries are not eligible for the existing debt relief 
initiatives. H.R. 2634 represents a major new step toward correcting 
this deficiency and making debt cancellation a reality for virtually 
all very poor countries that have participatory processes and financial 
management systems sufficient to assure that debt cancellation savings 
will be used to benefit the poor. We look forward to working with you 
and your congressional colleagues to help complete the unfinished 
business of poor country debt relief.'' As you know, H.R. 2634 passed 
the House last week with strong bipartisan support, and we were very 
pleased that this happened during the very days when our Holy Father, 
Pope Benedict XVI, was visiting our Nation's capital.
    I'd like to touch on several other issues.
                             additionality
    One objective of USCCB advocacy for debt relief has always been to 
assure that the debt relief received by a poor country frees up 
additional resources for combating poverty. In other words, we did not 
want donors to reduce other aid to that country in order to offset the 
loss resulting from debt cancellation (nor, as discussed above, did we 
want the loss offset by reduced aid to other poor countries.) We were, 
therefore, pleased to note the finding on this issue by the Independent 
Evaluation Group (IEG) of the World Bank in its 2006 HIPC update. It 
said that, with respect to the 28 countries that had reached their 
decision point, HIPC debt relief ``appears to have been significantly 
additional to other net resource transfers.'' Between 1999 and 2004, 
net annual transfers attributable to debt relief increased by $4 
billion, while other net annual aid transfers increased by $4.5 
billion.
                           arrearages to ida
    My understanding is that the U.S. has outstanding arrearages to IDA 
and regional development banks of almost $600 million. It will clearly 
hamper the administration's effort to carry out the mandate of S. 2166 
if these arrears are not cleared up quickly. S. 2166 calls for the cost 
of the bill's proposed multilateral debt cancellation to be financed, 
to the extent possible, by the multilateral institutions themselves. We 
believe that substantial resource should be available for this purpose 
particularly from the IMF (gold sales) and the World Bank (which has 
accumulated reserves sufficient to bring its equity-to-loans ratio well 
above the range its management considers necessary for long-term 
capital adequacy).
    Moreover, we estimate that probably 8 to 9 countries of about 24 
potentially eligible countries currently meet the financial management 
conditions for receiving the debt cancellation called for in the bill. 
(The nine are Lesotho, Kenya, Cape Verde, Mongolia, Moldova, Georgia, 
Samoa, Vanuatu, and, if it participates, Vietnam). Thus the need for 
financing to cover the cost of the debt cancellation is likely to be 
spread out over a number of years. Nevertheless, I expect that 
significant funding will be still required over time from the U.S. and 
other governments of the richer countries to finance multilateral debt 
cancellation. It will be very difficult for the U.S. to negotiate an 
agreed financing framework for new debt cancellation if it is not 
meeting existing commitments. I, therefore, very much support the 
inclusion in S. 2166 of the kind of ``sense of Congress'' provision 
included in the House bill (H.R. 2634) that calls for the U.S. to pay 
off the outstanding arrearages to IDA and the regional banks.
                debt relief is part of a broader agenda
     A final point that is important to emphasize is that while new 
debt cancellation would be a major achievement, debt relief is in no 
way a panacea. Even if the debt of poor countries were reduced to zero 
tomorrow, it would not end poverty. The problem is much too large, 
complex, and deep-seated for that. It must be addressed first and 
foremost by the countries themselves, with their governments and people 
working together on a variety of fronts for the common good. But their 
resources are not sufficient for them to do it alone. They need aid and 
just policies from the wealthier countries.

    Senator Casey. Thank you very much.
    Dr. Henry.

STATEMENT OF DR. PETER B. HENRY, KONOSUKE MATSUSHITA PROFESSOR 
 OF INTERNATIONAL ECONOMICS AND GUNN FACULTY SCHOLAR, GRADUATE 
     SCHOOL OF BUSINESS, STANFORD UNIVERSITY, STANFORD, CA

    Dr. Henry. Good afternoon, Senator Casey. Thank you for the 
opportunity to discuss the implications of my research for the 
Jubilee Act.
    Let me preface my remarks by saying that I am deeply 
sympathetic to the sentiment of this bill and to the debt 
relief movement in general. I am originally from a developing 
country, not a low-income developing country. I am from 
Jamaica, but even though Jamaica is a middle-income developing 
country, there is no shortage of poverty in Jamaica. So the 
issues that this bill raises are deeply important to me.
    Let me also mention, just for the record, I am a card-
carrying Episcopalian and the Episcopal Church cares a lot 
about these issues. I am not speaking for Episcopal Church here 
today, but I just want to echo the fact that I am deeply 
sympathetic to these issues.
    But I do have some questions about whether this bill and 
whether the debt relief movement in general is going about 
addressing the problems of poor countries in the most efficient 
way.
    Since there is not enough time to talk about all aspects of 
the bill, my comments will focus on the areas where I can add 
the most value. Specifically, I want to address the issues of 
grants versus loans and the efficacy of debt relief.
    When my colleague, John Taylor, was Under Secretary for 
International Affairs at the Treasury from 2001 to 2005, he 
argued that instead of lending to poor countries, the 
multilateral financial institutions should give grants instead. 
This is a good idea and I am glad to see it emphasized in 
section 1626(c)(3) of the bill under consideration.
    Poor countries are poor in part because they require large 
investments in public goods such as schools, roads, hospitals, 
and clean water. Prudent investments of this nature can 
generate a high rate of return to society in the long run by 
laying the foundation for future economic growth. But they are 
not likely to produce the short- to medium-run revenues needed 
to service loans. Therefore, using grants instead of loans to 
pay for public investments in low-income countries makes a lot 
of sense.
    Of course, the track record of foreign aid programs to date 
does not inspire confidence that grants can be conditioned and 
monitored to achieve their intended goals. This does not mean 
that we should not try. Past failures and current research 
provide important clues about how to design more effective and 
realistic aid endeavors. The Millennium Challenge Corporation 
provides an example of one such work in progress, and I would 
emphasize work in progress.
    The realization that poor countries need large infusions of 
financial resources to upgrade their social and economic 
infrastructure leads many to advocate for debt relief as a way 
of doing that. Keeping in mind the caveat that aid is not a 
cure-all and that we need to improve the efficiency with which 
we deliver aid, I turn now to the question of whether debt 
relief initiatives provide an efficient way of trying to 
address the social infrastructure problems of poor countries.
    The bill under consideration essentially proposes to extend 
the reach of the G-8 Multilateral Debt Relief Initiative, MDRI. 
MDRI is itself an extension and deepening of the Highly 
Indebted Poor Countries Initiative, HIPC. Accordingly, I will 
use my previous analyses of HIPC and MDRI as the basis of my 
comments about the implications of debt relief for the efficacy 
of S. 2166.
    If you believe that increased financial flows are an 
important part of the solution to the problems of poor 
countries, then a fundamental problem with MDRI and debt relief 
initiatives in general is that the amount of money at stake is 
trivial. The roughly $2 billion of annual debt payments 
forgiven under MDRI equals 0.01 percent of the gross domestic 
product of the OECD countries. Replacing the funds that would 
have been received by the multilateral development banks costs 
1 penny for every $100--not 1 penny per dollar; 1 penny for 
every $100--of OECD gross domestic product.
    Put another way, the reduction in annual debt servicing 
under MDRI is a mere one-seventieth--one-seventieth--of the 
quantity of official development assistance agreed to by world 
leaders on at least three separate occasions, dating all the 
way back to 1970.
    For the United States alone, honoring this pledge would 
provide roughly $70 billion per year, 35 to 70 times the 
quantity of debt forgiven under MDRI. Currently the actual U.S. 
aid contribution is closer to 0.1 percent of GDP per year than 
the 0.7 percent that the G-8 countries have pledged to provide 
time and again, including agreeing to reach those levels by 
2010.
    One could argue that if the G-8 is unwilling to live up to 
its aid goals, then debt relief provides a smaller but still 
positive boost in resource flows to developing countries. For 
example, if poor countries receive $3 billion per year in aid 
and pay $2 billion in debt service, then they receive a net 
financial inflow of $1 billion. The general public thinks that 
by writing off the debt service of $2 billion, net financial 
flows to poor countries would rise to $3 billion. This is not 
the way debt relief works in practice. Debt relief is not free.
    When one of the multilaterals, say, the International 
Development Association arm of the World Bank, writes off debt, 
like any other bank, its capital base shrinks. Without new 
capital, it has less money to distribute. To continue with the 
example, when debt service falls by $2 billion, aid drops by 
roughly the same amount. There is no increase in the net flow 
of resources to poor countries.
    Turning from textbook examples to real life, the record 
shows that increased debt relief results in less foreign aid. 
The sum of new lending and grants to the heavily indebted poor 
countries increased steadily from 1970 to the mid-1990s, but 
starting with the onset of the HIPC initiative in 1996, aid as 
a fraction of GDP decreased. Prior to 1996, aid amounted to 
roughly 13.7 percent of GDP in the highly indebted poor 
countries. Since 1996, that figure has dropped to somewhere 
between 9.9 and 11.1 percent. Those numbers are as of 2003.
    Now, section 1626(a)(5) of bill S. 2166 calls for the 
Secretary of the Treasury to ensure that the provision of debt 
cancellation is not simply offset by a decrease in development 
assistance. I applaud this language, but if history is a 
reasonable predictor of future actions, the words simply may 
not translate into reality.
    As we craft policies directed at low-income countries, we 
must ask whether we are interested in symbolic gestures of 
noblesse oblige or substantive efforts to help poor countries 
help themselves. Forgiving debt does not address the 
fundamental problem of inadequate economic institutions that 
impedes investment and growth in the world's poorest countries. 
To the extent that additional resources are part of the 
solution, the assistance provided by the indirect approach of 
debt relief pales in comparison to the size of unfulfilled aid 
promises. One of the central development issues of our day is 
whether the high-income countries of the world will stand ready 
to help with real money when the low-income countries show that 
they are ready to put the resources to good use. The danger is 
that debt relief may amount to a Pyrrhic victory, a symbolic 
win for advocates of debt relief that clears the conscience of 
the rich countries but leaves the real problems of the poor 
countries unaddressed.
    Thank you.
    [The prepared statement of Dr. Henry follows:]

   Prepared Statement of Dr. Peter Blair Henry, Konosuke Matsushita 
  Professor of International Economics, Stanford University Graduate 
                    School of Business, Stanford, CA

    Good afternoon Chairman Biden, Ranking Member Lugar, Presiding 
Member Casey, and distinguished members of the committee. My name is 
Peter Blair Henry. I am the Konosuke Matsushita Professor of 
International Economics at the Stanford University Graduate School of 
Business, a research associate of the National Bureau of Economic 
Research, and a nonresident senior fellow of the Brookings Institution. 
I have published a number of research articles on the topic of debt 
relief. Thank you for the opportunity to discuss the implications of 
this research for the Jubilee Act under consideration by this body (S. 
2166).
    The bill under consideration essentially proposes to extend the 
reach of the G-8 Multilateral Debt Relief Initiative (MDRI). The 
proximate impetus for MDRI was the Gleneagles summit in July 2005, 
where the G-8 heads of state called on the International Monetary Fund 
(IMF), the World Bank, and the African Development Bank to forgive the 
roughly $55 billion owed to them by the world's poorest nations. MDRI 
itself is an extension and deepening of the Highly Indebted Poor 
Countries Initiative (HIPC), so I will use my previous analyses of HIPC 
as the basis of my comments about the implications of debt relief for 
the efficacy of S. 2166.
     Debt relief is not free. Like any other policy intervention it 
entails costs--political capital to garner support and financial 
capital to pay for the writeoff. So the fundamental question is whether 
the potential benefits are greater. Over a decade ago, debt relief 
helped to restore investment and growth in a number of middle-income 
developing countries that arguably suffered from debt overhang. But 
debt relief is unlikely to help the world's poorest countries because 
they suffer not from debt overhang but from an absence of the economic 
institutions that provide the foundation for profitable investment and 
growth.
    the hipc initiative tries to raise growth and reduce poverty by 
                             relieving debt
    In 1996 the World Bank and the International Monetary Fund (IMF) 
launched the Heavily Indebted Poor Countries (HIPC) initiative in order 
to ``provide a framework for all creditors, including multilateral 
creditors to provide debt relief to the world's poorest and most 
heavily indebted countries, and thereby reduce the constraint on 
economic growth and poverty reduction'' (World Bank, 2004). The 
original HIPC initiative specified that in order to obtain debt relief 
a country must have: (1) A GNP per capita of $695 or less and (2) a 
debt burden deemed to be ``unsustainable'' even after the full use of 
traditional debt-relief mechanisms under the Paris Club. Unsustainable 
means a ratio of the net present value (NPV) of debt to exports in 
excess of a country-specific threshold of 200 to 250 percent, or, for 
very open economies, a NPV of debt exceeding 280 percent of government 
revenue.\1\ In 1996, 41 countries met these criteria (see the appendix 
for a list).
---------------------------------------------------------------------------
    \1\ See Rieffel (2003) for a detailed discussion of Paris Club 
logistics.
---------------------------------------------------------------------------
     After qualifying for debt relief, the eligible countries needed to 
produce a track record of reform for 3 years in order to reach a 
``decision point.'' At the decision point, the creditors arranged a 
debt relief package, given an adequate track record of reform. After no 
more than three additional years of proven policy implementation, 
countries reached their ``completion point'' and debt relief 
transpired.
                      the enhanced hipc initiative
     Under the original framework, only six countries reached their 
completion points, and a consensus emerged that the process needed to 
move more quickly. Consequently, the G-7 introduced the enhanced HIPC 
initiative at its fall 1999 meeting in Cologne, Germany. The enhanced 
initiative reduced the ratios that qualified a country's debt burden as 
unsustainable to 150 percent for net-exports and 250 percent for 
government revenue. The second initiative also made it easier for 
countries to reach a decision point, allowed them to begin receiving 
debt relief as soon as they did so, and provided greater relief. Under 
the enhanced HIPC initiative, 16 additional countries began receiving 
debt relief in 2000, and 4 more joined this group in January 2003.
The HIPC Initiatives Show No Signs of Increasing Growth Or Reducing 
        Poverty
     To assess the impact of the HIPC initiatives to date, consider 
first the countries that reached their decision points and began 
receiving debt relief in the year 2000. Panel A of Table 1 shows that 
from 1990-95 the GDP per capita of this subset of HIPCs grew at 
negative 0.5 percent per year. From 1996--the year in which HIPC was 
initiated--through 2000 their growth rate was 1.5 percent (the poverty 
indicators show a similar pattern). At a glance, the 2-percentage-point 
increase seems to suggest faster growth stemming from debt relief, but 
more careful consideration produces at least three pieces of evidence 
to the contrary.
     First, Panel B of Table 1 shows that the growth rate of the entire 
set of HIPCs from 1996 to 2000 was 2.4 percentage points higher than it 
was from 1990 to 1995. This means that the change in the growth rate of 
those HIPCs still waiting to receive debt relief (as of 2000) has been 
almost identical to those with debt burdens already reduced. Second, 
since the actual receipt of debt relief, as opposed to the qualifying 
process, did not begin until 2000, it is not clear that debt relief 
drove the increase in growth. Third, and related to the second point, 
since growth increased before the implementation of debt relief, the 
reforms required as a precondition may be the principal cause of the 
increase in growth for both sets of HIPCs. These three points 
notwithstanding, many argue that more generous debt relief delivered 
with greater dispatch would yield better results.
        the gleneagles declaration promises complete debt relief
     In contrast to the piecemeal approaches of the two previous 
initiatives, the Gleneagles declaration promises forgiveness of all the 
debt. For the HIPCs, the critical number is not so much the stock of 
debt being forgiven--$55 billion--but the reduction in debt service, 
which is somewhere between $1 and $2 billion per year. To get a better 
sense of the economic significance of the numbers at stake, it is 
helpful to introduce the concept of the annual net resource transfer 
(NRT). The NRT of a country is simply its annual net inflow of capital: 
Gross capital inflows minus gross capital outflows. Because most 
capital flows to the HIPCs take the form of either grants (also 
referred to as aid) or new lending, we can write their NRT as follows:

   Net Resource Transfer = New Lending + Grants - Debt Servicing (1).

    Table 2 highlights three central facts about the impact of the 
Gleneagles debt relief proposal on the net resource transfers to 
heavily indebted poor nations. First, the quantity of money at stake 
for the developed nations of the world is trivial. The $2 billion of 
annual debt payments is equal to roughly 0.01 percent of the GDP of the 
OECD countries. Replacing the funds that would have been received by 
the multilateral development banks would cost about 1 cent for every 
$100 of OECD GDP--not exactly a budget-busting expense.
     Second, contrary to popular belief, debt service does not cause a 
net drain of resources from the group of 38 heavily indebted poor 
countries. Although capital outflows in the form of debt service amount 
to a nontrivial fraction of the GDP of the heavily indebted poor 
countries--roughly 3 percent between 2000 and 2005--their gross inflow 
of capital over the same period of time was much larger--roughly 15 
percent of GDP. In other words, despite their debt servicing 
obligations, the heavily indebted poor countries receive more capital 
than they pay out to their creditors.
     Third, for the past 30 years rich country governments have made no 
significant increase in the net quantity of resources that they 
transfer to the heavily indebted poor countries. Given this third fact, 
it follows from equation (1) that debt relief cannot have a major 
impact on the overall magnitude of net resource flows. Debt relief 
reduces debt servicing, but instead of the net resource transfer rising 
when this occurs, grants or new loans tend to fall. In other words, 
debt relief in the past has been given instead of, not in addition to, 
foreign aid. The sum of new lending and grants to the heavily indebted 
poor countries increased continually from 1970 to the mid-1990s. But 
starting with the onset of the HIPC initiative in 1996, aid flows 
(i.e., grants) as a fraction of GDP decreased. Prior to 1996, aid flows 
amounted to roughly 13.7 percent of GDP in the heavily indebted poor 
countries. Since 1996 that figure has dropped to between 9.9 and 11.1 
percent. Together, the fall in aid flows and the postponed reduction in 
debt service has been associated with a decline in the HIPCs' net 
resource transfers (although they are still positive).
     Since its impact on the NRT is minimal, debt relief cannot propel 
the HIPCs toward sustained growth and poverty reduction unless it 
produces benefits not captured by the numbers in Table 2. The 
likelihood of such a possibility is the topic of the next section.
  debt relief promotes investment and growth when countries have debt 
                                overhang
    Debt relief promotes investment and growth when debt overhang 
inhibits a country's economic performance. ``A country has a debt 
overhang problem when the expected present value of potential future 
resource transfers is less than its debt'' (Krugman, 1988). In other 
words, a country suffers from debt overhang if it owes more money to 
its creditors than it is able to pay.
    Debt overhang arises when a country accumulates too much debt, but 
it can also occur when a previously manageable stock of debt becomes 
intractable due to a change in a country's circumstances. When a 
country not suffering from debt overhang experiences a bad shock (e.g., 
a fall in its terms of trade) or bad policy (e.g., poor economic 
management), the expected present value of its future resource 
transfers will fall. For a given stock of debt at the time of the 
shock, if the fall in expected value is large enough, the country will 
find itself in a position of debt overhang. The country will also be 
unable to attract new creditors, because lending to it would, by 
definition of debt overhang, result in a stream of expected repayments 
whose present value is less than that of the loan.\2\
---------------------------------------------------------------------------
    \2\ Existing creditors, on the other hand, have an incentive to 
continue lending in an effort to preserve the value of their initial 
loan (Krugman, 1988).
---------------------------------------------------------------------------
    Importantly, a country suffering from debt overhang will also 
invest less than it would in the absence of an overhang and 
consequently may forgo efficient (i.e., positive net present value) 
projects (Sachs, 1984). Underinvestment occurs because the stock of 
debt acts as an implicit tax. A country's government raises the 
resources it needs to service its debt by taxing firms and households. 
An increase in the government's debt increases the private sector's 
expected future tax burden. Because higher taxes divert the benefits of 
new investment from the private sector to the existing debt holders, 
they also reduce the private sector's incentive to invest. In summary, 
a country suffering from debt overhang is unable to service its debt, 
obtain new loans, and invest as much as it should.
    Krugman (1989) and Sachs (1989) point to a way out of this 
inefficient equilibrium. By extending the analogy between debt and 
taxes to a Laffer-Curve analysis, they show that both borrower and 
lenders can gain from debt relief. The logic runs as follows. At 
reasonable levels, the market value of the debt rises one-for-one with 
its face value. As the face value of the debt increases beyond a 
critical threshold, however, debt overhang ensues. The market value of 
the debt begins to fall--even as the face value continues to rise--and 
physical investment slumps along with the country's expected future 
growth rate. Consequently, if the creditors reduce the face value of 
the debt, the market value of the debt will rise. Debt relief also 
makes the borrower better off, because eliminating the debt overhang 
reduces the implicit tax on investment and reinstates the incentive 
for: (1) The country to undertake efficient investments and (2) for new 
lenders to extend credit.
    But debt relief will not happen without coordination, because any 
individual creditor would prefer to maintain the full value of its 
claims while others write off some debt (Sachs, 1989). By forcing all 
creditors to accept some losses, a third-party-coordinated debt relief 
program has the potential to solve this problem and pave the way for 
profitable new lending, investment, and growth (Cline, 1995).
debt relief helped restore investment and growth in the brady countries
    The theory of debt overhang and efficient debt relief captures the 
experience of the middle-income developing countries hit by the debt 
crisis in the 1980s. During the international commercial bank lending 
boom from 1970 to 1981, the net resource transfer to these countries 
was strictly positive. Starting in 1982, however, rising interest 
rates, a global recession, and poor economic policy choices 
substantially reduced the expected value of the banks' loan portfolios 
in the debtor countries. As their current and future economic prospects 
dimmed, debtors began defaulting, new lending to them ceased, and their 
net resource transfers turned negative for an extended period of time.
    In March 1989, U.S. Treasury Secretary, Nicholas Brady, initiated a 
plan under which 16 of the debtors reached debt-relief agreements with 
their private creditors. The commercial banks wrote off a fraction of 
the debt owed to them, and the countries agreed to implement major 
economic reforms.\3\ In the 12 months preceding the signing of its 
debt-relief agreement, the average Brady country's stock market 
appreciated by 60 percent--a $42 billion increase in shareholder 
value--while there was no significant increase in the stock market 
values of a control group of countries that did not sign Brady 
agreements (Arslanalp and Henry, 2005a).
---------------------------------------------------------------------------
    \3\ See Cline (1995) for a detailed discussion of the restructuring 
terms.
---------------------------------------------------------------------------
    Debtor-country stock prices rose, in part, because debt relief 
restored capital inflows. After roughly 10 consecutive years of 
negative net resource flows, the NRT in all 16 debtor countries turned 
positive immediately after the signing of their Brady plan and remained 
so for the next several years. In order to appreciate the full 
significance of the change in net resource transfers, it is important 
to distinguish between two effects of debt relief. The direct effect is 
that debt relief reduces a country's debt servicing obligations. The 
indirect effect is that debt relief cleans the books and paves the way 
for new creditors to lend (Summers, 2000). The direct effect is 
quantitatively less important than the indirect one. The Brady plan led 
to the forgiveness of approximately $60 billion of debt, but that 
number is small in comparison to the $210 billion of cumulative net 
resource transfers the Brady countries received in the 5-year period 
following the official settlement with their creditors.\4\
---------------------------------------------------------------------------
    \4\ See Arslanalp and Henry (2005b) for the source of the $210 
billion figure.
---------------------------------------------------------------------------
    The resurgence of capital inflows reflects the pithy Dornbusch 
maxim: ``Unresolved debt problems, not debt per se, are an obstacle to 
investment. It is hard for a man to establish a relationship with a 
lender if the estranged wife keeps barging in claiming alimony'' 
(Dornbusch, 1993, p.103). Indeed, the Brady countries' experienced an 
investment boom in the aftermath of debt relief. The average annual 
growth rate of their capital stocks rose by 1.9 percentage points--from 
1.6 percent per year in the 5 years prior to debt relief, to 3.5 in the 
subsequent five. The data on GDP per capita paint a consistent picture 
of economic recovery, rising from an average of 0 to 1.6 percent per 
year over the same time period.\5\
---------------------------------------------------------------------------
    \5\ The increase in growth can't be accounted for solely by the 
rise in the capital stock, so total factor productivity may also have 
increased due to the accompanying economic reforms (Henry, 2003).
---------------------------------------------------------------------------
             the hipcs exhibit no symptoms of debt overhang
    Debt relief helped the Brady countries, because it removed an 
obstacle standing in the way of new lending, investment, and growth.\6\ 
If all else were equal, one might plausibly argue that debt relief for 
the HIPCs would achieve similar results. The problem is that all else 
is not equal. There are at least three reasons why debt overhang does 
not deter capital flows to the HIPCs (and hence their investment and 
growth).
---------------------------------------------------------------------------
    \6\ This is not to say that debt relief solved all of their 
problems. Starting with Mexico in 1994 and most recently in Argentina 
in 2001, a number of Brady countries have encountered severe economic 
crises since the Brady plan.
---------------------------------------------------------------------------
    First, if debt overhang hinders capital flows to the HIPCs, then 
just as the Brady countries experienced negative net resource transfers 
during their bout with overhang, the HIPCs should now be experiencing 
negative NRTs. But this is not the case. And nor has it ever been. In 
contrast to the Brady countries, NRTs to the HIPCs have always been 
positive (Table 2). If debt relief works by restoring positive NRTs in 
scenarios where it has turned negative, then the means by which it will 
help a set of countries in the midst of an uninterrupted stream of 
positive NRTs since 1970 is not clear. One counterargument to this line 
of reasoning holds that even if the HIPCs do not suffer from debt 
overhang, debt relief would make their already positive NRTs even 
larger. After all, Equation (1) shows that holding the quantity of 
grants and new loans constant, reducing debt service will surely 
increase the country's net intake. The problem with this 
counterargument, as we discuss in greater detail below, is that it 
ignores budgetary reality: Historically, capital inflows such as grants 
do not remain constant when countries receive debt relief.
    Second, the concept of debt overhang is incongruous with the very 
nature of lending to the HIPCs. Debt overhang and the potential for 
efficient debt relief that stems from its presence are predicated on 
the incentives and rationale that drive lending by profit-maximizing 
entities. In contrast, official lending, the primary source of HIPC 
debt, responds to a very different set of considerations. For example, 
the international commercial banks lent to the Brady countries because 
they expected to make a profit for their shareholders by doing so. The 
HIPCs' principal creditors, multilateral lending institutions such as 
the International Development Assistance arm of the World Bank, have a 
broader mandate. At least part of their mission is to channel funds, 
through a combination of concessional loans and grants, to development 
projects that may yield large social gains in the long run, but are not 
immediately profitable (Taylor, 2004).
    Since debt relief is designed to enhance efficiency in the market 
for private lending, it is unclear what effects it would have in a 
market with a significantly different incentive structure. More 
generally, a case can be made that the multilateral financial 
institutions should not lend to poor countries at all but give grants 
instead (Bulow, 2002; Bulow and Rogoff, 1988, 2005; Taylor, 2004). The 
history of aid does not inspire confidence in the ability of such 
transfer schemes to achieve their intended goal (Easterly, 2003). But 
past failures and current research contain important clues for the 
design of more effective (and realistic) future aid endeavors such as 
the Millenium Challenge Corporation (Besley and Burgess, 2003; Birdsall 
and Williamson, 2002; Brainard, Graham, Purvis, Radelet and Smith, 
2003; Burnside and Dollar, 2000).
    The third point relates closely to the second. The private sector 
investment channel, which plays a central role in models of debt 
overhang, is all but absent in the HIPCs. In models of debt overhang, 
the government's debt burden deters investment because it imposes an 
implicit tax on private sector investment. Therefore, in order for debt 
overhang to act as a deterrent to private investment, the country must 
have a private sector with viable investment projects to deter. One 
indication that a country's private sector has viable projects is that 
it attracts capital to fund those projects. Again, the Brady countries 
and the HIPCs show stark differences on this score. As early as 1974, 
capital flows to the Brady countries' private sector (private debt + 
foreign direct investment + portfolio equity) comprised nearly half of 
their total net resource flow, but the HIPCs' private sector never 
attracted a significant amount of capital. Inflows to the private 
sector in the HIPCs have accounted for as little as 4 percent of 
inflows and have never exceeded 13 percent (Arslanalp and Henry, 
2005b).
    Furthermore, the difference between the composition of capital 
flows to the Brady and the HIPCs continues to widen. At the peak of the 
debt crisis (1985-89), grants plus public and publicly guaranteed debt 
accounted for 73 percent of the net resource transfer to the Brady 
countries, but by 1994, the private sector was the destination for the 
majority of their net resource flows (Arslanalp and Henry, 2005b). No 
such shift has taken place in the HIPCs. In fact, the opposite has 
occurred--official flows and flows to the public sector have become 
more, not less, important. The role of grants has increased to the 
point where they now constitute the majority of net resource flows to 
the HIPCs.
    The resurgence and expansion of the private sector in the Brady 
countries drove their post-debt-relief recovery in investment and 
growth, with foreign capital flows playing a significant financing 
role. Since the HIPCs' private sector has never attracted a comparable 
quantity or composition of foreign resources, it is hard to believe 
that even complete and immediate debt relief would generate capital 
inflows, investment, and growth of any consequential magnitude.
           the hipcs' principal problem is weak institutions
    Recent advances in law and finance help to explain why private 
capital does not flow to the HIPCs and would be unlikely to do so even 
in the event of complete and immediate debt forgiveness. In a series of 
papers, La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 
2002) demonstrate that the degree to which a country's laws protect the 
rights of investors exerts a significant influence on its access to 
external finance. They measure investor protection by constructing a 
composite index of shareholder rights, creditor rights, efficiency of 
the judicial system, rule of law, and the accounting system.
    The first row of Table 3 shows that the median Brady country ranks 
lower than the median G-7 country on the Laporta, et al., index of 
investor protection. The Brady countries' relatively low ranking may 
help explain why the quantity of capital flows they receive pales in 
comparison to the magnitude we would expect on the basis of the 
predictions of the neoclassical growth model (Lucas, 1990; Shleifer and 
Wolfenzon, 2002; Stulz, 2005). Although the median Brady country ranks 
low, the HIPCs do not even make the list. If private capital trickles 
to the Brady countries because they provide weak investor protection, 
then woe to the HIPCs whose capital markets and investor protection 
laws lack sufficient development to even merit a ranking.
    More generally, poorly developed capital markets tend to be 
correlated with a weak economic infrastructure. The second row of Table 
3 demonstrates this point by comparing the institutions of the HIPC and 
Brady countries using the index of economic infrastructure constructed 
by Hall and Jones (1999). The index ranks 130 countries and attempts to 
capture the extent to which a country's economic infrastructure 
provides ``an environment that supports productive activities and 
encourages capital accumulation, skill acquisition, invention and 
technology transfer'' (Hall and Jones, 1999). A ranking of 1 indicates 
the most development-friendly infrastructure, a ranking of 130 the most 
inimical. The median G-7 country ranks 14th while the median Brady 
country 63rd; the median HIPC comes in a distant 102nd. The third row 
of Table 3 shows that a comparison of the Bradys' and the HIPCs' 
economic infrastructure using the Heritage House Index of Economic 
Freedom gives similar results.
    In combination with the earlier data on net resource transfers, 
Table 3 demonstrates a point almost too obvious to state: Unlike the 
Brady countries during the 1980s, the HIPCs' principal problem is not 
debt overhang but an absence of economic infrastructure--both hard 
infrastructure like roads and schools, and soft infrastructure like 
markets and property rights. Without the crucial foundations for 
profitable economic activity, it strains the imagination to believe 
that even full and immediate debt forgiveness will precipitate the 
burst of foreign capital flows, investment, and growth that it did in 
the Brady countries.
    Ironically, the political and financial resources devoted to 
securing debt relief for the HIPCs might be more profitably employed 
toward a number of countries not being considered for such programs at 
all. These include a group of six highly indebted (but not as poor) 
developing countries--Indonesia, Pakistan, Colombia, Jamaica, Malaysia, 
and Turkey--whose economic infrastructures closely resemble those of 
the Bradys (Column 4 of Table 3). Because the group of six have viable 
private sectors and reasonably well functioning capital markets, it is 
more plausible to expect the response of their economies to mirror the 
experience of the Brady countries described earlier in the paper.
debt relief will not help build infrastructure and may have unintended 
                                effects
    The principle of policy targeting states that distortions arising 
from a market failure should be tackled with policy instruments that 
address the failure directly (Bhagwati, 1971; Dixit, 1994). Both debt 
overhang and inadequate economic infrastructure produce inefficient 
outcomes that result from market failure. However, the nature of the 
market failure, and therefore the appropriate policy intervention, 
differs in each case. Debt relief is an efficient policy response to 
debt overhang, because it forces each lender to internalize the 
negative impact of its intransigence on the borrower and other lenders.
    But the HIPCs market failure stems not from lender intransigence, 
but a classic public goods problem in the following vein: 
Infrastructure investment in the HIPCs could raise the rate of return 
to a range of private projects in these countries. For example, by 
allowing them to get their goods to market, building a road where none 
exists could encourage farmers to invest in technologies that increase 
crop yields. But no single farmer will want to build a road, because he 
will bear all of the costs while society reaps the benefits. In other 
words, left to their own devices, markets will not provide sufficient 
roads, or any other public good, so long as the private rate of return 
to doing so is less than the social return.
    Rich-country governments address this type of market failure by 
collecting taxes to pay for public goods like roads, schools, and 
hospitals. Since the HIPCs' tax base is not large enough for this task, 
they require foreign resources to help fill their public goods deficit. 
The question, then, is whether debt relief for the HIPCs will increase 
their net intake of capital from abroad?
    Ironically, past debt relief efforts have actually reduced net 
resource transfers to the HIPCs. The net resource transfer identity, 
equation (1), shows that debt relief increases a country's net resource 
transfer only if the reduction in debt service does not reduce other 
capital inflows. Historically, this has not been the case. Debt relief 
has been given instead of, not in addition to, foreign aid. Again, 
Table 2 displays the point. Aid flows to the HIPCs increased 
continually from 1970 to the mid-1990s. But starting with the onset of 
the HIPC initiative in 1996, aid flows as a fraction of GDP decreased 
significantly. Prior to 1996, aid flows amounted to roughly 16 percent 
of HIPC GDP. Since 1996 that figure has dropped to between 10 and 12 
percent. Together, the fall in aid flows and the postponed reduction in 
debt service has caused a decline in the HIPCs' net resource transfers 
(although they are still positive).
                               conclusion
    The main beneficiaries of the Gleneagles debt relief proposal would 
appear to be the rich countries who garner good political press at a 
trivial cost (Rogoff, 2005). Forgiving debt does not address the 
fundamental problem of inadequate economic institutions that impedes 
investment and growth in the world's poorest countries. And, to the 
extent that additional resources are part of the solution, the indirect 
approach of debt relief does little, if any, good. In the past debt 
relief has had a minimal impact on net resource flows, and there is 
nothing in the Gleneagles proposal to suggest that it will be much 
different. One of the central development issues of our day is whether 
the high-income countries of the world will stand ready to help with 
real money when the low-income countries demonstrate that they are 
ready to put the resources to good use. The danger is that the 
Gleneagles declaration may amount to a Pyrrhic victory: A symbolic win 
for advocates of debt relief that clears the conscience of the rich 
countries but leaves the real problems of the poor countries 
unaddressed.

TABLE 1.--THE HIPCS RECEIVING DEBT RELIEF ARE NOT GROWING ANY FASTER, OR
    REDUCING POVERTY ANY MORE QUICKLY THAN THE HIPCS STILL WAITING TO
                           RECEIVE DEBT RELIEF
------------------------------------------------------------------------
                                             1990-95   1996-00   2001-03
------------------------------------------------------------------------
Panel A: HIPCs That Began Receiving Debt
 Relief in 2000:
  Growth of GDP Per Capita................     -0.3       1.7       2.3
  Human Development Index.................      0.40      0.41      0.43
Panel B: All HIPCs:
  Growth of GDP Per Capita................     -0.5       1.9       2.0
  Human Development Index.................      0.41      0.42      0.43
------------------------------------------------------------------------
Source: World Bank, World Development Indicators.


TABLE 2.--NEW LENDING, GRANTS, AND DEBT SERVICE FOR THE HEAVILY INDEBTED
                             POOR COUNTRIES
------------------------------------------------------------------------
                                         Billions
                                            of     % of HIPC   % of OECD
                                         Dollars      GDP         GPD
------------------------------------------------------------------------
1970-79:
  Net Resource Transfers..............        4.5        7.7        0.10
  New Lending.........................        2.1        3.6        0.05
  Grants..............................        2.9        5.0        0.07
  Debt Service........................        0.5        0.9        0.01
1980-89:
  Net Resource Transfers..............       13.2       12.2        0.13
  New Lending.........................        6.1        5.6        0.06
  Grants..............................        9.1        8.4        0.09
  Debt Service........................        2.0        1.9        0.02
1990-95:
  Net Resource Transfers..............       18.9       15.9        0.10
  New Lending.........................        6.0        5.0        0.03
  Grants..............................       16.3       13.7        0.08
  Debt Service........................        3.4        2.9        0.02
1996-99:
  Net Resource Transfers..............       13.9       10.4        0.06
  New Lending.........................        4.8        3.6        0.02
  Grants..............................       13.2        9.9        0.06
  Debt Service........................        4.0        3.0        0.02
2000-03:
  Net Resource Transfers..............       17.7       12.2        0.07
  New Lending.........................        4.5        3.1        0.02
  Grants..............................       16.0       11.1        0.06
  Debt Service........................        2.8        2.0        0.01
------------------------------------------------------------------------
Source: The data on net resource transfers, new lending, and debt
  service are obtained from World Bank's Global Development Finance Data
  Base. The data on grants come from the World Bank's World Development
  Indicators Data Base.


  TABLE 3.--THE HIPCS HAVE MUCH WEAKER ECONOMIC INFRASTRUCTURE THAN THE
                             BRADY COUNTRIES
------------------------------------------------------------------------
                                           Brady                ``Group
                                 G-7     countries    HIPCs      of 6''
------------------------------------------------------------------------
Laporta, et al., Score......        7.5        4.9        N/A        4.6
Hall and Jones (1999) Rank..         14         63        102         61
Heritage House Index of              14         59        110         58
 Economic Freedom Rank......
------------------------------------------------------------------------
The first row lists the median La Porta, Lopez-de-Silanes, Shleifer and
  Vishny (LLSV) score of social infrastructure for the G-7 countries,
  Brady countries, HIPCs, and the group of six countries. The countries
  in the group of six are Indonesia, Pakistan, Colombia, Jamaica,
  Malaysia, and Turkey. The second row lists the median Hall and Jones
  (1999) rank for each country group. The third row lists the median
  Heritage House Index of Economic Freedom rank.

appendix a, the highly indebted poor countries eligible for debt relief 
                           at various stages
    The original 41 HIPC countries are: Angola, Benin, Bolivia, Burkina 
Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Cote 
d'Ivoire, Democratic Republic of the Congo, Equatorial Guinea, 
Ethiopia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao 
PDR, Liberia, Madagascar, Mali, Mauritania, Mozambique, Myanmar, 
Nicaragua, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, 
Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen, 
and Zambia.
    After a revised debt sustainability analysis, three countries were 
added (Comoros, the Gambia, and Malawi), while six countries were taken 
out of the group (Angola, Equatorial Guinea, Kenya, Nigeria, Vietnam, 
and Yemen). Currently, the HIPC group consists of 38 countries.
    The six countries that reached their completion points under the 
original HIPC Initiative are: Bolivia, Burkina Faso, Guyana, Mali, 
Mozambique, and Uganda.
    The sixteen additional countries that reached their decision points 
under the Enhanced HIPC Initiative, and began receiving debt relief in 
2000 are: Benin, Cameroon, Gambia, Guinea, Guinea-Bissau, Honduras, 
Madagascar, Malawi, Mauritania, Nicaragua, Niger, Rwanda, Sao Tome and 
Principe, Senegal, Tanzania, and Zambia.
    The five additional countries that had reached their decision 
points under the enhanced HIPC Initiative (as of June 2005) are: Chad 
and Ethiopia in 2001, Ghana and Sierra Leone in 2002, and Democratic 
Republic of Congo in 2003.
    The eighteen countries that have reached their completion points 
under the enhanced HIPC Initiative (as of June 2005) are: Benin, 
Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, 
Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, 
Tanzania, Uganda, and Zambia.
    The nine countries expected to reach their completion points in the 
next 1 to 3 years: Cameroon, Chad, Democratic Republic of Congo, The 
Gambia, Guinea, Guinea-Bissau, Malawi, Sao Tome and Principe, and 
Sierra Leone.
                    appendix b, the brady countries
    Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, Dominican 
Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, Peru, Philippines, 
Poland, Uruguay, and Venezuela.

    Senator Casey. Thank you very much, Doctor.
    I wanted to move to questions for our panelists. Dr. 
Birdsall, I wanted to start with you. You have a book entitled 
``Delivering on Debt Relief,'' and in your book, among other 
things, you address the advantages of debt relief as an 
alternative mechanism of delivering aid to developing countries 
as well as the possibility of selling IMF gold to finance debt 
cancellation.
    Could you discuss your views on these issues in greater 
detail? Could you provide a commentary on that aspect of your 
book?
    Dr. Birdsall. Certainly, Senator Casey. Let me make just 
two points. One is that my remarks in the written testimony 
that refer to debt relief as a hyperefficient form of aid are a 
reflection of the thought that I gave to the issue in writing 
that book some years ago and also to the more recent work of 
myself and colleagues at the Center for Global Development on 
the terrible inefficiencies in what I would call the aid 
industry. And those inefficiencies are a problem in the U.S. 
foreign assistance programs, but they are also a problem in the 
foreign assistance programs of many other bilateral donors and 
in the work of the World Bank and the multilateral development 
banks.
    I would not want to suggest that those aid programs do not 
make sense at all, just to suggest that they impose very high 
administrative burdens on the recipient countries, particularly 
the poorest countries which are receiving about 10 percent, 
sometimes more, of their GDP annually in aid, which means that 
they are sometimes covering more than 40 percent of their 
expenditures with aid inflows. And they end up spending a lot 
of time talking to the 50-plus donors, the many NGOs, the U.N. 
agencies, and being responsive to all these different demands 
for monitoring, reporting, disbursement procedures, protocols 
with respect to procurement on infrastructure deals instead of 
being responsive to their citizens.
    So I think any step that moves the United States in a 
direction for the poorest countries of making the aid process, 
including debt relief, more efficient for those countries, 
particularly those that are performing well, is a good one. So 
that is my first point that I am happy to have had a chance to 
emphasize.
    The reference to the IMF gold. Let me put it in the context 
of this particular bill. I think it is important to distinguish 
in a technical sense between the call in this bill for the 
World Bank to finance any additional debt writeoff for all IDA 
countries from its internal resources and that call on the IMF.
    In the case of the IMF, it is possible for the IMF to 
mobilize or sell gold in order to deal with these liabilities 
of the poorest countries which may remain to the IMF without 
creating the problem that it is robbing Peter to pay Paul. In 
effect, the IMF can sell gold. It would not take all that much 
in the case of these countries here, assuming that Vietnam and 
Bangladesh and some of the other big ones did not opt in. And 
the cost in a sense, I have said in other work, is that the 
central bankers of the rich countries sleep slightly less well. 
They have a slightly lower capital resources to cover any risks 
that might occur to financial stability in the global system.
    In the case of the World Bank and the other banks, as I 
suggested in my initial testimony, unless new debt relief--new 
relief to low-income countries for the debts owed to those 
institutions is covered by new contributions from the United 
States, the Europeans, the Australians, and so on--if that does 
not happen, if the World Bank uses its internal resources, 
those internal resources have to come either from existing IDA 
money, which will reduce lending and grants to those very 
countries or to other countries which may be more deserving in 
terms of performance, more able to use the resources well, or 
they will come from transfers from the hard window at the World 
Bank.
    If they come from transfers at the hard window at the World 
Bank, that eventually circles around to reduce, all other 
things the same, the capital available in the World Bank, which 
in turn comes around to slightly higher or more than slightly 
higher interest charges to those countries that are borrowing 
from the hard window.
    This is not really a big financial problem. You could say, 
let us have the Chinese and the Turks and the Mexicans pay for 
debt relief to Moldova, Lesotho, Kenya, et cetera. But it is a 
credibility issue. It is a reputational issue. It illustrates 
the point that the United States needs to develop any approach 
like this one in concert with the other rich nations which are 
the traditional donors.
    And then we come back to my point in my testimony that the 
United States is not now in a very good position to do that, 
given that it is in arrears to these institutions, which are 
like global clubs. So one member of the club is not behaving 
very well, and it does not seem appropriate for that member of 
the club, without paying up its dues, to be creating new 
demands, much of which will be borne by other members.
    It is very interesting, in particular, that of the nine 
countries that would qualify under the current Jubilee bill, 
given their performance--they meet the performance 
requirements--four or five of them have virtually no debt to 
the U.S. bilateral aid system. So we are calling on other 
creditors in Europe and so on to do something that, at least on 
the bilateral side, we do not need to do. I think we should do 
that only when we have cleared up the existing arrears.
    Sorry for the long answer.
    Senator Casey. That is OK.
    Let me ask a question to you and our other two witnesses. 
You can all take time to answer this. You heard a good bit 
today by way of oral testimony and also the written testimony 
with regard to the administration. If you can assess that, in 
other words, assess the administration's approach to this issue 
as it contrasts with the one that is contemplated by the 
Jubilee Act bill.
    Dr. Birdsall. I would say that what has been accomplished 
under this administration and the Clinton administration in the 
nineties on debt relief has been extraordinary. So I would give 
a lot of credit to the executive branch for following a lead 
set in the legislative branch on these issues in a way that has 
been technically sound and has been politically prudent. So I 
put some weight on the fact that the Treasury officials are 
concerned about the arrears in the context of this bill.
    I would urge the Congress, through this bill, to use the 
opportunity to ask Treasury to push harder on the insurance 
type facility that I mentioned. I think the events of the last 
few months illustrate the tremendous value of doing that, and I 
believe that such an approach is consistent both with the 
interests of the Jubilee movement and your interests and those 
of other legislators that have signed onto this bill in finding 
additional efficient ways to respond to poor countries' needs 
in supporting their development objectives, while at the same 
time not creating questions about whether there is something 
wrong with debt in itself and not creating political pressure 
in some countries, which honestly, frankly, I saw when I was at 
the Inter-American Development Bank in the case, for example, 
of Bolivia, which was an early HIPC beneficiary.
    Initially it was not really clear that the Government of 
Bolivia wanted to enter into the HIPC program--this is way back 
in the nineties--because at that time, that government was 
steaming ahead on a set of economic reforms with considerable 
support from the United States and wanted to lock in access to 
private capital markets. In the end, they made the tradeoff and 
they went ahead with opting in for HIPC eligibility.
    But the point is that we should respect countries' own 
processes for trying to get into the capital market and their 
own efforts at better debt management, at prudent borrowing 
when they are ready to do it and not create a sort of allure of 
new rounds over and over of debt relief when that may not be 
the single best instrument to help them out. It may be that 
they are better off to have more grants from the United States 
and from the World Bank and from other donors and at the same 
time be building up the reputation for good management that 
allows them eventually to go to private capital markets and 
allows borrowers inside those countries, small and medium 
enterprises, for example, to--it creates the environment where 
there is a better domestic capital market as well where some of 
the capital that does exist on the part of the rich in those 
countries, instead of going outside, begins to stay inside and 
be intermediated through the financial system for high return 
investments at home.
    This is all part of a process of developing a market-based, 
sustainable growth approach. So I am not sure I have answered 
your question very directly except to say I think we need to 
respect and take carefully into account the views that are 
developed in the U.S. Treasury and in these other institutions. 
They may not always be exactly right. No doubt. As I think you 
mentioned, the Center for Global Development has been pushing 
the IMF with success, by the way, to be less risk-averse in its 
recommendations on fiscal and monetary policy in poor 
countries. At the same time, we need to respect those views and 
take them into account. And in this instance, I would say that 
I would take pride as a U.S. taxpayer in the approach over the 
last decade or more that has emerged on this debt relief issue.
    Senator Casey. Mr. Flood.
    Mr. Flood. Thank you, Senator.
    Senator Casey. With regard to the administration's testi-
mony----
    Mr. Flood. Yes. Well, I was very interested when Mr. Lowery 
said that Secretary Paulson had spoken to ministers from 
several African countries and none of them brought up debt 
relief. I was thinking to myself, that is great, because almost 
all of the countries in Africa that he might have met with--and 
my guess would be all of them--have already received debt 
relief. They are already beneficiaries of the HIPC debt relief 
program and the MDRI. So the fact that they are not talking 
about debt relief means that they are going beyond it now to 
deal with some other issues and hopefully the fiscal space that 
has been provided by the debt relief that they received puts 
them in a better position to begin to move forward toward a 
more dynamic path of growth and poverty reduction. So I thought 
that was fine.
    But what we have here is countries that have never been 
through the process, and we are talking about completing the 
process now by bringing in those few remaining countries--it is 
not a huge number--who have been left out and who I think that 
for all the reasons that I tried to make clear in the oral 
testimony, merit being brought in so that we can say we have 
completed the job.
    The idea is not that countries should come back in every 2 
years and get another round of debt relief. That is not it at 
all. The idea is to give them a fresh start, which these 
countries have never had, and quite a few of them are in 
serious debt situations. There are a few that are not, but for 
the reasons I mentioned, the justification for bringing them in 
I think is strong as well.
    Now, on the question of the arrears, I think that is a 
serious question, and I certainly agree with that. I think that 
the United States should deal with that. I do not think this 
should be seen as a tradeoff, you know, either we do the debt 
relief or we clear up our arrears. I think we have to do both, 
and I think the sooner we get the arrears cleared up, the 
better. Only then will we be in a position to really go out and 
negotiate strongly a program like this, but let us get started 
working on it. In the meantime, get those arrears cleared. I 
think it is very important to do that.
    I had--well, I will let it go for the time being.
    Senator Casey. Thank you.
    Dr. Henry.
    Dr. Henry. Thank you.
    So let me start by saying again that the grants versus 
loans idea is one of the better ideas to come out of this 
administration. Actually it was started to some extent under 
the Clinton administration. So let us give credit in both 
places there. And the idea was pushed very hard early on in 
this administration, but it sort of fell out of view for other 
reasons.
    But the grants versus loans idea is really essential 
because when you think about the difference between the low-
income countries of the world and the Brazils, Mexicos, 
Argentinas, Turkeys, the middle-income developing countries of 
the world, you really start to see very clearly why grants 
versus loans make sense. In countries like Brazil, Argentina, 
Mexico, where there is access to private capital markets, you 
ask yourself, why do they have access to private capital 
markets? Because they have a certain amount of institutional 
capability that works. Markets do work. And if you think back 
to a case where debt relief actually did work, it was in the 
case of the Brady plan in the late 1980s and early 1990s 
precisely in middle-income developing countries.
    So debt relief is really designed to solve a very specific 
problem. It is really designed to solve a problem that occurs 
in private capital markets that Secretary Lowery actually 
alluded to, which is that if you have profitable borrowers who 
have just become overly indebted and actually suffer from debt 
overhang, then in those instances, writing off debt can 
actually lead to an efficient stall on payments to all 
creditors, forcing all creditors to take some losses so that 
the borrowers can actually recover. And then we end up seeing 
new flows of money going to these countries, and we see an 
increase in investment, increase in growth, and these countries 
are able to turn themselves around.
    The channel for that to happen is completely absent in the 
low-income countries because they have never had much private 
capital to speak of in the first place. So actually writing 
down the debt is not going to spur investment or growth in 
these countries. As I said in my testimony, it is an indirect 
way of trying to deal with the problem. The key investments in 
the poor countries of the world are really what we call high 
social rate of return investments, public goods, schools, 
roads, clean water, things that the private sector is not 
necessarily in a position to finance, and things which are 
going to be long gestation in terms of generating returns.
    That is the classic argument for actually giving foreign 
assistance. So if you really want to directly address the 
problems of the poor countries, then give assistance directly 
at that margin. That is the point that I really would like to 
emphasize.
    So I am not arguing that we should not help poor countries. 
The question is how. And then there is also the question of 
quantities. And this is where I think priorities are very 
important.
    As it stands, if you take the world as it is, there really 
does seem to be currently kind of a fixed amount of good will 
in the world, so to speak. The amount of resources that we are 
willing to transfer to poor countries has been fixed over time. 
If that is true, then all debt relief effectively does is 
change the form in which you are actually giving assistance to 
these countries. I happen to think it is not the most efficient 
way of doing it.
    It also becomes a distraction from the real issue, which is 
why are we not willing to provide the resources that we say we 
are going to do over and over. And I really do worry that all 
the focus on debt relief is an enormous distraction from the 
key issue.
    So if I were thinking about how to rewrite this bill, if I 
may be so presumptuous, I would put more emphasis on the fact 
that we are continually falling short on past aid promises and 
that while aid is not the answer in and of itself, there are 
ways to think about making aid more efficient, and we can do 
that in concert with actually ratcheting up our commitment to 
past promises rather than arguing about debt relief and 
accounting issues which really are beside the point because the 
money at stake is really trivial.
    Senator Casey. I wanted to start a little argument here, to 
have a response to the points you just made, Mr. Flood or Dr. 
Birdsall, if you want to respond to Dr. Henry's points.
    Dr. Birdsall. I will leave the last push to you.
    Mr. Flood. Go ahead.
    Dr. Birdsall. Well, I would like to differ slightly. I am 
not sure that it is fundamental to the challenge that you face, 
Senator Casey, with this legislation. But I would like to 
differ a little bit with what Peter Henry just said.
    I think that there is a great passion out there amongst 
Americans for what is seen justifiably as an approach to 
helping the poor in the world that is fair, that has an element 
of fairness about it, and that there is something patently 
unfair about the fact that many countries that are very poor 
have been burdened with these high debt payments. In that 
sense, I would say it is worth riding the horse of debt relief, 
frankly, because it is channeling a reasonable and really 
admirable passion and a sense of generosity out there in a way 
that I believe is very efficient, given the current structure 
of the aid industry.
    I agree with Dr. Henry that we could do a lot better in the 
way we deliver aid, and that is another entire hearing in my 
view, as some of your colleagues on your staff will know.
    So I just wanted to make that point. So I do think that it 
is useful to have this Jubilee Act. I think even this hearing 
has brought out the potential, frankly, through your good 
offices to use this in a good way to move on and get these 
arrears covered, which would make, frankly, myself, and I 
perceive the U.S. Treasury staff and managers, much more 
enthusiastic about thinking about this approach in and of 
itself.
    I do think it is also important to address the volatility 
problem, the vulnerability problem that I raised. I think that 
is probably in a technical sense a much better way to approach 
the overall difficulties of so many low-income countries than 
to go down to the last intensive margin of debt relief, 
particularly in countries like, frankly, Vietnam, Mongolia, 
even Bangladesh, Kenya. I think a lot of these countries--it is 
very good to have a system in which they are working toward 
entering the market while at the same time benefiting from some 
forms of assistance in the volumes that are critical so that 
the public goods can be covered which are critical inputs to 
the growth process.
    So these are highly technical points. In the end, I do not 
want this hearing, or at least my testimony, to come out 
seeming not to support the concept of debt relief. It is more 
about the specifics. The devil is in the details of how it is 
done and, in particular, the timing of such legislation with 
respect to the arrears problem.
    Senator Casey. I think, Mr. Flood, you may have the last 
word. I have a conflict. I have to appear with Senator Specter 
at an event that pertains to our State and I cannot miss it. I 
have another 25 questions, but what we might do is, after your 
answer, we could propound questions to each of you for the 
record and have you answer them in writing for the purposes of 
this hearing. But I apologize that I have to cut this short, 
but I wanted to make sure that Mr. Flood had the last word, at 
least responding to that basic question pertaining to what Dr. 
Henry said.
    Mr. Flood. Well, I do not have a whole lot to add to what 
Dr. Birdsall said about the overall value of debt relief.
    I just wanted to comment on two points made by Dr. 
Birdsall. One, I have always thought that the idea of some sort 
of insurance program or structure going forward was a good 
idea, and I certainly would support any efforts along those 
lines to make that sort of thing possible.
    On the financing of this particular debt relief that is 
being proposed here, I would have agreed with Dr. Birdsall 10 
years ago about the World Bank, but I really do not today. They 
are doing very, very well. Now, I am not saying that I think 
that it is realistic to expect that there will not be some 
requirement of budgetary support for this program. I think 
there definitely will. I do not think, even if one could argue 
that it was financially quite possible for the World Bank to 
finance all this out of its own resources, that its 
shareholders would agree with that.
    But I do think that with a bit of political will here, one 
would see clearly that the World Bank is in a very, very strong 
position right now. They issued a report only a few months ago 
showing that they had, by their own calculations, $10 billion 
in excess reserves. In other words, their equity-to-loans ratio 
was high enough to give them much more than they needed for 
long-term capital adequacy. They said that themselves. Of 
course, then they said we still think we have to keep it all to 
ourselves and not, for example, transfer funds to IDA for debt 
relief. They would not agree with that.
    But there is a basic assumption that they are making in 
saying that they cannot transfer a large part of this, if not 
all of it, to IDA, for example, for debt and perhaps other 
funding for poor countries, and that is that they say that 
their loans are going to grow at 3 percent a year over the next 
30 years or so. It is a very, very long time. The fact of the 
matter is that they have been in a long-term decline in terms 
of the amount of loans outstanding. Since 1994, it has dropped 
on an average of 2 percent a year, and that is even including 
the bulge of lending that they did during the Asian debt 
crisis.
    So the idea that their outstanding levels are going to grow 
at 3 percent a year is extremely optimistic. Instead of growing 
at 3 percent a year they grow at, say, 1 percent a year, which 
would be a big turnaround from the recent trend, there should 
be a very large portion of that very large amount of excess 
capital that could be available and could be transferred to IDA 
and could finance a large part of the debt relief that is being 
proposed here for the World Bank. And it would not mean that 
there would be any rise in interest rates to any of the 
borrowers because, by definition, this is excess. These are not 
funds which they need to retain to preserve their financial 
soundness. They are well, well beyond anything that might, 
arguably, be needed in order to maintain a AAA rating, for 
example.
    Finally, the bill does not say that this all has to be 
financed from the institutions from their own resources. It 
just says to the extent possible, and recognizes that it may 
not be possible to get it all out of the international 
financial institutions.
    Senator Casey. Thank you very much. Unfortunately, I have 
to go, but we appreciate your testimony. We will get more for 
the record, but thank you very much.
    The hearing is adjourned.
    [Whereupon, at 3:57 p.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


 Prepared Statement of Hon. Richard G. Lugar, U.S. Senator From Indiana

    I join the chairman in welcoming our witnesses. In 1999, the United 
States and other industrialized nations established the Highly Indebted 
Poor Countries Initiative in response to crippling levels of debt 
combined with anemic economic growth in dozens of developing countries. 
This was followed several years later by the more comprehensive 
Multilateral Debt Relief Initiative.
    These initiatives allowed poor countries to receive debt relief in 
exchange for adopting economic policy reforms and channeling their debt 
savings to poverty reduction activities. For example, Uganda is using 
its debt cancellation savings on primary education, health, and 
infrastructure. Zambia is devoting its savings to improvements in 
agriculture and health.
    However, despite many examples of successful debt relief, the debt 
problem in the developing world continues to threaten stability; impede 
economic growth; and constrict investments in health care, education, 
sanitation, and other elements essential to development. In response, 
Congress is now considering the Jubilee Act, which would expand the 
concept of debt relief to additional countries.
    Much of the international debt due to be forgiven is owed to the 
multilateral development banks and the International Monetary Fund. 
Since 2003, the Foreign Relations Committee has reviewed U.S. policy 
toward the development banks. We examined how to maximize development 
bank efforts and how to continue the fight against corruption linked to 
development bank financing. We found that corruption not only enriches 
the undeserving and undermines the effectiveness of development 
projects, it leaves the resulting debts to the impoverished. One 
important way to combat the need for future debt relief is to ensure 
that development loans are implemented effectively and ethically.
    It is critical that Congress fund our current commitment to debt 
relief and the development banks. The United States pledges for debt 
relief and the development banks are not being fulfilled. The gap 
between our pledges and our actual contributions jeopardizes U.S. 
efforts to advance key reforms promoting anticorruption, the 
measurement of results, and increased transparency of development bank 
operations. Our arrears status is leading to U.S. shares at some 
development banks being auctioned off to other countries, further 
undermining our ability to leverage the development banks for our 
foreign policy interests.
    Congress must also reauthorize debt-for-nature swaps through the 
Tropical Forest Conversation Act (TFCA), which is one of our most cost-
effective diplomatic and conservation tools. Through TFCA, more than 47 
million acres of tropical forests in developing countries have been 
conserved, helping to absorb internationally generated carbon. TFCA 
uniquely leverages the contributions of private donors, who have given 
more than $12 million to TFCA swaps.
    As an original cosponsor of the Senate version of the Jubilee Act, 
I appreciate the opportunity today to discuss the dynamics of debt 
relief and receive expert commentary on the bill. The Jubilee Act 
carries great promise, but we should be open to additional ideas that 
may improve the effectiveness of debt relief. I look forward to the 
insights of our witnesses.
                                 ______
                                 

Prepared Statement by Muyatwa Sitali, Coordinator, Debt, Aid and Trade 
 Programme, Jesuit Centre for Theological Reflection, Lusaka, Zambia--
     ``The Benefits and Challenges of Debt Cancellation in Zambia''

                     a. introduction and background
    On behalf of the Jubilee campaign in Zambia, I would like to 
express our sincere appreciation to the Jubilee USA Network and 
Senators Casey, Lugar, and Dodd for their leadership and support for 
the Jubilee Act for Responsible Lending and Expanded Debt Cancellation 
(H.R. 2634). We are also grateful for the opportunity to submit this 
written testimony on the occasion of today's hearing.
    We are also grateful to the institutions and committees that have 
already considered the Jubilee Act and have subsequently voted for it. 
We are particularly grateful to the House of Representatives for its 
strong bipartisan support for the legislation.
    It is with pride and a sense of solidarity that today we witness 
debt cancellation in 23 countries, including Zambia. At the same time, 
many more countries which are deserving of similar benefits are still 
being denied the opportunity to get space to concentrate on development 
which does not only help them meet their national development targets 
but also contributes to the achievement of the Millennium Development 
Goals (MDGs). This is due to the eligibility limitations of the current 
debt cancellation initiatives.
Brief Historical Context, Challenges and Benefits of Debt Cancellation
    Both Zambia's external and internal debts were very high before the 
HIPC Initiative, but it was the huge external debt and the country's 
poor export performance that qualified the country for entry into the 
Heavily Indebted Poor Countries (HIPC) initiative.
    Before reaching the Decision Point of the enhanced HIPC Initiative 
in 2000, Zambia's external debt stood at US$6.5 billion, more than 
twice Zambia's GDP. In 2004, Zambia's debt stock stood at US$7.1 
billion. With Decision Point qualification, debt servicing started 
reducing but marginally.
    With the attainment of the HIPC Completion Point (HIPC-CP) in April 
2005, many people had hopes rekindled and anxieties rose. Further debt 
cancellation under the Multilateral Debt Relief Initiative (MDRI) 
increased expectations. This was described by the Minister of Finance 
as ``optimism and a sigh of relief at having achieved one of the 
landmarks in the history of Zambia'' (Budget speech, 2006).
    After attaining HIPC-CP efforts were made to recruit 8,500 teachers 
in 2005 and a further pledge by the government to employ 5,000 more 
teachers, 1,700 more health personnel, build 31 high schools, 1,500 
classrooms in 2008. The local currency, the Kwacha, appreciated by 27 
percent (Development Zambia, 2006). This basically proves that debt 
relief can work and that debt relief can also reach some of the poor 
communities.
    Parliamentarians in Zambia attest to this fact. The Chair of the 
Economic Affairs and Labour Committee, Honourable Given Lubinda, in his 
presentation to the Jubilee Prayer Breakfast in the U.S. House of 
Representatives on October 16, 2007, alluded to the fact that ``the 
US$23.8m savings from debt relief for my country is going into 
agricultural projects, eliminating of school fees and user fees in 
rural health care centres and to infrastructure development.''
    Zambia's historical challenges stemming from a huge external debt 
problem did not only deny the citizens of Zambia benefits from their 
resources but also substantially constrained governments' abilities to 
plan effectively and implement national plans. For example, in 1986, 
Zambia spent 86 percent of its export earnings on debt service and was 
left with only 14 percent percent to distribute to other sectors. This 
trend continued even with the onset of HIPC when in 1999 Zambia paid 
over three times of its combined budget for health, education, and 
social security in debt service.
    With both HIPC and the subsequent Multilateral Debt Relief 
Initiative, Zambia's debt repayment has now come to an average of 
US$60-80 million per year as opposed to over US$300 before the 
attainment of HIPC completion point as well as entry into the MDRI 
initiative. These benefits are only party to a list of which the 
following is by no means exhaustive:

          a. Irrevocable debt relief which totaled US$3.8bn under HIPC 
        and over US$2bn under the MDRI.
          b. Significant annual debt savings. The country will be 
        saving annually about US$180 million or K500 billion in debt 
        service.\1\ At the time of reaching the completion point of the 
        HIPC initiative, annual debt service was projected to fall 
        below US$150mn per year at least up to 2020. Last year, 2007, 
        foreign debt service was K244 billion (approximately US$65 
        million) against the pre-HIPC and pre-MDRI figure of US$373.2 
        million in 2004.\2\ The amount of US$65 million (K244 billion) 
        was about 2 percent of the budget while the pre-MDRI figure of 
        K373.2 billion was 3.7 percent of the budget in 2006. These 
        savings arising from debt relief under both the HIPC Initiative 
        and MDRI are expected to assist the country in its development 
        efforts so as to reduce the current levels of poverty by 50 
        percent by 2015.
---------------------------------------------------------------------------
    \1\ Zambia's National Budget: 2006.
    \2\ Zambia's National Budget speech, 2007.
---------------------------------------------------------------------------
          c. Substantial reduction in the overall stock of external 
        debt. Preliminary information indicates that the country's 
        external debt stock stood at US$635 million as at end of 
        December 2006, a reduction of 86.7 percent from the end of 2005 
        stock of US$4.5 billion.\3\
---------------------------------------------------------------------------
    \3\ Zambia's National Budget speech, 2007.
---------------------------------------------------------------------------
          d. Increased policy space. Upon the attainment of HIPC 
        completion point, primary rural education and health care were 
        made free, enabling thousands of rural children and citizens to 
        access free basic education and primary health care. It is 
        worth stressing that of Zambia's 11.9 million, 65 percent are 
        in rural areas. Preliminary reports from Zambia's Central 
        Statistical Office indicate that between 2004 and 2006 rural 
        poverty increased by 2 percent to 80 percent while urban 
        poverty reduced from 53 percent to 34 percent.
          e. Increased focus on poverty through increased expenditures 
        on social sectors like education and health. The two post HIPC/
        MDRI budgets for Zambia have showed some modest increases in 
        social sector spending. For example, in 2005, social sector 
        spending totaled 30 percent of the budget; this increased to 36 
        percent in the 2007 budget and subsequently over 37 percent in 
        2008. With increased focus on poverty, the remaining ingredient 
        to halving poverty by the year 2015 is increased commitment and 
        consolidated action from donors to meet their aid pledges to 
        poverty reduction.
               b. remaining challenges in debt management
    The gains highlighted above are not without challenges. The 
challenges are both domestic and external and their resolution will not 
only depend on national reforms but also on the international 
communities' response to the post HIPC/MDRI challenges.
Macroeconomic Policies and Harmful Conditionalities
    Zambia's macroeconomic indicators reveal that there has been steady 
growth recorded at an average of over 4 percent in the last 5 years, as 
opposed to GDP growth of 2.2 percent in the 4 years before the 
government embarked on a return to national planning induced by the 
Poverty Reduction Strategy Programme under HIPC. Inflation has also 
been below 10 percent in the last 2 years. While this favourable 
macroeconomic outlook is necessary for the improvement of economic and 
human development; in itself, it does not guarantee human development 
and poverty reduction.
    In Zambia, the results of a stable macroeconomic outlook have not 
translated into direct benefits for communities. It is clear that 
striking the delicate balance and tradeoffs between macroeconomic 
stability and economic growth are ignored, while certain social 
priorities are subordinated. This is as a direct consequence of the 
policy prescriptions of International Finance Institutions whose 
impetus has always been built around macroeconomic reform rather than 
ensuring that social-economic progress is assured.
    The meddling of IFIs into Zambia's governance structure originates 
from the 1970s when Zambia's economy was faced with both internal and 
external shocks relating to the fall of world copper prices and the 
simultaneous increase of oil prices. This gave rise to the IFIs advice 
commonly known as Structural Adjustment Programmes in the 1980s. SAPs 
aimed at reducing the role of the state in the economy by stabilizing 
and liberalising the economy including external trade and privatizing 
state-owned enterprises (World Bank 2002a, 3).
    While SAP measures achieved macroeconomic stability, the GDP growth 
in the reform decade 1990-2000 was negligible, averaging 0.6 percent, 
while between 1991 and 1995 the economy contracted by 1.6 percent and 
external aid dependence increased. In 2002, 43 percent of the 
Government of the Republic of Zambia's (GRZ) annual budget was financed 
from external resources that included loans (Saasa 2006). Consequently, 
Zambia's external indebtedness rose from US$3.2 billion in 1980 to 
US$5.6 billion at the beginning of 1987. By 2000, it had skyrocketed to 
approximately US$7 billion. As the levels of Zambia's public debt rose, 
concurrently did the level of leverage of its creditors, especially the 
IFIs in determining Zambia's economic and social policies (White, 1999 
in Chisala 2006).
    The result of these policies are undoubtedly visible even in 
Zambia's current high levels of unemployment which the Central 
Statistical Office of Zambia indicate that employment between 2004 and 
2006 continued to take a downward trend. The CSO 2006 preliminary 
report of living conditions states that ``more people were employed in 
2004 than in 2006, 54 percent and 43 percent respectively, while more 
people were classified as unpaid family workers in 2006 (12 percent) 
compared to 2004 (5 percent).''
    Honourable Given Lubinda, the Zambian MP, in his speech to the 
Jubilee Prayer Breakfast, laments the current situation which is 
historically linked to the role IFIs play in low-income countries: ``As 
though they were a panacea to the unsustainable debt that my country 
and other poor countries had accumulated creditor nations and the 
Breton Woods institutions imposed various conditions such as 
privatisation, wage freezes, downsizing of the civil service, 
introduction of user fees for primary health care and basic education, 
cancellation of government subsidies to water and sanitation and so on. 
As we have now come to acknowledge the results of these formulations 
have been reduced productivity, increased joblessness, deepened poverty 
and even heavier debt. Under these circumstances, the attainment of the 
most important United Nations Millennium Development Goals (MDGs) by 
countries such as my own will be a far cry.''
    The international community has come to realise the dangers of the 
inappropriate conditionalities based on flawed assumptions. Even the 
World Bank staff has admitted this fact. The admission by Edward 
Jaycox, the then-World Bank vice president in charge of the African 
region, is particularly insightful as it underscored not only the 
strategic role multilateral bodies such as the IMF played in Zambia's 
structural reforms but, more significantly, confirmed how the IMF's 
Zambian Programme was poorly handled: Writes Jaycox: ``Zambia's was a 
terribly underfunded Programme. We overestimated copper revenue, 
overestimated aid flows, and did everything we could to paint a picture 
of an internally consistent financing plan based on the resources that 
we and others could bring to bear. If the case had been looked at more 
closely or more sceptically, the plan's lack of realism would have 
become apparent. A great number of shocks took place as the adjustment 
process went along: Copper prices went down or stayed at the same level 
when they were expected to go up; aid that was expected did not arrive; 
deals with the Paris Club that were normative were made less liberal 
when the aid was increased . . . In sum, the Zambian Programme was 
administered in a very chaotic way, and the chaos resulted in part from 
the inadequacy of financing and unrealistic financing projections.'' 
\4\
---------------------------------------------------------------------------
    \4\ Jaycox, E., 1991, ``Comments on Africa,'' in Thomas V. et al. 
(eds), ``Restructuring Economies in Distress: Policy Reform and the 
World Bank,'' Oxford University Press, Oxford.
---------------------------------------------------------------------------
    The consequences of the bad conditionalities Zambia needed to 
satisfy in order to attain completion point are still being reversed. A 
study on the Use of Conditionality by International Finance 
Institutions to encourage privatisation and liberalisation indicates 
the frustrations. ``It is noteworthy that, in spite of the 
acknowledgements regarding the acceptability of IMF's Poverty Reduction 
and Growth Facility conditionalities, some level of frustration has 
been recorded at lower levels within the Government system itself. A 
senior economist at the Ministry of Finance and National Planning 
shortly before the country was put on a Staff Monitored Programme 
following its failure to meet PRGF fiscal targets in 2003, the response 
(below) is illustrative'':

          Zambia is a case of a so-near-yet-so-far situation. We have 
        complied with all the benchmarks and targets save for one on 
        fiscal management and this has thrown the entire economic 
        programme with creditors off course. The implications of this 
        situation are obvious. Firstly, as a country we have forgone 
        US$3.8 billion, which should have been knocked off our total 
        debt stock had we reached the Completion Point this year. This 
        essentially means that we still remain heavily indebted to the 
        creditors. Secondly and more importantly, the amount of money 
        required to successfully implement the PRSP has been 
        drastically reduced meaning that some poverty reducing 
        programmes have simply been shelved aside. For instance, this 
        year's national budget allocation to the PRSP was K420 billion 
        out of which Government has only managed to mobilize K110 
        billion. The balance in the national budget was to come from 
        donors who have since imposed an aid freeze. Put differently, 
        the PRSP is slowly being rendered irrelevant as it cannot be 
        implemented and thus national development plans are at best 
        inconsequential if they cannot be implemented or realized. \5\
---------------------------------------------------------------------------
    \5\ Interview with Dr. Situmbeko Musokotwane, Deputy Secretary to 
the Cabinet, 20 October 2006.

    The Minister of Finance, in June 2005 during a meeting with civil 
society groups and after the country attained the HIPIC Completion 
Point, is acknowledged that ``creditors have substantial amount of 
control in the affairs of the nation when it comes to setting 
conditions on loans,'' but was quick to add that ``. . . this can be 
avoided if Zambia reduced on borrowing.'' \6\
---------------------------------------------------------------------------
    \6\ Jubilee-Zambia, National Conference Report on the theme 
``Beyond the HIPC Completion Point-Which Way Forward for Jubilee-
Zambia,'' Conference held on 9 June 2005.
---------------------------------------------------------------------------
    In the past 8 years a number of internal processes have taken place 
within the creditor community to respond to criticism on openness, 
accountability, and the power asymmetry. The responses of the IMF and 
World Bank are summarised in the figure below.

          IMF and World Bank response to Conditionalities

           IMF:

              Adopting the ``new aid architecture'': PRSP-
        alignment and donor coordination;
              Reaffirming of IMF's role to address balance of 
        payment problems;
              2002 Guidelines on Conditionality.

           World Bank:

              Adopting the ``new aid architecture'': PRSP-
        alignment and donor coordination;
              Devising a selectivity approach to aid allocation;
              2005 Conditionality Review.

    A study commissioned by the Norwegian Government in 2006 assessing 
``The World Bank's and the IMF's use of Conditionality to Encourage 
Privatization and Liberalization: Current Issues and Practices'' in 
Bangladesh, Mozambique, Uganda, and Zambia also concludes that while 
the IFIs have embarked on some important reform, their stewardship role 
is still highly prevalent. These conclusions are summed in the figure 
below:

          Do the IFIs adhere to their own guidelines?

            There is a stronger sense of national ``ownership'' 
        of the programs, but this is reduced by:

              Weaknesses in participatory processes;
              Extensive dependence on IFIs and foreign consultants 
        in elaboration of policies, and lack of local input;
              Lack of ``policy space'' and analysis of policy 
        alternatives; and
              Lack of unified view within the government, 
        frequently used by IFIs to promote their own cause.

            The IFIs are more flexible in their enforcement of 
        conditionalities. Sometimes bilateral donors and civil society 
        have demanded less flexibility.
            Donor coordination is strengthened, but this may 
        reduce policy space and weaken borrowing member countries' 
        bargaining power.
            Local IFI representatives show little in-depth 
        knowledge of the World Bank's GPPs.

    The same study also poses critical questions as to whether the IFIs 
(World Bank and IMF) still use Conditionalities to promote 
privatisation and liberalisation? The conclusion is that ``though less 
common, these conditionalities are still prevalent.''

           Do the IFIs still use condionalities to promote 
        privatization and liberalization?

              Privatization and liberalization are still 
        included as conditionalities in World Bank and IMF loans, but 
        are less common than before.
              The policy advice given by the IMF and the World 
        Bank on privatization and liberalization has changed; a clear 
        trend towards greater pragmatism and focus on complementary 
        policies, but changes not uniform across cases and sectors.
              The IFIs exert considerable influence through 
        providing policy advice, and have not generally elaborated 
        alternative policies to those involving privatization and 
        liberalization.

    Of critical concern for countries like Zambia, is the role the IMF 
and the Bank have continued to play in stewarding the process of 
development. In illustrating this point, in his 2006 study on the Use 
of Conditionality by International Finance Institutions to encourage 
privatisation and liberalisation, Professor Saasa quotes a former 
Ministry senior official who at the time of the interview was Managing 
Director of Zambia National Commercial Bank, ``There were times when we 
officials will . . . sit in the Minister's conference room [awaiting 
the Minister to join us] . . . Then he will come in the room 
accompanied by IMF officials and inform us the . . . already agreed 
position before we the officials] are given the opportunity to table 
the pertinent issues.'' \7\
---------------------------------------------------------------------------
    \7\ Personal interview with Mr. Likolo Ndalamei, Managing Director 
of ZNCB, Lusaka, 31 October 2006.
---------------------------------------------------------------------------
    In light of the above, the overbearing weight of the IMF and the 
World Bank in influencing the outcome of the PRGF negotiations as well 
as other development processes has been stressed by nearly all civil 
society organizations and this is said to have been caused by the 
restrictive dialogue approach to economic policymaking, generally.
Weak International Response to the Problem of Vulture Funds
    Zambia's post HIPC/MDRI debt situation is also challenged by the 
rise of ``vulture funds.'' \8\ Donegal International Limited, an 
incorporated company of Debt Advisory International LLC (DAI) of 
Washington area of the U.S. was the Vulture Fund that sued Zambia. It 
was registered in the British Virgin Island (BVI) on 18 December 1997. 
Donegal is owned and run by Mr. Michael Sheehan, a citizen of the 
United States. Donegal's major asset was its claim of over US$55 
million against Zambia from a loan it bought from Romania at a cost of 
only US$3.3mn.
---------------------------------------------------------------------------
    \8\ A ``Vulture Fund'' is a financial organization that specializes 
in buying securities which can be in the form of company shares, 
industries, and debts in distressed economic environments. These 
securities could be high yield bonds/shares in or near default and 
debts where debtors are struggling to pay. The goal of the vulture fund 
is to make profit by buying cheap debts of struggling companies and 
recently, heavily indebted third world countries facing debt repayment 
difficulties. These organizations work like circling vultures that 
patiently wait to pick up the remains of a rapidly weakening debtor and 
later claim huge interest repayments through litigation. According to 
Jubilee-U.K., currently, there were at least 40 lawsuits by ``Vulture 
Funds'' against poor countries by May 2007.
---------------------------------------------------------------------------
    Though this was not the first case of a commercial creditor seeking 
super profits from a country striving to provide basic social services 
and put its citizens back onto the path of development, the 
international community was not impressed with the development. While 
CSOs did what they could to stop this injustice, the authorities with 
the ability to change the situation responded in ways that leave much 
to desire. The World Bank put in place a Debt Reduction Facility which 
assists poor countries to buy back such debts but not actually dealing 
with the real cause of the problem, which is the lack of regulation to 
control the activities of ``vulture'' creditors such as Donegal.
    Jubilee-Zambia and partners opposed the directive which called on 
Zambia to pay Donegal US$15mn and also opposed the view point that 
Donegal should even make such a claim in the first place.
    In a publication entitled ``Vulture Funds and Debt Relief. The 
Immoral Tactics of Vulture Funds: The Case of Zambia''; Jubilee-Zambia 
and its partners state that:

        Why is Jubilee-Zambia and Its Partners Opposed to This Claim?

              We feel it is immoral for Donegal to ask for a 
        profit of several millions dollars (US$55 million) over and 
        above the price (US$3.3 million) it paid for the debt from 
        Romania.
              We feel debt repayments to Donegal International 
        will upset Zambia's fiscal stability and ability to deliver 
        public services. Our position is that Zambia cannot afford to 
        lose millions of dollars as the country needs to address 
        pressing poverty and development problems, which require 
        immediate financial resources.
              We also feel and agree with Judge Smith of the 
        London court that Mr. Sheehan and his agents did not act very 
        honestly in the acquisition of this debt. As Jubilee movements, 
        we are convinced that the purchase of the debt undermines and 
        erodes the full intended benefits from debt relief arrangements 
        initiated through the Highly Indebted Poor Country Initiative 
        (HIPC) and the Multilateral Debt Relief Initiative (MDRI).

    Additionally, this case has not only revealed the lack of an 
international mechanism to safeguard vulnerable countries against 
claims by rich companies but has also brought to the fore, weaknesses 
in international agreements. While debtors were bound to abide by every 
conditionality of the HIPC process, creditors were not bound by law not 
to cancel their debts.
    Additionally, the HIPC process and the MDRI were only limited to 
bilateral and some multilateral creditors. The creditor community also 
includes commercial creditors such as Commercial Banks and Private 
investors including Donegal International whose main interest is profit 
at all costs, however, the debt cancellation initiative was left to the 
mercy of creditors to join such important pro-poor mechanisms. It is 
essential that a mechanism be developed to make debt relief all 
encompassing and mandatory.
    The weaknesses of the HIPC process as a whole are evident by the 
lack of a binding agreement on the part of creditors to deliver their 
part of debt relief. According to the Ministry of Finance and National 
Planning (MoFNP), some creditors have not yet delivered their part of 
debt relief.
    The amount of US$635 million reported in last year's budget (2006) 
was adjusted upward during the year. This adjustment was to reflect 
undelivered HIPC Initiative debt relief from some of the bilateral 
creditors with whom we have not yet reached agreement. Budget speech, 
2008.
    It is clear that bilateral creditors were not bound to deliver 
their part of the deal even when they required Zambia and other HIPC 
countries to adhere stringently to their austere conditions and those 
of the multilateral institutions.
Accountability Issues: What Government, Parliamentarians, and CSOs are 
        doing
    It is worth mentioning that there are commendable efforts to fight 
corruption and increase financial accountability. Since the 
inauguration of the current government in 2001, the President has 
embarked on the crusade against corruption to the extent that his 
predecessor has been relieved of his immunity to pave way for a free 
and fair trial in several cases of alleged corruption.
    The Auditor General has also been meticulous in bringing out cases 
of misuse or misapplication of resources. For example, the lack of 
expenditure returns which was reported to be approximately US$1mn 
(K3,567,598,553) in 2005 was no longer the case in 2006. The 2006 
report of the Auditor General only indicates that less than US$500,000 
irregularly transferred. While these are regrettable occurrences and 
should not be inevitable, their magnitude is evidently reducing.
    To assist in this area, the Jesuit Centre for Theological 
Reflection has developed a simple tool that can be utilised by local 
communities in assessing the efficacy of debt resources. This tool, 
called the Debt Resources Monitoring Manual, which the Jubilee-Zambia 
campaign members are using in five districts of four provinces will 
help clarify the following:

          a. To what extent are both new and old loans benefiting the 
        communities in Zambia;
          b. Have the local communities been involved in the 
        identification, design, and implementation of projects/
        programmes benefiting from loans or debt relief in their 
        communities;
          c. Are the programmes/projects under loans demand driven or 
        supply driven; are they part of Zambia's development agenda;
          d. What is the rationale, conditions, and requirements for 
        the loans.

With this tool, we are confident that we will not only bring about 
early warning but we will also augment other processes and tools which 
seek to raise transparency and accountability in Zambia.
    Zambia has also embarked on a number of standard international 
accountability systems and tools including operationalising the Public 
Expenditure Management and Financial Accountability (PEMFA), which 
includes the Integrated Financial Management Information System 
(IFMIS). During the fifth national development plan period, 2006-2010, 
the government will implement routine tracking studies and periodic and 
detailed Public Expenditure Reviews (PER). The FNDP states ``Public 
Expenditure Tracking Surveys will be developed and implemented.''
    While recognising that the work of the Auditor General is 
extensive, the release of the report 1 year after the period in review 
does not rid it of worries around the possibility of recovering what 
has been lost and of course like in many places prosecution on 
defaulters has either tarried or nonexistence. Therefore the need for 
early warning cannot be ignored. Therefore the work of the JCTR-hosted 
Jubilee-Zambia campaign on monitoring of debt resources is extremely 
essential.
    CSOs in Zambia have also been actively engaged with 
Parliamentarians to ensure that the oversight role of Parliament in the 
loan contraction process in the future is made constitutional through 
the proposals for a Debt Management bill. Members of Parliament, 
particularly those in Reforms and Modernisation Committee, the 
Estimates of Budget Committee, and the Committee on Economic Affairs 
have been making significant efforts to introduce the following pieces 
of legislation:

          a. The Budget Act to provide for a transparent and 
        participatory budget preparation process, the development of 
        medium- and long-term development plans indicating 
        corresponding sources of income and submission to relevant 
        committee of Parliament of anticipated revenues and 
        expenditures for the year prior to submission of the final 
        estimates to Parliament.
          b. The Government Borrowing Act to provide for a transparent 
        loan contraction process and to provide Parliament to authorise 
        any borrowing after considering the source of the loan, the 
        extent of the total indebtedness by way of principal and 
        interest, provisions made for repayment of the loan and its 
        intended utilisation.
          c. Access to Information Act whose aim is to give every 
        citizen the right to information held by the state and to 
        compel the state to publicise any important information 
        affecting the welfare of the nation.
          d. The Code of Conduct of Public Officers legislation to 
        address conflicts of interest for public officers and for 
        declaration of incomes, assets, and liabilities by specified 
        public officers.
          e. The Budget Monitoring Framework to provide for the setting 
        up of a unit involving Civil Society Organisations and other 
        interest groups to monitor the implementation of poverty 
        reduction programmes financed by the national budget.
                      c. the need for legislation
    Debt cancellation should be expanded to all countries that it need 
to meet the Millennium Development Goals. In doing so, it is necessary 
to ensure that:

          a. Mechanisms to provide debt relief are expanded in order to 
        provide space for all low-income countries to reorient their 
        priorities toward national sustainable development rather than 
        external debt service.
          b. The International community's responses to the problem of 
        low-income countries' debt are secured from incessant 
        litigations and claims made by creditor institutions/companies 
        which have chosen to free-ride by claiming their part of debt 
        repayments while others have provided debt cancellation.
          c. Gains made by debt cancellation are not eroded due to poor 
        or weak institutions, and there must be accountability, greater 
        transparency and effectiveness.
          d. Interference of external institutions is circumscribed 
        only to necessary areas such as those listed above.

    To do the above, legislative actions are necessary. It is therefore 
essential that such proposals as the Jubilee Act which encompass all 
these are put in place.
    In Zambia, the Jesuit Centre for Theological Reflection has already 
come up with similar proposals which are meant to increase 
parliamentary oversight in the contraction and management of loans. 
This proposal will also be discussed between the JCTR and the 
parliamentary committee for Economic and Labour Affairs on April 28, 
2008. The Zambian community is also becoming aware of the proposed 
legislation through the activities of the JCTR-hosted campaign, 
Jubilee-Zambia. Government intentions in the 2008 budget are ``to 
consolidate the legal framework governing the contraction and 
management of debt.''
    With the Jubilee Act and the Debt Management bill in place in the 
United States and in Zambia respectively, it is clear that 
coresponsibility envisaged in the Monterrey consensus is possible and 
this can herald many such processes. The Monterrey consensus in 2002 
declared, ``Debtors and creditors must share the responsibility for 
preventing and resolving unsustainable debt situations.'' Here lies the 
challenge: Generating the political will to ensure both expanded debt 
cancellation and responsible lending and borrowing practices in the 
future.
                                 ______
                                 

   Letter From David H. McCormick, Under Secretary for International 
 Affairs, Department of the Treasury, to Representatives Barney Frank 
                           and Spencer Bachus

                                     Washington, DC, April 2, 2008.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
U.S. House of Representative, Washington, DC.
    Dear Mr. Chairman: I am writing regarding H.R. 2634 ``Jubilee Act 
for Responsible Lending and Expanded Debt Cancellation of 2007,'' 
scheduled to be marked up by the House Committee on Financial Services.
    This Administration has provided strong international leadership on 
debt relief for the world's most heavily indebted poor countries. 
Building on the work of the previous Administration and with strong 
congressional support, we have deepened and broadened the Enhanced 
Heavily Indebted Poor Countries (HIPC) debt reduction initiative. This 
Administration then initiated, largely designed, and negotiated the 
Multilateral Debt Relief Initiative (MDRI) and the recent agreement in 
the Inter-American Development Bank for 100 percent debt relief for 
heavily-indebted poor countries. These initiatives combined are 
providing over $100 billion in debt reduction to 32 countries, and 
there are another 8 countries that could eventually become eligible. In 
addition, to avoid repeating the ``lend and forgive'' cycle, this 
Administration led the efforts in the multilateral development banks to 
switch to grants for the poorest countries. For instance, in 2001, IDA 
provided less than one percent of its resources in grants to the 
poorest countries (IDA-only)--today it is over 40 percent. The 
Administration has also worked to put in place an internationally 
agreed debt sustainability framework to help guide future lending.
    The goals of the proposed Jubilee Act are laudable, but we think 
the consequences of such a bill are problematic and the Administration 
does not support it. While there are a number of problems with the 
bill, let me note four.
    The countries to be covered by the Jubilee Act are managing their 
debt, and some of the countries that would be covered by this bill are 
now actively working towards expanded access to international capital 
markets. Providing debt relief to countries that can service their debt 
sends the wrong message, and undermines efforts to assist countries in 
developing sound debt management practices that will allow them to 
transition gradually toward access to private capital markets.
    Any debt relief should be conditioned on the adoption of policies 
that promote sound economic practices, or it could easily be seen as 
throwing ``good money after bad,'' though in this case the money has 
not gone ``bad.'' Policy conditionality is important and often 
necessary to ensure that debt relief is used in a manner that will 
promote economic growth and provide real benefits to the poor.
    The budget impact of such a program would be significant, and would 
require trade-offs that could affect key foreign policy priorities. The 
Treasury Department estimates that the budget cost to forgive the $2.5 
billion in nominal debt (including loan guarantees) owed to the United 
States by non-HIPCs would be approximately $1 billion. (This cost 
estimate assumes that all IDA countries qualified in FY 2008 and would 
change depending on the year each country qualified for debt relief.) 
These countries also owe the World Bank and IMF over $32 billion in 
nominal debt, in addition to other bilateral and multilateral debts. 
While the bill calls for international financial institutions (IFIs) to 
fund debt relief from internal resources, the availability of such 
resources is very likely to be limited, as recently demonstrated by the 
donor funding for the Multilateral Debt Relief Initiative (MDRI), as 
well as by the financial engineering that was required to make Liberia 
debt relief work. Therefore, the U.S. would need to be prepared to make 
a significant contribution, at the expense of other development 
assistance.
    Finally, the Responsible Lending Framework described by the bill 
could hinder access by poor countries to private capital. The bill 
calls for the creation of a binding international legal framework for 
lending by all multilateral, bilateral, and private creditors. While we 
recognize the goals underlying such a framework--to encourage 
sustainable lending and borrowing levels--the prospects for such an 
agreement are doubtful. Given the wide range of international 
creditors, creation would be very difficult and enforcement would be 
nearly impossible. Finally, the threat of sanctions from such a 
framework will likely discourage legitimate creditors from lending to 
poor countries, further reducing these countries' access to financial 
markets.
    My staff is ready to go into much more detail on these issues with 
your staff, but I believe that one other obvious problem should be 
highlighted. The United States is far from making good on its current 
commitments to the current debt reduction initiatives--that help the 
poorest, most heavily indebted countries. We find ignoring this reality 
to be a serious flaw in this bill.
    The Office of Management and Budget advises that from the 
standpoint of the Administration's program, there is no objection to 
the submission of this letter.
    Thank you for your consideration of these issues. I look forward to 
a continued dialogue and to working with Congress to develop the best 
possible policies in this area.
            Sincerely,
                                        David H. McCormick,
                         Under Secretary for International Affairs.
                                 ______
                                 
                                Department of the Treasury,
                                     Washington, DC, April 2, 2008.
Hon. Spencer Bachus,
Ranking Member, Committee on Financial Services,
U.S. House of Representatives, Washington, DC.
    Dear Mr. Bachus: I am writing regarding H.R. 2634 ``Jubilee Act for 
Responsible Lending and Expanded Debt Cancellation of 2007,'' scheduled 
to be marked up by the House Committee on Financial Services.
    This Administration has provided strong international leadership on 
debt relief for the world's most heavily-indebted poor countries. 
Building on the work of the previous Administration and with strong 
congressional support, we have deepened and broadened the Enhanced 
Heavily Indebted Poor Countries (HIPC) debt reduction initiative. This 
Administration then initiated, largely designed, and negotiated the 
Multilateral Debt Relief Initiative (MDRI) and the recent agreement in 
the Inter-American Development Bank for 100 percent debt relief for 
heavily-indebted poor countries. These initiatives combined are 
providing over $100 billion in debt reduction to 32 countries, and 
there are another 8 countries that could eventually become eligible. In 
addition, to avoid repeating the ``lend and forgive'' cycle, this 
Administration led the efforts in the multilateral development banks to 
switch to grants for the poorest countries. For instance, in 2001, IDA 
provided less than one percent of its resources in grants to the 
poorest countries (IDA-only)--today it is over 40 percent. The 
Administration has also worked to put in place an internationally 
agreed debt sustainability framework to help guide future lending.
    The goals of the proposed Jubilee Act are laudable, but we think 
the consequences of such a bill are problematic and the Administration 
does not support it. While there are a number of problems with the 
bill, let me note four.
    The countries to be covered by the Jubilee Act are managing their 
debt, and some of the countries that would be covered by this bill are 
now actively working towards expanded access to international capital 
markets. Providing debt relief to countries that can service their debt 
sends the wrong message, and undermines efforts to assist countries in 
developing sound debt management practices that will allow them to 
transition gradually toward access to private capital markets.
    Any debt relief should be conditioned on the adoption of policies 
that promote sound economic practices, or it could easily be seen as 
throwing ``good money after bad,'' though in this case the money has 
not gone ``bad.'' Policy conditionality is important and often 
necessary to ensure that debt relief is used in a manner that will 
promote economic growth and provide real benefits to the poor.
    The budget impact of such a program would be significant, and would 
require trade-offs that could affect key foreign policy priorities. The 
Treasury Department estimates that the budget cost to forgive the $2.5 
billion in nominal debt (including loan guarantees) owed to the United 
States by non-HIPCs would be approximately $1 billion. (This cost 
estimate assumes that all IDA countries qualified in FY 2008 and would 
change depending on the year each country qualified for debt relief.) 
These countries also owe the World Bank and IMF over $32 billion in 
nominal debt, in addition to other bilateral and multilateral debts. 
While the bill calls for international financial institutions (IFIs) to 
fund debt relief from internal resources, the availability of such 
resources is very likely to be limited, as recently demonstrated by the 
donor funding for the Multilateral Debt Relief Initiative (MDRI), as 
well as by the financial engineering that was required to make Liberia 
debt relief work. Therefore, the U.S. would need to be prepared to make 
a significant contribution, at the expense of other development 
assistance.
    Finally, the Responsible Lending Framework described by the bill 
could hinder access by poor countries to private capital. The bill 
calls for the creation of a binding international legal framework for 
lending by all multilateral, bilateral, and private creditors. While we 
recognize the goals underlying such a framework--to encourage 
sustainable lending and borrowing levels--the prospects for such an 
agreement are doubtful. Given the wide range of international 
creditors, creation would be very difficult and enforcement would be 
nearly impossible. Finally, the threat of sanctions from such a 
framework will likely discourage legitimate creditors from lending to 
poor countries, further reducing these countries' access to financial 
markets.
    My staff is ready to go into much more detail on these issues with 
your staff, but I believe that one other obvious problem should be 
highlighted. The United States is far from making good on its current 
commitments to the current debt reduction initiatives--that help the 
poorest, most heavily indebted countries. We find ignoring this reality 
to be a serious flaw in this bill.
    The Office of Management and Budget advises that from the 
standpoint of the Administration's program, there is no objection to 
the submission of this letter.
    Thank you for your consideration of these issues. I look forward to 
a continued dialogue and to working with Congress to develop the best 
possible policies in this area.
            Sincerely,
                                        David H. McCormick,
                         Under Secretary for International Affairs.
                                 ______
                                 

 Response of Dr. Nancy Birdsall to Question Submitted by Senator Lugar

    Question. Your testimony provides clear suggestions to improve the 
Jubilee Debt Relief Act which is before this committee. Are there 
additional accountability, anticorruption and democracy conditions that 
should be considered as well?

    Answer. The standards used for HIPC completion (including an IMF 
program or equivalent) should apply equally to any new debt reduction 
for all IDA-eligible countries. It would be reasonable for the bill to 
call for Treasury, or another agency such at the GAO or World Bank, to 
assess the application of those standards in the past, and propose any 
improvements in their application given experience in the last decade, 
particularly with respect to corruption, financial management, budget 
transparency and so on. (A standard on democracy would best be framed 
in terms of transparency, rule of law, public access to information.) 
Such an assessment could compare the existing HIPC program standards to 
the Millennium Challenge Corporation standards for eligibility, for 
example.
    The addition of an insurance-style facility which I recommended in 
my testimony has the following advantage: In contrast to a one-time, 
upfront debt writeoff, it creates a healthy incentive for countries to 
maintain eligibility for benefits from it into the future, while 
allowing for reasonable new borrowing, including from the IMF and the 
multilateral banks.
                                 ______
                                 

    Response of Gerald Flood to Question Submitted by Senator Lugar

    Question. Could you please provide additional examples of the 
tangible benefits to poor countries of debt relief? Would we have seen 
the same improvements in those poor countries if debt relief had not 
occurred?

    Answer. The following are additional examples of how debt relief is 
benefiting poor countries:
                            country examples
Tanzania
    When Tanzania reached its completion point under the Heavily 
Indebted Poor Countries Initiative (HIPC) in 2001, it received debt 
stock relief totaling $3 billion. Former President Benjamin Mkapa 
explained what this meant to his country in a letter to the Jubilee 
Debt Campaign in 2004: ``When I became President of Tanzania in 1995, 
our country was witnessing a serious deterioration of basic services, 
and a high and unsustainable debt burden. One of my first priorities 
was to reverse these trends by increasing government revenue and 
seeking debt relief . . .'' He said that when HIPC debt relief was 
received in 2001,

          [It]enabl[ed] us to increase resources for poverty reduction 
        by 130 per cent. We have already witnessed tremendous 
        successes. The primary school population has increased by 66 
        per cent--the greater part of an extra 2 million children--and 
        the shortfall in the enrolment of girls has been eliminated. We 
        have built 45,000 classrooms, 1,925 new primary schools and 
        over 7,500 homes for teachers in partnership with their 
        communities; between 2000 and 2004, we recruited 37,261 new 
        teachers, and retrained another 14,852. The pass rate in the 
        Leaving Examination doubled in 2 years.
          Much has been attained in other sectors as well. For 
        instance, hospitals are being rehabilitated and refitted with 
        diagnostic equipment; the previous shortage of basic drugs is 
        now history; and the rate of immunization has reached 83 
        percent. We are now introducing the hepatitis vaccine and this 
        will save 20,000-25,000 lives annually.

(Tanzania received an additional $3.7 billion in debt cancellation in 
2006 under the Multilateral Debt Relief Initiative--MDRI.)
Niger
    Niger, located in the Sahel region of sub-Saharan Africa, is one of 
the poorest countries in the world. It began receiving HIPC debt relief 
in 2001, reached its completion point in 2004 and received MDRI debt 
cancellation in 2006. The following is an excerpt from ``Debt Relief 
Yields Results in Niger'' by Emilio Sacerdoti and Philippe Callier, IMF 
African Department, January 25, 2008:

          In the landlocked Western African country of Niger, lower 
        debt service, together with continued significant budgetary aid 
        and higher domestic revenue mobilization, is having an impact 
        on spending in education, health, and the rural sector, where 
        budgetary allocations increased by 4 percent of GDP between 
        2002 and 2007.
          The debt stock was reduced through the [HIPC and MDRI] from 
        76 percent of GDP at end-2002 to 14 percent at end-2006, or by 
        the equivalent of $1.3 billion. . . . Debt cancellation yielded 
        a drop in debt service of about 2 percent of GDP between 2003 
        and 2006. . . .
          The higher spending associated with debt relief has resulted 
        in progress in improving key social indicators, which are among 
        the weakest in Africa. The country is finally moving up in the 
        rankings of the U.N. Human Development Index.

          The infant mortality rate dropped from 156 deaths per 
        1,000 births in 1997 to 81 per 1,000 in 2006. Under-5 mortality 
        is still among the highest in Africa.
          The primary school completion rate improved from 16 
        percent in 1997 to 28 percent in 2005. Overall primary school 
        enrollment is among Africa's lowest.
          Access to potable water increased from 40 percent in 
        1996 to 69 percent in 2005.

    Thus, while Niger still has a long way to go to emerge from extreme 
poverty, debt relief is helping to launch the country and its people 
toward a brighter future.
Zambia
    The case of Zambia illustrates the importance of debt relief to a 
country facing severe fiscal constraints. Zambia had a difficult road 
to the completion point. When I looked into the problem in 2004, I 
found that the completion point was apparently being held up in large 
part because pressures to increase salaries led to an overshooting of 
the wage bill target agreed with the IMF. I noted that the World Bank 
had recently examined the wage bill problem as part of a comprehensive 
review of public expenditure management. It found that:

          [L]ow remuneration in the public sector is a major factor 
        contributing to the problem of poor productivity, motivation, 
        and recruitment and retention. At a time when government is 
        seeking efficiency improvements, in part by reducing the size 
        of the civil service, there exist significant staff shortages 
        in a wide range of professional and technical jobs owing to 
        poor pay compared to that available in the private sector and 
        within regional labor markets. . . .
          The problem of low pay . . . notwithstanding, the wage bill 
        in Zambia has remained large relative to overall government 
        expenditures, thereby crowding-out operational expenditures. 
        The challenge for Zambia is therefore how to design and 
        implement a pay reform strategy that is consistent with the 
        macroeconomic goal of containing the size of the wage bill (as 
        a proportion of GDP).

    The World Bank report outlined a broad strategy for addressing the 
issue, but the challenge was an enormous one--how to make wages 
sufficiently remunerative to attract as well as retain qualified staff 
while at the same time minimizing the cost. It was difficult to see how 
it could be dealt with effectively except, at best, over the medium 
term. In the meantime, Zambia continued to be plagued by a severe 
fiscal constraint, attributable in large measure to its heavy debt 
service obligations. According to the IMF and World Bank, Zambia's debt 
service in 2004 was expected to reach an extremely high 31 percent of 
government revenues. It was a kind of catch-22 situation. Zambia badly 
needed the fiscal space that debt relief would provide, but because 
fiscal pressures were so great, it had difficulty meeting the IMF 
fiscal target that would have made it eligible to receive debt relief.
    Eventually, in April 2005, Zambia satisfied the conditions for 
reaching the HIPC completion point, and a year later it became eligible 
for MDRI debt cancellation. Debt cancellation under the two programs 
totaled more than $6.5 billion. Fiscal relief was at hand at last, and 
the World Bank reports that a significant number of new teachers and 
health workers were hired in 2005 and 2006.
    Moreover, in April 2006, just after qualifying for MDRI 
cancellation, the Zambian Government abolished ``user fees'' in all 
rural health clinics in Zambia. This meant that while costs previously 
may have deterred the poorest from coming into health clinics, care was 
now free. This was particularly important for a country facing one of 
the world's most severe HIV/AIDS pandemics. Early last year, Neil 
Watkins, National Coordinator of Jubilee USA Network, led a delegation 
of a dozen Jubilee USA supporters to Zambia. In Neil's own words:

          On our first day in Zambia, we drove south of the capital, 
        Lusaka, to a town called Siavonga, to witness the impact of 
        debt relief. After a long, bumpy ride through the Zambian 
        countryside, we arrived at the Siavonga Rural Health Clinic. As 
        we toured the clinic, Grace Chibanda, a pharmacist, showed us 
        the pharmacy, which was full of antiretroviral 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.'' 
        Nurses and doctors we talked with confirmed that they had seen 
        an increase in patients since April. It was inspiring to see 
        the impact of debt relief firsthand and to know that debt 
        relief is improving the lives of many Zambians in need.
                     transparency and participation
    A facet of the HIPC program that often does not get much attention 
is that it became a vehicle for establishing transparent and 
participatory processes for allocating and monitoring the use of debt 
relief savings, and in some cases for allocating and monitoring 
poverty-oriented budgetary resources more broadly. Debt campaigners, 
locally and internationally, had always stressed the importance of such 
processes in assuring that the funds would, in fact, benefit the poor. 
In my written testimony I mentioned the case of Cameroon, where a 
broad-based HIPC funding committee overcame political opposition to 
allocate debt-relief savings to a path-breaking program for uniting 
sustainable forestry with rural community development throughout the 
country. Another example is:
Malawi
    Several years ago local civil society organizations came together 
to form a federation called the Malawi Economic Justice Network (MEJN). 
Once HIPC funds were granted, they worked closely with the 
Parliamentary Budget and Finance Committee to identify 12 key 
categories of priority poverty expenditures in the budget. They 
persuaded the Malawi Ministry of Finance to produce periodic 
expenditure figures for each of these categories and worked with the 
Parliamentary Budget and Finance Committee to monitor the allocation of 
funds to the relevant line ministries.
    The MEJN formed subgroups to monitor the delivery of services in 
different parts of the country. They selected dozens of local districts 
and provided training to local leaders in the use of questionnaires to 
discover, for example, whether clinics had medicines, schools had 
books, and teachers were trained. The information was compiled and 
analyzed by experts, and the findings were publicized. The survey 
results were shared first with communities, then with the government, 
donors, and other stakeholders. As of 2004 (when I examined this case) 
the monitoring exercise was having an impact. For example, the national 
budget was revised, e.g., to shift allocations from nonpriority items 
(foreign travel, expenditures of the office of President, etc.) to 
priority poverty programs. The Ministry of Education was using the 
findings in its own planning, and Parliament was using them to question 
the line ministries.
    The broader point in the Malawi and Cameroon examples is that the 
procedures instituted with the HIPC debt relief program appear to be 
making a contribution to the strengthening of democratic processes in a 
number of countries where historically weak governance has often led to 
serious neglect of the needs of the large majority of very poor and 
vulnerable citizens.
                          the economic impact
    Another noteworthy effect of HIPC and MDRI debt relief that is 
often overlooked is its impact on the overall economy of the 
beneficiary countries. As Dr. Nancy Birdsall, President of the Center 
for Global Development, observed during her testimony before the 
committee, ``[T]he increased fiscal space due to debt relief (along 
with faster growth and recent stability in HIPC countries) has clearly 
played a role in helping low-income countries sustain sound economic 
programs, by permitting reductions in fiscal deficits and accumulation 
in some cases of reserves.'' In a 2003 IMF Working Paper entitled 
``External Debt, Public Investment and Growth in Low-Income 
Countries,'' the authors conclude that the substantial reduction in the 
stock of external debt projected for highly indebted poor countries 
(HIPCs) would directly increase per capita income growth by about 1 
percentage point per annum. While 1 percent may not seem high, its 
significance increases when one takes into account that most of the 
HIPC countries are in sub-Saharan Africa, and according to the World 
Bank, GDP growth per capita in these countries during 1995-2005 was 
1.88 percent. (It should also be noted that the Working Paper did not 
take into account--because it did not exist--the major additional debt 
stock reduction provided by the MDRI.)
    Another interesting and potentially highly significant development 
is reported in a recent edition of the IMF Survey Magazine. According 
to an article entitled ``Africa's Improved Debt Outlook Sparks Investor 
Interest,''

          Strengthened macroeconomic fundamentals and lower debt levels 
        following debt relief from the IMF and other international 
        institutions have increased the attractiveness of low-income 
        African countries to a broader universe of investors. A larger 
        group of bilateral lenders is now active in Africa, with 
        creditors outside the traditional OECD-based donor community 
        initiating or expanding their operations in the continent.
          Private investors have also stepped up their lending 
        markedly. In the past year, two sub-Saharan African (SSA) 
        countries have issued international bonds and in at least 
        eight, a significant share of domestic securities are held by 
        foreign investors.
          Reflecting these trends, more than a dozen SSA economies are 
        now the subject of an international credit rating. Although 
        immature, some African stock markets are also starting to take 
        off.

    This new investor interest is a promising development, but it also 
presents major challenges. It places a special premium on both strong 
debt management by African governments and responsible lending by the 
new creditors (a topic addressed in
S. 2166). Otherwise, the benefits of the HIPC and MDRI programs may 
prove ephemeral as countries fall back into unsustainable debt. It is 
in the interest of all parties to make sure that this does not happen, 
and that the new investor interest will translate into opportunities 
for a substantial number of African countries to move beyond exclusive 
reliance on traditional aid donors to a new level where they can tap 
diverse sources and types of financing on a sustainable basis for 
critical investment needs.
                                 ______
                                 

 Responses of Dr. Peter Henry to Questions Submitted for the Record by 
                         Senator Richard Lugar

    Question. You noted many concerns with debt relief. If debt relief 
has not been as effective as expected, can anything be done to 
structure debt relief so that it truly helps to reduce poverty?

    Answer. If the goal is to reduce poverty, then debt relief is not 
an efficient tool to achieve that end. As I outline in my testimony, 
holding debt service constant and increasing the flow of foreign 
assistance to anything approximating the quantities that we have 
promised to deliver time and again would provide a much more effective 
way of reducing poverty. See my answer to your next question for ways 
to improve the allocation of foreign assistance.

    Question. From your perspective, what are the most effective 
economic policy and foreign assistance tools to help countries fight 
poverty? If we had one additional dollar foreign assistance available, 
how would you specifically recommend it be spent?

    Answer. Much has been made of the fact that foreign assistance has 
not helped promote economic growth and development in poor countries. 
This should come as no surprise, because much of our foreign assistance 
was given with no such intent. Aid that we grant for political reasons, 
or tied-aid that requires the recipient to buy goods from U.S. 
corporations, irrespective of the appropriateness of those goods for 
the recipient country, cannot be expected to promote development.
    The aid that we grant through multilateral organizations such as 
the International Development Association arm of the World Bank has a 
better record than our direct foreign assistance, but the results have 
still been disappointing.
    This does not mean that all is lost. A large body of research that 
uses randomized trials (a technique similar to the way medical 
researchers test the effectiveness of new drugs) to evaluate the 
effectiveness of antipoverty programs, points to a potentially 
promising path for the use of foreign assistance. Surveying the results 
of this research, Professor Abihijt Banerjee of MIT identifies several 
areas where foreign assistance can be put to use efficiently: 
Education, Provision of Vitamin Supplements, HIV Prevention, Spraying 
for Malaria, Fertilizer, and Vaccination.
    In his survey, Professor Banerjee identifies specific micro level 
programs that were successful in each of these areas in various 
countries. He also estimates the cost of scaling up such interventions 
from the micro level to include all low-income developing countries.
    Based on my read of the evidence, if we had one additional aid 
dollar to spend, I would recommend that we give it as a cash transfer 
to a mother in a poor country in return for vaccinating her children 
and sending them to school.
                                 ______
                                 

Responses of Assistant Secretary Clay Lowery to Questions Submitted for 
                  the Record by Senator Richard Lugar

    Question. How has debt relief been important from a U.S. foreign 
policy perspective?

    Answer. Economic development and poverty reduction are important 
foreign policy priorities not only for the direct benefits they 
provide, but also to reduce the desperation and radicalism that poverty 
can breed. As President George W. Bush stated on March 22, 2002, ``We 
fight against poverty because hope is an answer to terror. We fight 
against poverty because opportunity is a fundamental right to human 
dignity. We fight against poverty because faith requires it and 
conscience demands it. We fight against poverty with a growing 
conviction that major progress is within our reach.'' Further, as the 
2006 National Security Strategy of the United States notes, ``America's 
national interests and moral values drive us in the same direction: To 
assist the world's poor citizens and least developed nations and help 
integrate them into the global economy.''
    When external debt levels become so high that they interfere with a 
country's basic economic sustainability, as was the case with the 
countries eligible for the HIPC initiative, they can become a major 
obstacle to achieving these goals, and therefore need to be reduced. 
Debt relief can be a valuable tool to help the poorest, most heavily 
indebted countries reestablish a sound economic footing and reengage 
with the international community, thereby supporting their efforts to 
lift people out of poverty. For countries with unsustainable debts, the 
prospect of debt relief, particularly when provided in a coordinated 
fashion by all external creditors on comparable terms such as under the 
HIPC initiative, can also create an important incentive for governments 
to consult with their citizens and make the reforms necessary to 
sustain growth. However, while debt relief is a valuable tool in these 
cases, it must also be balanced against other policy instruments, such 
as direct development assistance. In countries where debts are 
sustainable, other development tools can offer a more immediate, 
targeted method to encourage economic growth, support poverty 
reduction, and achieve U.S. goals.

    Question. Have the current debt relief programs, HIPC and MDRI, 
hurt the ability of the development banks to finance projects in the 
poorest countries?

    Answer. Although the financing for debt relief initiatives has been 
slightly different at each development bank, implementation of HIPC and 
MDRI debt relief at the development banks has generally been financed 
through a combination of increased bilateral donor contributions and 
limited use of the institutions' net income and internal resources. One 
example of these donor contributions is that donors have agreed to 
offset, dollar for dollar, the cost of MDRI debt relief at the World 
Bank and the African Development Bank.
    As a result of these financing arrangements, including increased 
donor contributions, debt relief under HIPC and MDRI has not caused a 
decrease in the overall financing levels provided by the development 
banks for projects in the poorest countries. In the long term, the 
ability of the development banks to provide debt relief without 
reducing their overall level of financing for the poorest countries 
will largely depend on donor countries successfully meeting their 
funding commitments to these institutions. In FY 2008, we anticipate 
the U.S. Government will have over $870 million in arrears to the 
multilateral development banks, including $385 million to the World 
Bank's IDA alone. Our budget request this year for payment of arrears 
to the multilateral development banks is specifically targeted at 
fulfilling our commitment to MDRI and our annual commitment to IDA.

    Question. Did HIPC and MDRI include adequate accountability and 
anticorruption mechanisms? If Congress moves forward with Jubilee debt 
relief, what accountability and anticorruption requirements should be 
included in the legislation?

    Answer. In our view, HIPC and MDRI include adequate accountability 
and anticorruption mechanisms. In order to qualify for debt relief 
under these programs, the country must develop a strategy for poverty 
reduction and a prudent economic plan. The international financial 
institutions and donors work with the country to lay out a course for 
improved performance and accountability at the beginning of the 
program.
    When the country qualifies for HIPC, it begins to receive interim 
debt relief. However, in order to receive full HIPC debt cancellation, 
the country must demonstrate satisfactory performance over time in 
carrying out its poverty reduction strategy and economic reform 
program, including satisfying a number of country-specific requirements 
for improvements in areas such as fiscal management, anticorruption 
measures, and improved social programs. Since debt relief under MDRI is 
nearly always conditioned on successful completion of the HIPC process, 
the accountability and anticorruption mechanisms included in HIPC also 
apply to MDRI.
    The Senate Jubilee bill (S. 2166) includes provisions that require 
eligible countries to develop and implement effective policy reforms to 
ensure that savings from debt cancellation are redirected to poverty 
reduction efforts, and requires that the beneficiary government produce 
an annual report detailing how debt relief savings were used. The 
inclusion of these requirements is a positive element of the bill. 
However, the accountability and anticorruption requirements in the 
Jubilee bill (S. 2166) are not as extensive as the requirements 
included in the HIPC legislation. For reference, the relevant standards 
for the HIPC Initiative are found in Public Law 106-113, Appendix E, 
Title V (1999).

    Question. The International Monetary Fund has recently suggested 
selling a significant portion of its own gold reserves to fund 
operating expenses. Could some of this gold be used to fund additional 
debt relief as well?

    Answer. The sale of IMF gold requires an 85-percent majority vote 
in the IMF Board. The IMF Board supported a sale of gold, as 
recommended by the Crockett Committee, strictly limited to the 12.9 
million ounces to fund an endowment for operating expenses.
    We believe there would be little support in the IMF Board for gold 
sales to finance the additional debt relief called for in the Jubilee 
bill, since there appears to be very limited support in the IMF Board 
as well as among G-7 governments for the proposals contained in the 
bill. In addition, compared to other institutions, debt to the IMF 
represents only a small portion of the total debt of the Jubilee 
countries. Even if there were backing in the IMF Board to sell IMF gold 
to finance forgiveness of the IMF's loans to these countries, the 
Fund's membership would not support IMF gold sales to finance debt 
reduction at other institutions. Finally, while the IMF Board agreed to 
a limited gold sale, selling IMF gold to fund debt relief at other 
institutions would require a very large gold sale that could disrupt 
gold markets and harm the poorest gold producing countries. Therefore, 
we see very little chance that such a sale could gain the support it 
would need in the IMF Board.

    Question. You mentioned Bangladesh during the question and answer 
portion of the hearing. Is it true that the Government of Bangladesh is 
sending debt repayments to the United States Government that are close 
to the amount that the U.S. provides Bangladesh in foreign assistance? 
Could you please provide the committee with the amount that Bangladesh 
is now repaying the U.S. (including Public Law 480 debt repayments) and 
the amount that the U.S. is giving Bangladesh?

    Answer. In 2006 (the most recent year for which complete data is 
currently available), the United States disbursed $77.67 million in 
gross official development assistance for Bangladesh. During that same 
period, Bangladesh paid $51.5 million to the United States Government 
in debt repayments. Currently, all of Bangladesh's outstanding official 
bilateral debts to the United States are low-interest rate, 
concessional Public Law 480 debts owed to the U.S. Department of 
Agriculture.

    Question. On the second panel, Dr. Henry noted that the G-8 has 
repeatedly committed to providing 0.7 percent of GDP in foreign 
assistance. Is this correct? If so, was the U.S. party to such a 
commitment?

    Answer. The G-8 has not committed to providing 0.7 percent of GDP 
in foreign assistance, and the U.S. is not party to such a commitment 
in the G-8 or elsewhere.
    While many countries use this target, the 0.7-percent target bears 
no relationship to the ability of partners to use aid effectively. The 
United States strongly endorses continued efforts to increase aid 
effectiveness, and is a signatory to the 2005 Paris Declaration on Aid 
Effectiveness.

                                  
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