[Senate Hearing 110-929]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-929
 
REFORMING KEY INTERNATIONAL FINANCIAL INSTITUTIONS FOR THE 21ST CENTURY 

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
              SECURITY AND INTERNATIONAL TRADE AND FINANCE

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

             REFORMING INTERNATIONAL FINANCIAL INSTITUTIONS


                               __________

                        THURSDAY, AUGUST 2, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
          Julie Y. Chon, International Economic Policy Adviser
                    Andrew Olmem, Republican Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                          Jim Crowell, Editor

                                 ------                                

      Subcommittee on Security and International Trade and Finance

                      EVAN BAYH, Indiana, Chairman
                 MEL MARTINEZ, Florida, Ranking Member
SHERROD BROWN, Ohio                  MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota            ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania        ROBERT F. BENNETT, Utah
CHRISTOPHER J. DODD, Connecticut
                       Jayme Roth, Staff Director
            Jennifer C. Gallagher, Republican Staff Director










                            C O N T E N T S

                              ----------                              

                        THURSDAY, AUGUST 2, 2007

                                                                   Page

Opening statement of Chairman Bayh...............................     1

Opening statements, comments, or prepared statements of:
    Senator Martinez.............................................     3
    Senator Casey................................................     4

                               WITNESSES

Daniel Tarullo, Professor of Law, Georgetown University Law 
  Center.........................................................     6
    Prepared statement...........................................    40
Adam Lerrick, Ph.D., Professor of Economics, Carnegie Mellon 
  University.....................................................     8
    Prepared statement...........................................    55
Karin Lissakers, Director, Revenue Watch Institute...............    11
    Prepared statement...........................................    61
Diane Willkens, President and CEO, Development Finance 
  International..................................................    14
    Prepared statement...........................................    65


REFORMING KEY INTERNATIONAL FINANCIAL INSTITUTIONS FOR THE 21ST CENTURY

                              ----------                              


                        THURSDAY, AUGUST 2, 2007

                               U.S. Senate,
  Subcommittee on Security and International Trade 
                                       and Finance,
           Committee on Banking, Housing and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 2:36 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Evan Bayh, (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF CHAIRMAN EVAN BAYH

    Chairman Bayh. I am pleased to call to order the hearing of 
the Subcommittee to focus on reforming key international 
financial institutions for the 21st-century.
    I want to thank our chairman, the Banking Committee 
Chairman, Senator Dodd, for his assistance in arranging the 
hearing and for his support in looking into these important 
matters.
    I also want to recognize the leadership of Senators Biden 
and Menendez on the Foreign Relations Committee. We sort of 
have, in some ways, a hybrid hearing here today. We had this 
experience for the full Banking Committee yesterday, focusing 
on some aspects of global trade where there was joint 
jurisdiction between the Finance Committee and the Banking 
Committee. Today we have the Banking Committee and the Foreign 
Relations Committee.
    So I am fully respectful of their leadership, of their 
jurisdictional rights, and look forward to cooperating and 
working with them on these important issues and want to thank 
them also for their focus on the subject of today's hearing.
    We have Senator Martinez, my colleague and friend, the 
ranking minority member with us today. Mel, I want to thank you 
for your leadership.
    Also Senator Casey, thank you, Bob. Good working with you. 
And I appreciated your forbearance during my testimony the 
other day before the Foreign Relations Committee. You were very 
kind to chair that important hearing. I hope it went well after 
I left.
    What I would like to do is just make some brief comments of 
my own, then Mel, look to you and Bob to you for your comments. 
I will then introduce our panelists and call on you in order.
    I think our ground rules today, I will be generous with the 
time. If we could, for the oral comments, try to shoot for 5 
minutes give or take. The full written statements you have been 
kind enough to submit will be submitted in their entirety. If 
you have to go over a few minutes, that is OK. But please do 
not be Senatorial in the length of your remarks. We will try 
and be a little briefer than that here today. And then we will 
go to questions and alternate among members of the Committee 
who are here, try to keep our questions to 5 minutes. If there 
is need for a second round, we will do that.
    Let me give my own brief opening remarks, Mel, and then I 
will turn to you.
    Chairman Bayh. Almost exactly 63 years ago, in fact it was 
July 1944, some of the worlds most celebrated economists 
gathered in Bretton Woods, New Hampshire to design a system of 
trade, monetary policy, and development that would prevent the 
catastrophic events that led to the Great Depression and World 
War II from recurring.
    Then Secretary of State Cordell Hull, British economist 
John Maynard Keynes, and other luminaries articulated policies 
on trade, monetary policy, and poverty alleviation and created 
an international architecture to promote those policies.
    Today we gather with some notable experts of our own to ask 
whether these lofty objectives can be achieved or are being 
achieved and whether the structure established to promote them 
is working well or whether fundamental reform is in order to 
achieve these objectives in the context of the 21st-century.
    Since Rodrigo de Rato will be leaving his post as Director 
of the International Monetary Fund, this is an opportune time 
to take a close look at the institution, its effectiveness, and 
what reforms may be needed. Yesterday the Banking Committee 
took an initial step toward dealing with the problem of 
exchange rate manipulation domestically. Today we have an 
opportunity to discuss what relevant international financial 
institutions can be doing to address this issue. In fact, I 
think you can argue that an absence of multinational focus on 
this issue has left nations such as our own to deal with it 
unilaterally. And that is what we began to do in yesterday's 
Banking Committee, along with our brothers and sisters in the 
Finance Committee.
    In recent years, the IMF was able to help reestablish 
financial stability after crises in Asia and elsewhere. Today 
the IMF is struggling to define its purpose. The American 
public is more concerned about exchange rate manipulation that 
at any point in our history. And yet the IMF seems completely 
unable to address this problem.
    China's increasing undervalued currency is a glaring 
reminder that the IMF is unable to manage international 
exchange rates. Or if it is able, has so far been unwilling.
    The United States faces a dilemma on another issue of 
whether to grant increased voting rights in the IMF for 
countries that apparently are violating one of its primary 
tenets.
    With regard to the World Bank, like the IMF, 2007 marks a 
shift in leadership. In June the Bank welcomed former U.S. 
Trade representative Robert Zoellick as its 11th president. The 
motto of the Bank is ``Working for a world free of poverty'' 
and all nations should support that important objective.
    Unfortunately for the IMF, the World Bank suffers from its 
own set of problems. Many believe that the Bank has become too 
willing to accept corruption as just another cost of doing 
business in certain countries and has internal staff that 
resists efforts to change.
    The question before us is whether the Bank, as currently 
constituted, is an effective instrument for achieving the very 
noteworthy objective of poverty alleviation. Many believe the 
Bank has become too willing to--the vast majority of the Bank, 
excuse me. The vast majority of the Bank's IBRD lending is in 
countries that no longer need the Bank for development finance. 
What should the role of the public and private sectors be in 
such circumstances?
    The Bank's consideration of using country systems 
procurement directly conflicts with the direct wishes of the 
U.S. Senate, as expressed in previous votes. What should be 
done about that?
    Accountability, apparently, has all too often broken down, 
whether for bad lending decisions or for evaluating performance 
based on results rather than just the volume of loans which 
have been approved. Success all too often appears to be defined 
by the volume of activity rather than the amount of poverty 
actually alleviated.
    These are some of the important questions we have gathered 
to explore today. We are fortunate to have a distinguished 
group of panelists, as I mentioned. But before we turn to them, 
I would first like to give my colleagues an opportunity for 
their perspective.
    Senator Martinez, we will begin with you.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you very much and 
appreciate very much you calling this hearing. It is very 
timely, particularly doing so right before our August recess. I 
thank the panel for taking time from your busy schedules to be 
with us on a hot August afternoon.
    The International Monetary Fund and the World Bank are very 
important components of our financial system in the world and I 
think it is telling that the last time there was a hearing on 
these institutions was in 2004. So it is more than time that we 
address it and look to you for your guidance and your comments.
    It is a very dynamic world in politics and economics that 
we live in, and so therefore it is important that we take a 
temperature check, that we see where things are relevant to 
today, and the relevance of these institutions going forward.
    So I welcome each of you here today and thank you for your 
time and look forward to hearing your expertise in this very 
important topic.
    I am very interested in hearing your views about the 
changing role of the IMF and what impact the current and 
projected economic environment might have on its relevancy. I 
am also concerned that the IMF and the World Bank continue to 
decline as relevant institutions to the global financial 
systems and whether they might, if that continues, be replaced 
by more regionalism. That would have, I think, a negative 
impact as we look to certain regions of the world. One in which 
I am very interested in is Latin America. I know that there are 
potential there for rogue states or, frankly, things that I do 
not think would be in the best interest not only of our country 
but of the world financial system.
    I am also very interested in your testimony as it relates 
to corruption within the institutions. Misallocation of 
resources by officials who do not have the public interest at 
heart is a big concern to me. So I would like to know to what 
extent you believe corruption is plaguing the developing world, 
as well as your thoughts on how effective these institutions 
are at dealing with that very specific problem.
    The IMF and World Bank are critically important to the 
international financial framework and since their inceptions 
their goals have been to increase economic and financial 
stability and to raise economic growth and reduce poverty. 
While the goals are still relevant, the institutions need to be 
equal to the challenge to meet the changing world in which we 
live and to address the goals that have been set.
    So I look forward to hearing your comments and to our 
discussion as the afternoon wears on.
    Mr. Chairman, I thank you again for your courtesy and for 
calling this hearing at a very timely moment.
    Thank you.
    Chairman Bayh. Thank you, Senator Martinez.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Chairman Bayh, thank you very much for 
calling this hearing and Ranking Member Martinez as well. Thank 
you for your leadership on this.
    And to our panelists, I have to say I will be somewhat 
parochial here and mention that Dr. Lerrick has some roots in 
Pennsylvania at Carnegie Mellon and we are grateful that he is 
here. I hate to do that but when you come from a State like 
Pennsylvania it is important to mention people that are making 
use of the great institution that Carnegie Mellon is. Thank you 
very much.
    And all of the panelists, because your testimony today and 
the information you provide through question and answer gives 
us a great insight into these issues, very important issues for 
the world, for our country in terms of governance, in terms of 
reform. One of the problems for me today as I will not be able 
to stay very long. I have to preside over the Senate. There was 
an emergency change when one Senator had to change their time. 
So one of the responsibilities that these two distinguished 
senators to my left do not have as much of because they have 
been here longer is to preside over the Senate. So I have to 
show up when I am called.
    Senator Martinez. I also have another affliction, that I 
happen to be in the minority.
    [Laughter.]
    Senator Casey. We are going to be trading hours, maybe.
    So I may not be able to ask any questions today but I did 
want to thank you for your testimony and appreciate what you 
are trying to do in providing that testimony.
    I think a lot of the issues that will be discussed today 
and beyond today, either in your presentations or submitted for 
the record, are critically important. Just noting a few of 
them, the IMF enforcement authority and its ability to enforce 
its authority with regard to member responsibilities, a 
proposal that has been floated to change the distribution 
quotas in order to give developing countries and emerging 
market countries more influence in the organization. We would 
like to hear about that, obviously. But a whole series of 
important issues that bring to bear all of the experience that 
you bring to this hearing today in your testimony. So we are 
grateful to that.
    Contrary, I guess, to popular belief these hearings provide 
us with a lot of important information. The expertise and the 
knowledge and experience you bring here gives us the kind of 
foundation of knowledge that we cannot just get among 
ourselves. We all have great staffs and this, I think, 
amplifies their understanding of some of these issues. So we 
are grateful to that and we are grateful for the service that 
you are providing today and we look forward to your testimony.
    Thank you very much.
    Chairman Bayh. Thank you, Senator Casey. We fully 
understand when you need to leave to preside.
    Senator Martinez, one of the few benefits of being in the 
minority is you do not have the obligation of presiding on the 
floor. So that is finding a silver lining, I understand, but an 
important one nonetheless.
    I want to thank all of you for your time today. I know you 
are very busy and could be doing other things. At least a 
couple of you have appeared before the Subcommittee before on 
other topics so I am grateful to have you back once again.
    I am going to make very brief introductions, so if I leave 
out a lot of the good things that I have here about each and 
every one of you, I am just doing that in the interest of time 
and hope you will understand.
    First, with regard to Dan Tarullo, thank you for coming 
back. Dan Tarullo is a Professor of Law at Georgetown 
University where he teaches in the areas of international 
economic regulation, banking, and international law. He spent a 
year as a Senior Fellow at the Council on Foreign Relations and 
is currently a Nonresident Senior Fellow at the Center for 
American Progress. He served in a variety of other important 
capacities, is widely published. Dan, it is good to have you 
back once again.
    I will just complete the introductions and then we will 
just start with you.
    Adam Lerrick, thank you for coming back once again, you 
have been before us previously. I think Argentina was the 
subject at that time. Some of these things are recurring. 
Perhaps you will be on that subject again one day.
    Adam Lerrick is the Friends of Allan H. Meltzer Professor 
of Economics and Director of the Gailliot--did I get that 
correct? Gailliot Center for Public Policy at Carnegie Mellon 
University. He is currently a visiting scholar at the American 
Enterprise Institute. While at AEI, he is studying 
international capital markets, financial crises, sovereign debt 
researching, and economic development including the impact of 
aid and the role of multilateral institutions. Dr. Lerrick, 
thank you for being with us once again today.
    Next we are pleased to have Karin Lissakers. With a last 
name like mine, I am always sensitive to try and get the 
pronunciations correct. I have been called a variety of things 
over the years, but rarely Bayh until people have met me and 
heard my pronunciation for the first time.
    Karin is Director of the Revenue Watch Institute, a 
nonprofit organization that promotes transparent and 
accountable management of oil, gas, and mining revenues and 
helps countries realize the full economic benefit of their 
natural resource wealth. She has held senior posts in 
Government and the academic world. Ms. Lissakers was U.S. 
Executive Director of the Board of the International Monetary 
Fund from 1993 to 2001, representing the Fund's largest 
shareholder during a period of turmoil, the international 
markets, and a U.S.-led campaign to redesign the international 
financial architecture and reform the IMF, including opening 
its policies and practices to public scrutiny.
    Karin, thank you. And you should know, I spoke with Larry 
Summers earlier today who had many, many positive things to say 
about both you and Dan and his work with both of you. So thank 
you for your presence here today.
    Next we have Diane Willkens. Ms. Willkens is President and 
CEO of Development Finance International, which she founded in 
1992. DFI is a member of the National Foreign Trade Council and 
Ms. Willkens' testimony will reflect the Council's perspective 
on this subject. She leads a 20-person team providing a broad 
range of international development Bank project and export 
finance consulting services to U.S. and non-U.S. firms. With 
nearly two decades of experience working within the dynamic 
international development setting, DFI is recognized for its 
practical understanding and long-term relationships with a full 
array of stakeholders. Diane, thank you for your time today, as 
well.
    Mr. Tarullo, we are pleased to start with you.

   STATEMENT OF DANIEL TARULLO, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Tarullo. Thank you, Mr. Chairman, Senator Martinez, 
Senator Casey.
    As your introductory remarks have suggested, the Bretton 
Woods Institutions are showing their age, this for both 
external and internal reasons. Externally, the environment in 
which they operate has changed dramatically not just since 1944 
when they were founded but really in the last 10 years. The 
emergence of middle income countries with large current account 
surpluses, the related phenomenon of the shift in global 
economic weight more toward Asia, the huge almost unanticipated 
increases in flows of portfolio capital the world, along with 
the astonishing proliferation of new financial instruments have 
all changed fundamentally the world in which these two 
institutions function.
    Internally, they have been somewhat maladaptive to these 
external changes. It is true they have both adjusted to new 
conditions before. This time around though they both seem to be 
having more difficulties.
    Perhaps this is because of the tendency of most 
organizations over time to evolve into bureaucracies. Perhaps 
it has something to do with the inability of the U.S. to 
provide as much leadership as it has in the past. It is much 
easier to change an international institution in a multilateral 
world with a nation willing and able to provide leadership than 
it is to change an institution in a multipolar world.
    My second point is that despite these difficulties, the 
successful adaptation of both of these institutions is very 
much in the interest of the United States. This again for two 
separate sets of reasons. First, the missions of these 
institutions are, in and of themselves, as important as they 
have ever been. For the Bank, providing the international 
public good of development through assisting developing 
countries in providing public goods within their own economies 
continues to be central to the foreign policy interests of the 
United States.
    For the Fund, promoting international financial stability 
may be a very different kind of task than it was 10, 15 or 20 
years ago, but it is just as important for providing the 
backdrop for a well functioning real economy here and 
throughout the world.
    But there is a second set of reasons, alluded to by Senator 
Martinez, as to why the successful reform of these now troubled 
institutions is very important to us. The fate of the Bretton 
Woods Institutions is, in many respects, a bellwether for the 
future of the multilateral economic system that the United 
States was so instrumental in founding and has been so 
instrumental in maintaining over the last 63 years. The 
alternative, as the Senator suggested, is in all likelihood not 
a new set of multilateral institutions, nor a vacuum, but 
instead the turn toward regionalism in much of the world but 
particularly in the fast-growing countries of Asia.
    Now it is true that the predictions of regionalism that 
have been made off and on for the last 20 years have proven at 
best premature, and at worst just wrong. But I think there is 
no doubt but that the palpable weakening of the multilateral 
system will lead to the growth of regionalism in all its 
manifestations.
    This is quite probably bad for economic world welfare and 
it is certainly an adverse development for U.S. influence. U.S. 
influence over the rules and norms by which the international 
economy is structured and, I would say more generally, U.S. 
influence in all foreign affairs capacities.
    So my third point: given the difficulties these 
institutions face and given the importance of their success 
what kind of vigorous but constructive criticism can we on this 
panel, and more importantly you in the Senate, offer? Well, the 
core problems of the institutions actually vary, I think, in a 
fundamental way. The two have been joined at the hip since 
their creation at Bretton Woods. They stare across 19th Street 
at one another even today. But they actually are quite 
differently situated in their missions. And thus, the right 
reform agenda area varies, as well.
    At the Bank the problems are largely managerial. To be 
sure, there are lots of different views of optimal development 
strategies. But the very fact that the Bank has 500 different 
lending decisions every year means they can pursue 
simultaneously different strategies. In these circumstances 
though they have got to change the fundamental nature of their 
operations. They need to assure the maximum effectiveness of 
Bank assistance in promoting development. And that is why my 
suggestions for change in my written testimony focus on things 
like outcome oriented lending, systematic program evaluation, 
the kinds of mechanisms which would shift their mode of 
operation.
    The Fund, in my judgment, faces a much more serious 
problem. There is a lack of consensus as to what the role or 
roles of that institution should be in the world today, a lack 
of consensus among the Fund's members.
    It is true that the Fund's leadership has not been as 
strong as it should be. It is absolutely true that its 
performance in things like surveillance has been sometimes 
distressingly weak. But at root the absence of agreement among 
nations as to what the Fund should be doing is going to impede 
even the best management at the Fund from adapting that 
institution to today's international financial challenges.
    And let me close briefly by suggesting that those are, 
first and foremost, once again becoming the guardian of 
exchange rate stability in the world. This is a task which the 
Fund performed for its first 25 years under the par value 
system. It has not been doing it consistently in the last 30 
years. It needs to do it again. As Senator Bayh suggested, it 
has to this point failed in doing so.
    Second, it needs to address the new sources of potential 
international financial disruption. The meltdown--the next 
financial crisis will probably not be based in a fast-growing 
emerging market because they are sitting on huge reserves. We 
do not know where it will come from but the events of the last 
couple of weeks suggest to us that, for example, a meltdown of 
international derivatives markets is not so far fetched.
    Also, the growth of sovereign wealth funds poses a new kind 
of challenge.
    The management of the Fund has laid out a modest reform 
agenda. It is moving in the right direction. It is not 
particularly ambitious. I have some skepticism as to how well 
even that agenda will be moved forward. So I think we all, in 
and out of Government, in and out of the executive branch, need 
to focus attention on how we will produce the conditions that 
will lead the Fund to a new set of missions.
    Thank you so much.
    Chairman Bayh. Thank you, Mr. Tarullo.
    We look forward to following up with some questions on your 
very informative testimony.
    Dr. Lerrick.

  STATEMENT OF ADAM LERRICK, PROFESSOR OF ECONOMICS, CARNEGIE 
                       MELLON UNIVERSITY

    Mr. Lerrick. Thank you, Mr. Chairman. It is always a 
pleasure to appear before this Subcommittee. The questions 
posed are always insightful and demanding.
    I will concentrate my oral remarks on the World Bank though 
I will be happy to discuss the Fund, on which I have numerous 
opinions as well.
    The question of the World Bank which Professor Tarullo 
talked about is what should the World Bank do in a new world? 
While China is buying a $3 billion stake in private equity 
giant Blackstone with the expectation of a 25 percent annual 
return, the World Bank is busily lending to China at a 5 
percent interest rate which does not even cover the Bank's own 
cost of funds.
    While India's multinationals, many of them state-owned, are 
acquiring industrialized nation assets and invest in the 
developing world to fuel an economy exploding at 10 percent per 
annum, the Bank has just doubled its lending to India to almost 
$4 billion, most at a zero interest rate, which constitute a 
gift of $1.5 billion from industrialized nation taxpayers. The 
Bank should not be subsidizing projects the Indian government 
does not think worth financing at market rates.
    While the world reached out at the millennium to forgive 
the debt of 18 of the globe's most impoverished economies, the 
Bank piled on another $10 billion of net new loans, raising 
their Bank indebtedness by almost 50 percent. The Bank should 
not continue to lend in the same old way with the expectations 
that its losses will always be made good by rich countries.
    As globalization transforms the world economy, the Bank is 
one of the losers. Its historic comparative advantage is gone 
and its role inevitably diminished. There are powerful new 
competitors in the market. Private capital now channels 300 
times the funds offered by the Bank to the emerging world and 
will finance any project the Bank would consider. Nations 
moving up the economic ladder--China, Brazil, India, and 
Russia--are funding and building the infrastructure and 
industry for even the poorest countries in exchange for access 
to raw materials and export markets. China alone will send $25 
billion to Africa over the next 3 years, which is 50 percent 
more than the funds the Bank will send to that continent.
    While Bank presidents come and go, a bureaucracy hostile to 
change and clever at manipulating an unwieldy multinational 
board is flouting the Bank's founding articles, bending the 
rules, distorting the facts, concealing losses, and lowering 
standards. The Bank is desperate to maintain the illusion of 
relevance to emerging countries that no longer need its money 
and no longer want its advice.
    The Bank was established 60 years ago in what is now 
financial prehistory. Its core mission was to solve two 
shortcomings in the global economy: a shortage of money to 
finance development and a shortage of knowledge in developing 
nations. The Bank would borrow from the world's financial 
centers and couple loans with advice to speed the growth of 
poor countries. In the last 20 years the world has changed 
dramatically but the World Bank has refused to change with it.
    Today the private sector dwarfs official funding and 
emerging nation leaders are just as smart, just as skilled, and 
know their countries infinitely better than anyone at the Bank. 
Yet 80 percent of Bank loans flow to just 12 middle income 
governments led by Turkey, Brazil, Mexico, and China. If the 
Bank stopped lending tomorrow to its major borrowers, no one 
would notice. It provides only 0.3 percent of the funds sent by 
the private sector.
    Loans to middle-income countries are clearly good for the 
Bank's balance sheet and beef up its image of influence. But 
Bank reasons for continuing to lend to the prosperous are 
specious and refuted by the facts. The Bank does not lend, as 
it claims, where the poor live. More than half of Bank loans 
since 2000 flow to six upper middle-income nations where only 
10 percent of the developing world lives. In the creditworthy 
countries the Bank courts, the hardhearted private sector is 
ready and willing to finance pro-poor projects on the same 
guarantee the Bank demands. If Brazil's full faith and credit 
is on the line, private capital does not care if the proceeds 
are used to vaccinate Indians in the Amazon or to build nuclear 
warheads.
    Far from generating a surplus for the poorest countries, 
lending to middle income nations is draining resources. To 
compete with the market the Bank has waived fees and interest 
spreads, reducing its operating margin by 50 percent. All in 
the Bank does not cover its administrative costs and now loses 
$500 million per annum on its emerging economy loans. The 
Bank's reported $1.5 billion net income comes from the $2 
billion return on its $37 billion of zero cost capital.
    Every 3 years the industrialized world is required to write 
a big check to the World Bank to fund the International 
Development Association, the arm of the Bank that focuses on 81 
of the globe's most underprivileged countries. Zero interest 
rates make these loans a 70 percent gift. The price tag for the 
2008 cycle will be $32 billion, of which $10 billion is the 
first installment on a $46 billion debt relief promise to 
reimburse the Bank for past bad loans. The total U.S. share 
will be $4 billion to $5 billion.
    A dangerous precedent has been set. Whenever rich nation 
taxpayers fund the Bank, there is an open-ended obligation to 
cover future Bank mistakes.
    At the Bank the need to know is an insider's prerogative 
that does not extend to world taxpayers, those in the 
industrialized world that provide the funds and those in the 
developing world that assume the debt. What do we know about 
Bank lending to the poor? And what doesn't the Bank want us to 
know?
    We know that after 60 years and $600 billion there is 
little to show for Bank efforts. Bank aid was not behind the 
impressive economic gains in China, India and Indonesia where 
all the progress in poverty reduction has been concentrated. We 
know that for two decades the Bank continued to pour money into 
countries clearly unable to repay and concealed the truth by 
rolling over worthless loans until the G-7 governments were 
forced to assume the debts and make the Bank whole. We know 
that the Bank continues to tolerate corruption, which in Africa 
alone has diverted between $100 billion and $500 billion into 
offshore bank accounts. We know the lack of effectiveness of 
Bank projects is startling. By the Bank's own numbers 59 
percent of investment programs worldwide and 75 percent in 
Africa failed to achieve satisfactory long-term results over 
the 1990-99 decade.
    There is a common thread. The overwhelming priority has 
been to ship off funds even when there is no deserving 
destination. Before handing over the 15th IDA replenishment, we 
need to know more and should not be deterred by claims of 
confidentiality or the cost and complexity of documentation. 
The Bank's internal evaluation group is captive and its 
findings suspect. Calls for an external performance audit have 
been stonewalled. We want the answers to very simple questions 
that the Bank is afraid to ask. How many babies were 
vaccinated? How many miles of roads are functional? How many 
cubic meters of wastewater were treated? How many children can 
read?
    Transparency and accountability are close at hand on the 
Internet. For every one of the 280 projects the Bank approves 
each year, there already exists detailed reports in electronic 
form ready to be delivered to a public website. Disclosure 
would not be a burden. Ghanaian parents will monitor World Bank 
funding for their children's schools. Zambian farmers will look 
for roads ready to carry their produce to market. Africa 
fighting malaria and other NGO's will see if the mosquito nets 
are hanging in place. Opposition politicians and political 
watchdogs will know if funds and equipment have been spirited 
away. A whole universe of activist shareholders will keep count 
every step of the way. The world will become the independent 
evaluator of the World Bank and reach collective judgment.
    Thank you.
    Chairman Bayh. Thank you, Dr. Lerrick.
    Ms. Lissakers.

STATEMENT OF KARIN LISSAKERS, DIRECTOR, REVENUE WATCH INSTITUTE

    Ms. Lissakers. Thank you very much.
    I think it is very useful for committees of the Congress to 
pose the question periodically are these international 
financial institutions relevant? And are they effective in 
executing their mission?
    As I note in my testimony, there were certainly a number of 
reform measures in the 1990s. But the demands of the world 
changed and the institutions need to change with them.
    I also note that there were some big institutional issues 
that were never resolved in the 1990s and should have been. 
When you talk about effectiveness of an institution one obvious 
key player is the leader of the institution. And I have to say 
that the process by which we choose the heads of the Bank and 
the Fund are both an embarrassing anachronism and undermine 
both the credibility and the effectiveness of the institutions. 
It is simply no longer acceptable that, to put it crudely, a 
few rich white guys who should decide in a closed room who 
heads an institution with more than 180 shareholder governments 
and then simply presents the person, take it or leave it, which 
is what has been the case. It may have been defensible when 
they were first founded, but it is no longer defensible.
    I was very disappointed that the U.S. missed the chance to 
change the process when the opening arose most recently in the 
World Bank.
    The Europeans now have a chance to change the process by 
actually opening up the selection. I am afraid they, too, are 
about to miss that opportunity. And I hope that Congress will 
speak forcefully on the issue and say that the two institutions 
and their governments should decide now, not wait until the 
next opening, that there will in the future be a merit-based 
and open and proper selection process so that whoever ends up 
as the head of the institution has the wide support and 
confidence of the members. I think there has been weak 
leadership and it has cost both institutions in recent years.
    The second and related reform that is incomplete that has 
been talked about a lot but still not resolved is the necessary 
redistribution of quotas, voting rights and voice 
representation in the boards of the two institutions. There is 
now a serious misalignment between not just the influence of 
emerging market countries in these institutions but also their 
share of the responsibility and their share of the financial 
obligations of these institutions that go with voice and 
influence and vote.
    There is a process under way to redistribute shares. I am 
just concerned that what is being talked about so far that came 
out last year's annual meeting will not really go far enough. I 
again think that Congress can be very helpful in keeping the 
pressure on and saying if you are going to do this and go 
through this complex exercise, you should do it right and 
really solve the problem once and for all. And solving it does 
not mean taking voting shares out of the U.S. hide. If anything 
we are underweight in the current voting formula. And I think 
the members all accept that.
    I would note also, with regard to your concern or 
Congress's recent concern on China's exchange rate posture that 
one of the factors that is weighed in deciding how big a 
country's quota is its openness. In the past it has only looked 
at the trade account. I think Congress should suggest that 
openness should also the capital account, which is directly 
relevant to the exchange rate, pegging exchange rates and so 
on.
    The third internal reform is to give the developing 
countries a bigger voice in the institution. The board 
discussions, sort of like Congress, may seem very arcane and 
tedious at times but it actually is an--the boards are a very 
important forum, not just because they have the ultimate 
decisionmaking power but because that is also the forum where 
the peer review and the discussion of policies really takes 
place.
    It is so clear that the developing countries are 
underrepresented in terms of just presence in the executive 
boards. IMF has 24 members. A country like South Africa gets to 
sit in the executive director's chair once every couple of 
decades because it is part of a 19-country constituency where 
each country has to take a turn and sit for 2 years. It is 
actually more than a couple decades.
    In the meantime, Europe has eight chairs in this 24-member 
board and at this stage they do not need eight chairs to repeat 
the common EU policy that they have adopted. But that is what 
is happening. And it really is up to the Europeans to get off 
the chairs and make room for more developing country executive 
directors.
    I was sorry to see that the Singapore reform agenda that 
came out of last year's annual meeting did not include this 
question. Apparently the European members remain dug in and I 
think the U.S. should be much tougher on that score. It 
actually has, in its power, the ability to force that issue to 
be resolved, which I would be happy to speak to.
    In terms of relevance and larger institutional 
effectiveness questions, it is true obviously that the IMF is 
much less important now as a source of finance. I think we 
cannot necessarily count on that always being the case because 
we know that just when we think the world economy is cruising 
along, something is just about to happen and we may be due for 
one of those periodic decadal eruptions.
    But on a continuing basis it really is a talk shop. It is 
true that members have lost, important members have lost 
interest in the IMF, the Asians most notably. They have created 
their own defense chest in huge currency reserves and their own 
fora for discussing policies. I think that is unfortunate. We 
need multilateral, truly multilateral, institutions to discuss 
and resolve important global issues. And the Fund and the Bank 
are really what we have that are truly universal and we should 
do everything we can to preserve them. That, again, goes to the 
voice and vote move.
    In terms of have we gotten enough poverty reduction bang 
for the development buck, I think it is pretty obvious the 
answer is no. And I think finally development economists agree 
that money alone does not solve poverty and conflict problems. 
In the end it is institution building, governance, and 
accountability that eliminate poverty and conflict. In the end, 
change in the developing countries, as elsewhere, has to come 
from the inside.
    And that means that the institutions like the World Bank, 
that are trying to address these issues, really have to put 
their efforts not into financing or general lending, 
development lending, but put much more effort and much more 
targeted effort into institution building, encouraging 
effective laws, proper fiscal financial regimes, creating a 
healthy business environment in these countries and fighting 
corruption, of course.
    We were very pleased to see the effort that Paul Wolfowitz 
put into the anticorruption program in the Bank's external 
activities. We certainly hope that Bob Zoellick will build on 
that, not diminished the focus.
    I think both the Bank and the Fund have recognized the need 
for a different approach to development and structural reform. 
I think they have been quite effective in some areas. The IMF 
has really had a huge success in instilling good central 
banking institutions and policies. You can see the result in 
lower inflation around the world. But on other issues that they 
have not performed as well.
    Governance accountability and anticorruption are the focus 
of much of our work. These are inherently political and 
therefore it is very hard for the Bank and the Fund to do much. 
But they can insist when they invest, for example as the IFC 
does, in very large extractive industries projects, that all 
the payment flows are fully transparent and accounted for.
    Extractive revenues are one of the biggest sources of graft 
and resource looting in the very poorest countries and the Bank 
and the Fund can play--especially the Bank--a direct role in 
countering that by the way they manage. So can the U.S. 
Congress, the U.S. Government, in its policies vis-a-vis OPIC 
conditions for funding and guarantees. And we hope to see a law 
passed by Congress this year that would require extractive 
companies to publish all of their payments country by country 
to foreign governments as a direct counter to the kind of 
massive corruption that is underway.
    Thank you, Mr. Chairman.
    Chairman Bayh. Thank you, Ms. Lissakers. I look forward to 
asking some questions and getting some additional perspective 
from you.
    Ms. Willkens.

  STATEMENT OF DIANE WILLKENS, PRESIDENT AND CEO, DEVELOPMENT 
                     FINANCE INTERNATIONAL

    Ms. Willkens. Thank you, sir.
    Mr. Chairman and Senator Martinez, thank you for the 
opportunity to testify today to share a private sector 
perspective on the World Bank.
    I am testifying on behalf of my company, Development 
Finance International, as well as the National Foreign Trade 
Council, a business organization of 300 American companies 
whose mission is to advance open and rules-based trade. I serve 
as the Chair of an Ad Hoc NFTC working group on the World Bank.
    It has been my privilege over the years to work with some 
of the world's leading private sector firms--such as Hewlett-
Packard, GE, BASF, and Philips, to name a few--in their pursuit 
of sound business policies with the Bank and its sister 
institutions and have been involved in sectors as diverse as 
health information and communications technology, education, 
agriculture, environment and transportation.
    I would like to begin by emphasizing the important role of 
the World Bank and the regional development banks since their 
creation after the second world war. As we have heard, as part 
of the Bretton Woods Institutions, the World Bank continues to 
serve a vital multilateral institution and advancing sound and 
sustainable economic development and alleviating poverty in the 
developing world.
    We welcome President Zoellick in his new role and encourage 
his furthering the Bank's collaboration with the private 
sector. With his depth of international experience, record of 
accomplishment in several prominent high-level trade and 
foreign policy positions in the U.S. and commitment to helping 
the developing world grow and prosper, there is no one better 
qualified to lead the Bank today.
    My testimony will touch on several areas where the Bank 
could and should improve its policies and interaction with the 
private sector in meeting its overall mission. With the shift 
in the World Bank's relative importance, given the abundance of 
capital liquidity around the globe, it is in the Bank's own 
interest to find flexible new ways of working with others, 
including the private sector.
    Many of my comments have direct relevance, as well, to the 
regional development banks since they follow closely the lead 
of the World Bank.
    What I would like to do is highlight five overall 
recommendations that are elaborated in the written testimony. 
Number one, we believe the World Bank should better recognize 
that the private sector is both a key stakeholder and enabler 
of sound economic development and should incorporate the 
private sector into its planning and its operations. U.S. 
companies which operate and invest in developing countries 
bring numerous best practices through their presence and 
contribute meaningfully to economic growth and development. The 
private sector should be viewed more as a partner rather than 
an afterthought in the development of major new policies.
    Number two, the Bank should push forward with critical 
initiatives on governance and anticorruption. The Bank should 
strengthen its role in promoting accountable and transparent 
practices, especially in procurement, an area that is most 
susceptible to corruption on both the demand and the supply 
side.
    The private sector from the U.S. as well as several 
European countries have been very concerned about recent 
proposals by the Bank to abandon World Bank international best 
practices in procurement and effectively lower the Bank's 
standards on international competitive bidding. Our concerns 
relate to fundamental issues that define the business 
environment and investment climate in these developing 
countries.
    The Bank's recent proposal involves adopting a more hands-
off approach in favor of the procurement systems of its country 
clients. However, as the OECD said in its Paris declaration of 
2005, where corruption exists it inhibits donors from relying 
on partner country systems.
    And again in 2007, in the OECD's paper on bribery in public 
procurement it was said a multiplicity of rules will have a 
negative effect on transparency and lead to uncertainties and 
high transaction costs both for the procurement agencies and 
potential suppliers.
    As designed, the Bank's recent proposals go against its own 
important overall initiatives on anticorruption and improved 
governance and they should not be implemented.
    Number three, there continues to be a strong case for 
better coherence between the WTO and the World Bank, 
particularly in the area of trade capacity building and 
mainstreaming trade. This will be even more critical if the 
Doha Round concludes successfully. For example, an agreement on 
eliminating needless red tape at the border through a WTO 
agreement on trade facilitation will require substantial hands-
on capacity building and other assistance which the World Bank 
is well equipped to do.
    Number four, we recommend that the World Bank Group find 
creative new ways to engage other governmental organizations 
such as the export credit agencies. Further, we suggest that 
the political risk insurance provided by the World Bank Group's 
Multilateral Investment Guarantee Agency, known as MIGA, be 
available for transactions beyond investments in order to 
support sales that do not fit the export credit agency model. 
Namely we encourage eliminating the equity requirement for debt 
transactions and allowing support for subsovereign and/or 
parastatal transactions.
    MIGA's continued improvements to process transparency and 
responsiveness will be essential to its future and sustainable 
growth of its mission.
    And finally Number five, the U.S. Government should enhance 
its efforts to ensure the U.S. companies have an equal and a 
fair opportunity to compete for World Bank funded contracts. 
Within the multilateral development banks we would like to see 
representation of the U.S. private sector interest that is 
similar to the representation afforded European and Asian 
private sector, namely long tenured, highly experienced 
procurement experts within each of the multilateral 
institutions working on behalf of the U.S. private sector.
    In closing, the challenges facing the World Bank are many 
as the institution defines its changing role. The private 
sector is committed to working with the Bank in constructive 
approaches to the development challenges and the opportunities 
before us.
    Thank you for the opportunity to appear today and I welcome 
your questions and, with your permission, I would also like to 
supplement the written testimony with copies of correspondence 
between the private sector and the Bank concerning procurement.
    Chairman Bayh. Without objection, we would be happy to 
entertain that supplementary testimony.
    Thank you. It is always good, Ms. Willkens, to get a 
perspective from the private sector. Pragmatic reality-based 
observations are always helpful, even in Washington.
    We will now turn to questions. Mr. Tarullo, I will begin 
with you. I will try and keep mine to five minutes. Actually, I 
guess they have given me seven, Mel, so then I will turn to 
you. And if we need a second round, we will do that.
    Mr. Tarullo, you mentioned that the challenge facing the 
Bank is primarily managerial. The challenge facing the Fund is 
one of defining its mission in the 21st century. And you 
suggested that it could beef up its role as a guardian of 
orderly exchange rates among the countries of the world.
    Do you have any suggestions about how the Fund can do that 
besides mere surveillance and commentary? Is there anything 
practical that can be done?
    Mr. Tarullo. Well, I would not underestimate the importance 
of good surveillance as a first step, Senator. I think we need 
to distinguish that kind of surveillance that has been done to 
date and what I and others would regard as more rigorous 
surveillance.
    Chairman Bayh. Define for us what more rigorous 
surveillance would entail. And then the reason I wanted to 
follow up on this is, as you know, several of us have been 
engaged in our own surveillance of exchange rate policies of 
other countries. To date mere commentary does not seem to have 
had much of an impact.
    Mr. Tarullo. One of the big problems right now is that when 
we talk about redefining the Fund's mission, everybody 
understands that to mean China currency. And when one is 
talking about institutional change but everybody thinks it is 
really about a particular country at a particular moment 
positions, to put it mildly, tend to get dug in because it is 
about a specific issue rather than about the larger issue. That 
is a reality and we need to face that reality.
    Chairman Bayh. How can we back that up and not have the 
Fund appear to have become an instrument of U.S. policy but 
instead be an objective arbiter of sound global economic 
policy?
    Mr. Tarullo. That, I think, is exactly the goal. In fact, 
from my perspective as a U.S. citizen I do not think they have 
been doing a particularly good job in the last few years in 
pursuit of our interests, much less in pursuit of global 
interests. It comes back to are they going to be honest and 
forthright in their surveillance?
    The IMF's own----
    Chairman Bayh. If they are, do you think that will have an 
impact?
    Mr. Tarullo. I think it is a first step, and I will say 
why. The IMF's own internal evaluation operation concluded that 
their performance in surveillance, including surveillance of 
China, is just not very good. They soft-pedal things. Their 
economic prognostication is not good. My understanding is--this 
is not on the record, but my understanding is that they 
declined U.S. request for special consultations on China's 
practices.
    That suggests that the Fund, rather than trying to push to 
the limit its role under its current mandate----
    Chairman Bayh. Why the reticence?
    Mr. Tarullo. Why? I cannot explain that, to tell you the 
truth, except that they have become a bit of a political--they 
have become an institution which is caught between the politics 
of multiple strong countries.
    I will say, this gets actually to something that Karin 
Lissakers has mentioned----
    Chairman Bayh. Their reticence is going to implicate their 
relevance here if it continues.
    Mr. Tarullo. Exactly.
    Chairman Bayh. Can we segue to her comments? I think you 
were about to touch on this.
    Mr. Tarullo. Yes. Is that what you were getting at?
    Chairman Bayh. I was going to get at that, and then perhaps 
some of the structural changes. We have a moment here where the 
leadership of both the Fund and the Bank will be new, 
presumably will be set for 5 years. Perhaps this is a moment to 
address the mechanisms through which future leaders will be 
taken and perhaps address voting rights and those sorts of 
things to elicit more interest and participation by some of the 
countries. But at the same time the Fund has to be able to call 
it the way it sees it, if it is going to have any impact.
    Mr. Tarullo. The thing--what we have had at the Fund, we 
have now had two straight heads of the Fund who have left 
early. The first explicitly to go back and reenter German 
politics. Mr. de Rato says he has got to leave because he has 
got to pay for his kids' education but the rumors were all over 
that he was----
    Chairman Bayh. I am tempted to say that he should move to 
the Bank, but I will not.
    Mr. Tarullo. That does not help. And although, as Karin 
suggested, it would have been better to have a more open-ended 
process, if Mr. Strauss-Kahn is going to be the next head of 
the Fund one would have thought that one thing the United 
States could do is to ask him A, are you going to stay for 5 
years? The rumors are that President Sarkozy put you into the 
Fund to get you out of France politics. When they open back up 
again, are you going to go home or are you going to stay here 
and finish the job?
    B, what do you think about the Fund's performance on 
surveillance? What should its role be? Because I think if you 
are getting from the top demands that there be good honest 
analysis, an analysis which seems to me as invariably going to 
produce the outcome that China's exchange rate policies are 
currently destabilizing, then you are at least beginning down 
the path for a multilateral consensus on what needs to be done.
    And C, I would ask him, as a European, whether he agrees 
with the consensus that seems to exist in the rest of the world 
that Europe is overrepresented and some of the fast growing 
emerging markets are underrepresented.
    So I do not want to overstate what the Fund can do and the 
Managing Director can do on his own. But it seems to me that 
they have underutilized such influence and potential as they do 
have. As a result, you and your colleagues on the Finance 
Committee I think really feel as though you have no choice but 
to begin putting pressure from an external source. I think you 
and Senator Baucus and Senator Schumer and Senator Graham would 
all probably prefer the 3 years ago we had had real change.
    Chairman Bayh. Real change accomplished in the context of a 
multilateral effort, as opposed to having to go at it on our 
own. That leads to all sorts of frictions, which are not 
helpful.
    My question is designed--and I would be interested in the 
comments by any of the panelists--to really revitalize the 
Fund, their role, increase the weight that is attached to their 
advice so that perhaps we will get some consensus about what 
needs to be done. Perhaps if we can give more buy-in on the 
parts of these countries, they will start to accept some of 
that so we can reduce the level of global economic friction, 
which is not helpful and in the long run not sustainable.
    I am going to turn to Mel here than I have got some other 
questions. But would anybody else--Ms. Lissaker, would you like 
to comment on that? Or Dr. Lerrick?
    Ms. Lissakers. I think that one of the major reasons the 
IMF has been so weaken in recent years is not just the quality 
of the leadership at the top of the institution but the quality 
of the leadership of its major shareholder. The U.S., as far as 
I can see, for the last 8 years has basically ignored the Fund. 
It has not asserted itself and aggressively asserted----
    Chairman Bayh. I think the record should reflect she is 
referring to the executive branch, Mel?
    Ms. Lissakers. Yes, if there is there any ambiguity.
    I was amused when----
    Chairman Bayh. Following the financial crises of the 1990s, 
our attention has been focused on other things and it has 
become sort of an afterthought?
    Ms. Lissakers. My sense is it is part of a larger lack of 
interest in multilateral approaches, but we will leave that 
aside.
    I have been amused to have former board members--I mean my 
former colleagues at the IMF Board say you know, we used to 
complain about the U.S. pushing everybody around and constantly 
pushing an agenda and pushing this reform and that reform in 
Congress. Now we are all looking around and saying where is 
U.S. leadership in this institution?
    The fact is we are the dominant member and without it these 
institutions will not be strong and they will not be effective, 
either in terms of advancing what we see as our interests but 
also in terms of international resolving important fundamental 
global issues like the very important global currency 
imbalances.
    Chairman Bayh. My time has expired and Dr. Lerrick, we want 
to hear from you and then Senator Martinez. Is it your opinion 
then, Ms. Lissakers, that if we can get better leadership at 
the Fund and a greater engagement level from its principal 
shareholder, our own Government, that its surveillance will be 
taken seriously and perhaps followed by some of the countries 
who can benefit from it? Or are we naive in thinking that they 
will not continue to pursue their more narrow self-interest?
    Mr. Lerrick. I think you have to focus on how the world--
first you have to ask a very simple question. What do you want 
the Fund to do today? And the same for the World Bank. No one 
has asked that question of either institution.
    Someone needs to sit down, the leadership, as Karin would 
say the members possibly. But the leading members need to sit 
down and say we have decided the new role of the IMF is X and 
the new role of the World Bank is Y. Now finance ministers, 
Secretary of the Treasury, central banks, go and implement it. 
No one has done that to date.
    Coming back to I think where you started Mr. Chairman, 
which has to do with China, which is that hot topic now. One of 
the oldest lessons of international economics is there is 
nothing that can force a country running a balance of payments 
surplus to adjust because if they are willing to just keep 
accumulating reserves there is no mechanism to force them to 
change.
    A deficit country will eventually run out of reserves and 
they will be forced to adjust but a surplus country is not 
forced to adjust.
    The question of China and the role of the IMF and the role 
of surveillance has, I think, been overemphasized and the 
potential role the Fund can play grossly exaggerated. Because 
really, first, what makes us think that the IMF is better at 
determining reference exchange rates than the market? It is 
just an opinion of one group of people.
    And second, the IMF has no enforcement capability. This is 
very simple. If the IMF comes to a surplus country and says we 
need your exchange rate is grossly undervalued, it should be 30 
percent higher, 20 percent higher, whatever the number is. And 
the country responds that is your opinion. What is the IMF 
going to do? Is the IMF going to impose financial penalties on 
the country? Is the IMF going to have them thrown out of the 
WTO? Is the IMF going to say their banks, their commercial 
banks cannot participate in the international clearing systems? 
Of course not.
    And so there really is no capability for the IMF to enforce 
its views. And the idea of naming and shaming countries into 
submission is very innocent, to say the least.
    China is a very powerful country. The Chinese understand 
these issues very well. But it is important to recognize that 
to the Chinese government the overwhelming, the overarching 
goal is social stability. And they must absorb every year, they 
must create 30 million new jobs just in order to keep the 
economy growing because of the massive amounts of numbers of 
people coming from the countryside into the industrialized 
coast. That is what they are going to focus on.
    And so far they have focused on an export-oriented growth 
model, just like all of Asia. It has been very successful. That 
is what they are going to continue to focus on.
    When the IMF says--you saw how adversely the Chinese 
government reacted when the IMF announced just 2 weeks ago its 
new role of establishing exchange rates. The Chinese 
immediately reacted sort of like that is none of your business. 
It is a sovereign right and we are not going to listen to you. 
And so I think you then have to figure out why, when you deal 
with any country, especially a powerful country, why it is in 
that country's self-interest to make the adjustments you want 
them to do. Not why it is in the U.S.'s self-interest or the 
European's self-interest. You have to convince the Chinese. And 
it is going to be a very long-term process. And in my opinion 
the adjustment of the Chinese exchange rate--and it is clear 
the exchange rate is undervalued and they are subsidizing their 
exports through the undervalued exchange rate. There is no 
difference of opinion. How much a change in the exchange rate 
would actually affect the U.S. economy and the current account 
deficit is a great debate.
    My own view is a 20 percent revaluation of the renmimbi 
would have an infinitesimal effect on the U.S. current account 
deficit and on U.S. manufacturing employment. All of China, 
first of all most of Chinese experts are simply processing 
where the domestic content, the value added in China is 20 
percent or less. So they buy the inputs in dollars, they sell 
the outputs in dollars. A 20 percent revaluation is going to 
change the price by 4 percent.
    And second, even if you could have a major impact on the 
cost of Chinese consumer goods, our imports would not shift to 
U.S. domestic producers. They would shift to Mexican producers, 
Brazilian producers, Indonesian producers. And so for the 
rallying cry of many of the Senate and the Congress that we 
just need to force China to revalue its exchange rate and that 
will solve our current account deficit is naive to say the 
least.
    Chairman Bayh. That is a topic worthy for discussion. It is 
not the subject of our hearing here today. We get a variety of 
opinions on that.
    The question here today is whether we should try and have 
some sort of multilateral institution, not to substitute its 
judgment for the judgment of the market but instead encourage 
the market to value currencies as well as other things and to 
invest that institution with as much legitimacy as we can.
    I would be delighted to have you answer the question about 
why you think the mission should be in the next round but my 
time is way past expired. Senator Martinez, we would love to 
hear from you.
    Senator Martinez. I was picking up right on that actually. 
I enjoyed your comments because yesterday in this very room we 
were having a discussion on the very issue and some of us 
expressed a strong opinion that it would be foolish for the 
United States to pretend that we cannot continue to be the 
great trade nation that we have been with protectionist 
policies. That would be designed to create a false sense of 
security where it would not exist otherwise and that we should 
be competing with the world and in the world.
    But anyway I was going to ask you, based on the fact that 
you were part of the Meltzer Commission, what recommendations 
of that commission you would find were useful? Which ones have 
been adopted? Where should the IMF be going in the future, in 
your estimation and the estimation of the Commission? What 
should the role be really?
    Mr. Lerrick. I was very disappointed when I saw an 
interview with Mr. Strauss-Kahn in the Financial Times 2 years 
ago where he said that one of the principal functions of the 
IMF, equally important to global financial stability, was 
reducing the gap between the rich and the poor are. I did not 
think that was the IMF's job. I thought that was the World 
Bank's job.
    The IMF has a very simple function as laid out in its 
articles, which is to increase the stability of the 
international financial system. That is its job.
    If we want it to continue that job, we have to think of it 
in a new world. The IMF has created a world where there were no 
international capital markets. There were exchange controls. It 
was a gold standard. That world is gone.
    You have to think what does it mean to improve the 
stability of the financial system today?
    Clearly, the IMF cannot pay the role--and many of us 
believe it should not have played the role it did in the 1990s 
in intervening in all of the financial crises with bailout 
packages. We consider that that increased the frequency and 
severity of such crises and was counterproductive and the IMF 
failed in that mission.
    But that is no longer an option for the Fund. $30 billion, 
which at that time was thought to suffice to stem a financial 
crisis in a large emerging market country, would now be gone in 
a matter of minutes with the size of the financial flows. The 
IMF does not have the financial capability to intervene in a 
financial crisis even in a middle income emerging nation today.
    It certainly does not mean the IMF should be out there 
lending to the poorest countries. That is the job of the World 
Bank. And it certainly does not mean the IMF should be out 
there giving its opinions on exchange rates or imbalances 
between different countries.
    The IMF has one asset though that is extraordinarily value 
for the stability of markets, which is its information 
gathering and its data collection and dissemination process 
which is grossly undervalued. It is a very small part of the 
Fund in terms of its visibility.
    But remember what creates crises are surprises. Markets 
hate surprises. If you improve the quality and timeliness of 
information you will do much work to reduce the frequency of 
crises and reduce their severity when they occur. And that is 
what the IMF, in my opinion, should focus on, which is it has 
done an extraordinary job at creating the requisite data and 
information the country should supply to the markets. It should 
improve that even more for countries government sectors and for 
their financial systems.
    And by providing that to the market the Fund is going to do 
far more to increase the stability of the system than any other 
of these more grandiose rolls it is now seeking.
    Senator Martinez. Mr. Tarullo, we were talking earlier 
about the regionalism and the potential for that. I wonder if 
you might elaborate on this and discuss what already you have 
seen in terms of the building of regional institutions and 
whether the rise of regional and economic institutions could 
have a serious adverse effect on the United States economy?
    Mr. Tarullo. Thank you, Senator.
    The rise of regionalism obviously is most advanced in 
Europe in the form of the European Union and the European 
Monetary Union. We tend to think of it, as indeed I do, most 
acutely in the case of Asia because these are the fastest 
growing economies in the world. And it is, I believe, in our 
interest to integrate those economies successfully into the 
global economic system as importers as well as exporters. And 
in order to do that they are going to have to turn more toward 
domestic demand led growth.
    All of those things are, I think, accomplished more easily 
through the multilateral mechanisms of the WTO and the 
International Monetary Fund than they would be trying to do it 
bilaterally.
    The Asian countries, in the aftermath of the Asian 
financial crisis in 1997 and 1998, have skepticism bordering on 
rejection of the multilateral financial system, certainly the 
IMF. They feel that they were left in the lurch, that they were 
stuck with the aftermath of the crisis. They feel that the 
Fund's response was insufficient instead of excessive.
    And so the one area in which regionalism has actually moved 
forward concretely in Asia is on finance and in the monetary 
area. That is to say discussions among the central banks and 
agreements to have resources pooled in the event of a financial 
crisis.
    Now countries that are running massive current account 
surpluses and sitting on $1 trillion of reserves are not going 
to face a current account crisis anytime soon. So it is not as 
though these mechanisms are going to be activated. But it seems 
to me that they portend ill for what our role should be, which 
is anchoring a multilateral system that is moving--in that part 
of the world--is moving toward a set of economies that consume 
domestically, that import as well as export. And I think to the 
degree that regionalism takes hold in the monetary area it is 
more likely to take hold in the trade area as well.
    My last comment on this is it is not inevitable. People 
talk as though it is inevitable. I do think it is inevitable, 
for two reasons. One, if you reenergized the multilateral 
institutions there is an alternative. And two, many countries, 
including countries in Asia, will be more comfortable with a 
multilateral system than one in which there is a dominant 
regional power. That is the United States, for much of the 
world, serves as a counterweight to regional powers as well as 
sitting up there as the big global power. And I think we ought 
to take advantage of that desire on the part of a lot of other 
countries to provide stronger multilateral leadership.
    Senator Martinez. Mr. Chairman, my time is up but I would 
like to just maybe follow up with one quick question because 
perhaps this might do it. I think we are going to have votes 
coming up shortly.
    Ms. Lissakers, you mentioned about the elections of the 
leadership of the organizations and the preeminent role, I 
guess, of the United States perhaps advocating for a more open 
process. And while that sounds on its face to be a good thing, 
I also wonder whether or not the current system has not served 
the institutions well. In other words, whatever other problems 
there may be going forward, is the election of leadership and 
the way it has been done in the past at the root of whatever 
the problems may be? And would a different process yield a 
better outcome necessarily?
    Ms. Lissakers. I do not think there is a guarantee that it 
would yield a better outcome. One certainly would not want to 
emulate the U.N. model where the position just gets handed from 
one continent to the next to the next. That is definitely not a 
model to emulate.
    There was actually a joint World Bank/IMF Board committee 
on reforming the selection process while I was on the board and 
we came up with a process where the initial--where any country 
could nominate. But there would be a screening committee that 
would not be governmental but would be eminent persons who were 
widely and internationally respected.
    Some could include former managing directors our heads of 
the World Bank but other respected individuals, from a mix of 
backgrounds, from business, from academia, and so on. And they 
would then short list of candidates to get away from this 
political horse-trading that goes on in most multilateral 
institutions and then present the short list for the votes and 
straw votes to the two boards, to the members.
    I still think that is actually a pretty good model and I 
think it would be a significant improvement to the current one. 
You just cannot have--I mentioned earlier how important it is 
for these institutions to be effective promoters of sound 
governance and public accountability. How can they really do 
that credibly when their leaders are selected in this totally 
non-open or accountable manner?
    Senator Martinez. But I am encouraged by what you suggest, 
which is perhaps a semi-open process which would have a short 
list drawn together by an elite group of people. I think that 
may yield a better outcome than just throwing wide open.
    Yes, sir, you wanted to comment?
    Mr. Lerrick. Very quickly, Senator Martinez. Again, before 
you discuss how the leadership should be chosen you should 
decide what you want the institution to do. Let me give you an 
example. If you want these institutions to continue as lending 
institutions, with that as a major function that they play, the 
leadership should be chosen from the creditor members. There is 
no example in the private sector where borrowers get to 
determine how the bank is run because borrowers only want three 
things: more money, lower interest rates, and longer 
maturities.
    Senator Martinez. Or loan forgiveness.
    Mr. Lerrick. Or loan forgiveness. That is the extreme of 
longer maturities, lower interest rates, and more money. And so 
therefore, if you have a system where you want these 
institutions to be lending large amounts of money, it has to be 
the creditors that determine policy.
    Senator Martinez. Thank you, Mr. Chairman.
    Chairman Bayh. Thank you, Senator Martinez.
    I would be interested, Mr. Tarullo and Ms. Lissakers, if 
you would comment on something that Mr. Lerrick mentioned and 
at least alluded to. I think in Article I of the IMF part of 
its mission is to ``maintain orderly exchange arrangements 
amongst its members.''
    Dr. Lerrick, I interpreted your remarks as being that that 
should not be a part of its mission. Further--and I do not want 
to get into the wisdom of the policy about the Chinese 
management of their currency or what our reaction should be, 
but I interpreted your remarks as being that we essentially 
should not have a global entity that comments upon the wisdom 
or lack thereof, of that, that it should be sort of a free-for-
all. And if our country, in spite of your opinion, if a 
majority of American policymakers disagree with your point of 
view, we should take unilateral action vis-a-vis the Chinese, 
as opposed to trying to establish some sort of international 
consensus.
    Mr. Lerrick. No, Senator, I believe the Fund can certainly 
provide its opinion, but that is all it is is an opinion. The 
Fund says well, what we believe this is what the appropriate 
exchange rate should be----
    Chairman Bayh. No, but----
    Mr. Lerrick. Remember, that article was written under a 
system where, first of all, the entire world economy was 
dominated by industrialist economies.
    Chairman Bayh. Might they not say that it is nobody's 
business to determine what the Chinese currency's value should 
be, but it is a job for the market to do?
    Mr. Lerrick. Certainly one can say that. In fact, in 
today's financial markets, that is what is going to occur.
    Chairman Bayh. But not with regard to China's currency.
    Mr. Lerrick. There you have a question of whether the 
Chinese government has the sovereign right to try to influence 
the value of its currency. And that is a debatable point. That 
is one of the things----
    Chairman Bayh. I do not want to get too far down on that 
path but there are different questions about whether they are, 
in fact, managing their currency. And if so whether, even if 
they have the right to do that, then presumably other countries 
should also have the right to do something in reaction to that 
if they so choose.
    Mr. Lerrick. Absolutely.
    Chairman Bayh. It is sort of an every country for 
themselves and you get the bilateral action and reaction as 
opposed to some sort of multinational entity.
    But I was curious, Mr. Tarullo and Ms. Lissakers, if I 
mischaracterized your position, Mr. Lerrick----
    Mr. Lerrick. I think you have not totally mischaracterized 
it. I think the fact of the matter is the Fund does not have 
the ability to play the role that that article you are quoting 
assumed it did. And it had that role--even if it had that role 
in 1945, which it really did not, that capability, it certainly 
does not have it today.
    And then the question is do you want to try to have an 
institution--when you asked why has the Fund been too reticent 
to assert itself aggressively in certain cases? Maybe because 
the fund understands that all that will happen if it asserts 
itself aggressively is that it will lose the remaining 
credibility it has.
    Chairman Bayh. Is moral suasion, Mr. Tarullo and Ms. 
Lissakers, something that it would be beneficial?
    Mr. Tarullo. Look, none of us should be and I do not think 
anybody here has overstated the potential for the Fund in 
managing exchange rates. But I would disagree with Dr. Lerrick 
on the potential that the Fund, or indeed any multilateral 
process has, for the following reasons.
    First, I do not--if you have got a process, an analytic 
process, that is regarded as credible and as not having a 
particular vested interest in anyone's outcome and that process 
acquires credibility over time, as it must, then it can serve 
as--the staff report can serve as the starting point for a 
discussion.
    Second, of course you cannot force any country to change 
whatever its exchange rate policy may be. And of course, in a 
highly legalistic sense, it is a sovereign prerogative of the 
country.
    But the whole nature of international economic interaction, 
and indeed international interaction, is that countries talk, 
they come together, they negotiate, they play one another's 
interests, desires and outcomes in order to try to maximize 
their position. And when a country concludes that it is not 
particularly useful for its standing in the rest of the world, 
that it is eliciting negative reactions that are getting in the 
way of achieving their ends in other areas, and importantly 
where they can see how their own self-interest, in this case, 
actually does lie in eventually revaluing their currency, then 
I think you have got the potential for a helpful process.
    You know one thing, the first G-7 summit that President 
Clinton ever went to, in 1993 in Tokyo, as you recall we were 
still running--still. Then we were running significant budget 
deficits. That changed and now we are back to the budget 
deficits.
    But at that time, when the president got back he was just 
shaking his head, both literally and metaphorically, saying all 
he was hearing from the other leaders the drag, the dangers the 
U.S. budget deficit was posing to the global economy.
    We are talking about the leader of the free world who is 
affected by the fact that other leaders say here is a problem 
you are posing for us.
    I, in my capacity as his sherpa, felt the same thing, 
although by the time I was sherpa we had made progress on the 
budget deficit. It does not seem as though anybody can force 
the most powerful country in the world to do something in 
particular. And they cannot. But what they can do is to 
cooperate more or cooperate less on your own initiatives.
    And I think that, just as the G-7 process at the proper 
moment in history, which we are long past, actually was 
valuable for the G-7 countries, sharing views yes but also 
creating some not-so-subtle pressures on one another, I think 
that can be true here as well.
    But like Dr. Lerrick, I would not overstate the--the IMF is 
not going to become an adjudicator of exact precise exchange 
rates. It neither can do it and I agree with him it should not 
do it either.
    Chairman Bayh. Dr. Lerrick I will get back to because you 
did ask a very good question, which is defining what its 
mission should be going forward, and we have not really gotten 
back to that, which I would really like to. Ms. Lissakers, I 
would like to hear from you.
    But it does seem as if there is some overlap here. Dr. 
Lerrick you said, of course, they can comment and offer their 
opinion and so forth. Not with an expectation they can force 
anybody to do anything.
    Mr. Tarullo, what you are saying is that the more that is 
viewed as being an objective, informed opinion about why it is 
in someone's best interest to take a course of action that has 
some utility. It is not a panacea but it has some utility.
    Mr. Tarullo. If it begins a process. If the report is just 
sitting out there it does not get you too far. there will be a 
story on it in the Financial Times and that will be about the 
end of it.
    But if it is the beginning of a process and the de Rato 
idea on multilateral surveillance seems to me to have some 
merit, even though it was not particularly an impressive first 
set of results because it says OK we are going to have reports 
first to try to get some objective analysis. And then we are 
going to try to replicate the old G-7 model in a new forum with 
the right players, which the G-7 clearly does not have.
    Chairman Bayh. Ms. Lissakers.
    Ms. Lissakers. Mr. Chairman, you said a few moments ago 
look, if these multilateral institutions are not effective and 
they are not working then why shouldn't countries just go their 
own way, adopt unilateral policies, respond as they need to to 
make things happen?
    Chairman Bayh. That is not my desire. It is just my 
observation in a vacuum that is what is likely to happen.
    Ms. Lissakers. And that is exactly the scenario that the 
founders of the Fund especially had in their heads and the Bank 
when they created them. The original mission of these 
institutions was precisely to prevent that from happening and 
to give countries an alternative and effective channel to 
address issues that affected them directly but also required 
the participation and cooperation of other countries to 
resolve. And that is exactly where we are.
    So I think the original mission is still valid. The 
question is whether the techniques and the approach of the 
institutions are still effective. And clearly they have to 
change. The fact is the Fund does not try to set exchange rates 
anymore. It does an analysis which says if you, China or 
another country, allow your exchange rate to float and let the 
market set the rate, this is roughly where we think you will 
end up right now. This is what we think is probably an 
equilibrium exchange rate.
    That is an analytic point against which the U.S. can and 
does use to go to the Chinese and say the Fund analysis and our 
own analysis shows clearly that your exchange rate comment, by 
any market measure, is undervalued. You need to adjust. The 
real impact is exactly what--effectiveness or not--is through 
the mechanisms Dan described, which is the governments, the 
member governments of these institutions collectively bearing 
down on a member that is acting in a way that is contrary to 
the best analysis and policy guidance and saying you are out of 
line. You need to adjust your policies.
    Sometimes that works and sometimes it does not. But it is 
this peer review mechanism that is the real value and that we 
should not discard, as Adam, I think would----
    Chairman Bayh. Yes, Dr. Lerrick.
    Mr. Lerrick. Very simply, Mr. Chairman, Professor Tarullo 
raised what I consider an extraordinary good example of the 
problems the Fund faces in this role. A year and a half ago the 
Fund announced the major initiative of the multilateral 
surveillance mechanism where--as opposed to the Fund speaking 
one-on-one to individual countries of what they thought the 
problem was they would bring together groups of countries who 
were part of a global problem and we will work out a solution 
together.
    It was extraordinary--and after the first year there was a 
big announcement in April, this spring, of how successful the 
Fund had been at this. I was asked to come in after the 
announcement was made to meet with the senior management of the 
Fund where they told me look at the extraordinary success of 
the multilateral surveillance program. And they pulled out the 
announcement. And on the announcement it said the United States 
is going to reduce its fiscal deficit and its current account 
deficit; the Germans and the other Europeans are going to make 
their labor markets more flexible, work to make their labor 
markets more flexible; the Chinese are going to work to make 
their exchange rate more flexible.
    I asked, I said well what on this piece of paper is any 
different than what these same governments have announced many 
times before officially in writing? And their response came 
back but we got them to put it all on one piece of paper 
instead of five pieces of paper.
    And I said well, what is that great achievement? And they 
said well, if you do think getting it all on one piece of paper 
instead of five different pieces of paper is a success, well 
then you will not be impressed by the multilateral surveillance 
mechanism. I think that is an example you should think about.
    I think there is an immediate stage between the 
multilateral system----
    Chairman Bayh. They are working hard to save the rain 
forest, Dr. Lerrick. Less paper, fewer trees.
    Mr. Lerrick. But I think there is an intermediate stage 
between the totally multilateral approach that, of course, 
people would love and this every country goes its own way. I 
think that is based on countries' self-interest.
    I think what will happen is, as you will see, is that 
companies will pair off into regional groups or into select 
groups where if it is a problem you will see the United States 
speaking directly to China. The United States is not just going 
to go off by itself and impose certain sections without at 
least attempting to discuss the problems with China. I think 
that is Secretary Paulson's strategy, has been his strategy. I 
think you will continue to see that. And what you will see is I 
think the choice is not----
    Chairman Bayh. It has borne about as much fruit as the 
document you just described.
    Mr. Lerrick. Of course, but I do not think the multilateral 
IMF system will bear much more fruit. But I think that it is 
what you are going to see, this intermediate stage where there 
will be regional or bilateral discussions.
    Chairman Bayh. Let's move to something, if we might, that 
Mr. Tarullo mentioned as what he felt was part of a mission 
going forward for the IMF. That was sovereign growth funds, I 
think you mentioned, trying to analyze what the effect of that 
is going to be.
    Dr. Lerrick if you are correct, and you probably will be 
for the foreseeable future, China will be running large 
surpluses. They have questions about what to do with those 
surpluses. They are in the process of making equity 
investments, the Blackstone investment just got a lot of 
attention and so forth and so on.
    Is a legitimate function for the Fund going forward to at 
least begin to explore the consequence of nation-states making 
equity investments of this type?
    Mr. Tarullo. Senator, I would say not just equity 
investments but investments of all sorts.
    Chairman Bayh. It is kind of ironic, we advise most 
countries to reduce the role of government in their own 
economies and now their governments will be taking ownership 
interests in the economies of other countries.
    Mr. Tarullo. This is, in part, an example I think of be 
careful what you wish for. I recall not very long ago a number 
of prominent economists advising countries to diversify the 
destinations of their reserves not simply in terms of currency 
but also higher yielding instruments.
    In direct response to your question, it seems to me that 
there are two sets of concerns one of which is a concerned that 
this Committee addressed last year and that you just wrapped up 
not so long ago, which is the CIFIUS kinds of concerns. That 
is, the potential acquisition of an industry, a company, in a 
country which raises national security type issues if it is 
held directly or indirectly by the government of another 
country.
    As you may have noted, Chancellor Merkel of Germany has 
recently evinced her anxiety at the prospect for sovereign 
wealth funds doing that.
    I think that that kind of issue is best handled directly 
through a CIFIUS-like process, as you all have amended it.
    The second set of issues, though, gets to the aggregate 
effects of these financial flows on global financial stability. 
And it seems to me that the Fund not only has a role going 
forward, it ought to have had a role over the last several 
years. Because the data dissemination standards which Dr. 
Lerrick mentioned a few minutes ago would appear to me to be a 
logical place for the addition of some standards on disclosure 
of the practices of countries in investing there foreign 
exchange reserves. And that that would help tell us where the 
money is going. It would help everyone, markets, governments, 
the Fund itself, know whether there are asset flows into some 
areas and some kinds of instruments which could be potentially 
destabilizing.
    So I think at the very least the Fund should be doing that 
and has not to date.
    Chairman Bayh. Dr. Lerrick, Ms. Lissakers--and Ms. 
Willkens, I have not forgotten about you. I have some questions 
for you, too. We just sort have gotten off in an area of their 
expertise for the time being.
    Mr. Lerrick. Mr. Chairman, Professor Tarullo is absolutely 
right. The Fund should focus, in my opinion, on its mandate 
which is how do you improve the stability of the system? The 
way you improve the stability is identifying sources of 
instability.
    Whatever the source could be, it could be sovereign 
investment funds, it could hedge fund leverage, it could be 
derivatives. That is what the Fund should be focusing on, 
gathering the information, setting the disclosure standards, 
getting that information out to the markets and to policymakers 
so they know where the risks are.
    Because if they know where the potential risks to the 
system are market participants will take preventive action so 
that they will not be caught, to protect themselves against 
that risk. And policymakers like the Fed or the European 
Central Bank will know where the potential source of 
instability is. And that, in my opinion, is the most valuable 
role for the Fund. The advent of sovereign growth funds or 
investor funds is certainly a new phenomenon. The Fund should 
be studying, gathering information and disseminating it to the 
market.
    Chairman Bayh. What do we do in a case where perceived 
national interest may differ from systemic risk to the global 
economy?
    Mr. Lerrick. That is not the Fund's job. National interests 
are the job of national governments. Again, if you define the 
Fund's job as maintaining global financial stability.
    Chairman Bayh. What if the policies of a nation-state run 
the risk of destabilizing the global economy?
    Mr. Lerrick. Then you get back to the system of what is the 
enforcement mechanism?
    Chairman Bayh. And the answer to that is none.
    Mr. Lerrick. The answer to that is at this stage we do not 
have one on the international level. We were just possibly--in 
theory you could try to have some ad hoc coordinated action by 
different member governments.
    Chairman Bayh. Coalitions of the willing.
    Mr. Lerrick. Coalition of the willing or the frightened.
    Mr. Tarullo. Senator, it is not a binary world here. We are 
not limited to institutions that either have rules that are 
subject to a quasi-adjudicative process that are then enforced 
in some respects, or a kind of everything goes, it is all up to 
you.
    The world is mostly composed of intermediate levels of 
cooperation, discussion, and pressure. And I would say that 
although Dr. Lerrick and I agree, I think, substantially on the 
sovereign wealth fund issue and what the Fund should be doing 
about it, I would go a step further and say it seems to me that 
when the kind of trend that you mentioned becomes evident, it 
ought to be a function of the Fund to have a discussion of that 
in an appropriate forum with the appropriate people there.
    And to say well, it is just talk, it is just a discussion, 
I think is to overlook how much difference talking and 
discussion has made among central bank Governors of major 
countries in the last 30 or 40 years. You do not read about 
that in the FT but it makes an enormous difference in people 
understanding about the consequences of what they are doing and 
communicating with one another.
    Chairman Bayh. Ms. Lissakers, and again what had occurred 
to me is I think what Dr. Lerrick said is exactly right. The 
Chinese care about domestic stability. They are undergoing 
great change. They need to promote rapid rates of growth to 
accommodate that change. And it is quite possible that what 
will promote stability within China may have a different 
impact, if it goes on for some period of time, for the rest of 
the world. Or perhaps not. But at least there needs to be 
someone that renders an objective opinion about that.
    Ms. Lissakers. I think we should not underestimate the 
government of China's level of sophistication about the policy 
choices, the complex policy choices they face. Any policymaker 
who observed or participated in the financial crisis in the 
1990s came away, I think, convinced that fixed exchange rates 
are very dangerous in a fundamental way because they lead 
financial players to take excessive risks. It creates a very 
distorted incentive system.
    The Chinese, I think, have seen that in their own domestic 
financial systems. They have had a terrible banking problem. I 
believe--I have not followed this closely--that they have used 
some of their large foreign exchange reserves to shore up and 
reform their banks and recapitalize those banks.
    That is a very important step for them to have the choice 
of loosening their exchange rates. Because if you look at the 
Korean example, which Korea had huge foreign exchange reserves 
when it blew up, which is one of the reasons they took everyone 
by surprise, their crisis. But their banks had all these hidden 
exposures that the Fund, among others, had not carefully 
monitored. And it led to a massive economic crisis for Korea. 
That is certainly an experience the Chinese do not want to 
repeat. And that, I would assume, is one of their concerns 
about not moving rapidly on exchange rates. But they also have 
the growth. They are very export dependent.
    I think, like every government, they face conflicting push 
and pull and pressures and they are treading very carefully. In 
the end, they are going to have to make their decision of what 
is in China's interest. I think where the Bank and the Fund can 
be useful and the dialog with members can be useful is in 
showing them why they need to make a change for themselves, 
they need to make the exchange rate move. And there are ways to 
do it that would avoid any major financial crisis.
    But in the end not the IMF, not the U.S. has--can alone 
make them do something that they think is fundamentally against 
their economic and political interest.
    Chairman Bayh. If I could shift for just a moment, we have 
been focusing here on the Fund. I thought Dr. Lerrick made an 
interesting point, and he has written about this. That is the 
Bank's practice of continuing to lend to middle income 
countries, some of which enjoy these very large reserves and 
are now engaged in investing in ownership stakes abroad and so 
forth. I would be interested in other panelists' view about 
what is the continued legitimacy of the Bank being involved in 
countries with those sorts of reserves? Shouldn't they be 
required to spend some of their own reserves internally before 
the Bank basically--and they can borrow on equal terms with, in 
some ways, fewer strings attached in a private credit markets. 
What is the legitimate role of the Bank in this sort of 
situation?
    Ms. Willkens, we have neglected you, and then Ms. 
Lissakers.
    Ms. Willkens. It has been a privilege to get the education 
I have, so thank you.
    There are many projects that the Bank is doing in the 
middle income countries that private credit markets would not 
touch. They would not touch a primary education project. They 
would not touch a malaria or HIV/AIDS project. There is no 
profitable return on those. So the question then becomes 
whether the government is going to use its only resources.
    Chairman Bayh. Are those IDA projects?
    Ms. Willkens. No, I mean IBRD. I am speaking of IBRD, as 
well.
    Chairman Bayh. Let's let her finish, Dr. Lerrick.
    Ms. Willkens. So you have a range of projects and in the 
public sector lending that the Bank does on the IBRD side my 
observation over the last 10 years has been by and large these 
projects are projects that are not going to have a large 
profitable return that the credit markets would expect.
    And as we heard, some of the challenges facing us going 
forward in these middle income countries are going to be trade, 
trade capacity, normalization----
    Chairman Bayh. I guess my question to you would be I am 
sure they are worthy projects. If we are looking at a country 
that has hundreds of billions of dollars of their own reserves, 
why shouldn't they undertake those worthy projects in their own 
country first before calling upon the rest of the world?
    Ms. Willkens. That is a good question. Today, I think the 
Bank offers the expertise. I have always said that the World 
Bank has two things it sells. It sells expertise and it sells 
money. And to the extent the Bank maintains an international 
best practice expertise in some of the new areas that it is 
pressing forward on, then I think the Bank is a legitimate 
offerer of finance.
    Chairman Bayh. I will have a few questions about some 
internal management issues. Dr. Lissakers and then Dr. Lerrick.
    Ms. Lissakers. Unless you change the incentive structure 
for the Bank, that pattern of behavior is not going to change. 
There are three, I think, major incentives. One, loans to 
middle-income countries are the major source of income, 
operating income for the Bank, as I understand it. And if they 
stop lending to middle-income countries the Bank is going to 
have a serious budget problem.
    Chairman Bayh. That is interesting, they are a major source 
of revenue for the Bank and yet they are not profitable and so 
the private sector would not make them?
    Ms. Lissakers. They generate interest income for the Bank. 
You can argue with how the Bank keeps its books. But certainly 
that is what people at the Bank--you can understand I am less 
familiar with the internal interstices of the Bank's funding. 
But that is certainly what I have been told.
    Second of all, I know in the past at least--I do not know 
if it is still true--career paths were really determined by 
your ability to push loans out the door. That was the most 
concrete measure of----
    Chairman Bayh. Success is measured by the volume of loans 
undertaken?
    Ms. Lissakers. Right.
    But the third one is that the members like these loans 
because they are very often tied to procurement of goods from 
the richest manufacturing countries. Not always but very often. 
And the members want to see these institutions generate a lot 
of procurement from their own manufacturers.
    Chairman Bayh. Dr. Lerrick.
    Mr. Lerrick. Senator Bayh, I think there is a 
misunderstanding about the type of project the World Bank 
funds. The first premise is every IBRD loan carries the 
government guarantee. It does not matter whether the loan is 
for an AIDS project, to build a power plant, to build a road, 
for primary rural education. The central government is the 
entity on the hook.
    Once that entity is on the hook, the private sector does 
not care what you do with the money. It does not care whether 
you are financing on AIDS Project or building a power plant. In 
fact, if you look at a prospectus for a public bond offering 
for Brazil or for Mexico or for Korea or Indonesia, the use of 
proceeds section simply says general government purposes. The 
government has total discretion as to how it uses the funds.
    So to say that the markets are not willing to finance pro-
poor programs is just incorrect. Any pro-poor program the Bank 
will fund, the private markets will fund.
    Second, the question of the income on loans to middle-
income countries, the Bank does not make its income off of 
lending to middle income countries. They do not even cover 
their administrative budget from it, from the spread. The way 
they really make their money is the Bank has on its balance 
sheet almost $40 billion of zero cost capital, which is the 
initial cash contributions of the members when they join the 
Bank; and second the accumulated past retained earnings the 
Bank made when lending was profitable.
    It is the income on that $40 billion that is paying all of 
the expenses at the Bank. Because very simply $40 billion 
invested in U.S. Treasury notes at 5 percent generates $2 
billion a year of income. The World Bank's net income reported 
last year was $1.7 billion. So that proves that there was a net 
loss on its lending activities of at least $300 million.
    Mr. Tarullo. Senator, can I just make one point on this 
issue, because there is a certain irony here since I sat on a 
group considering what the World Bank should be doing in which 
I was the one saying they should not be lending to middle 
income countries so much. And in this forum I just want to 
offer a couple of reasons why although that should be the 
direction in which things move there may be reasons to have 
some lending to middle income countries for some time.
    First, as somebody as already referred to, part of what the 
country buys is expertise. If you look at the--there have been 
cases in which a middle income country is paying higher 
interest on a Bank loan than it could have gotten in private 
capital markets and that is because they are buying something 
different.
    Now we could say that should be a market transaction, too. 
But there is, I think, a global interest in some of the 
interaction that takes place because the things like 
environmental standards, things like treatment of minorities 
are dealt with differently when there are Bank standards 
attached to the lending. And we are talking about some 
countries in which those values have not been internalized. 
That does not justify----
    Chairman Bayh. So there are non-economic values, perhaps 
that----
    Mr. Tarullo. That are sort of global goods, in some ways.
    The second thing is, to return to a theme that you and I 
actually were talking about in the Fund context, it may be that 
there is more of a global package here that is eventually going 
to re-energize both institutions and pull China and other 
countries more into them.
    That package is probably going to consist of, it is going 
to consist of, a reallocation of quotas and more voting 
influence. It is going to consist of a greater sense of 
expectation upon China's own practices in a sort of reciprocal 
fashion.
    But I wonder whether some sense of continued access to some 
Bank resources for some limited period of time might not end up 
being de facto a piece of that.
    I guess my point is all the things we are talking about in 
both institutions are separate in one sense, in an analytic 
sense. They could be tied together in the larger task of trying 
to move the institution forward.
    Chairman Bayh. Dr. Lerrick, you mentioned, and I cannot 
recall the amount precisely, $3 billion or $4 billion will be 
the U.S.'s part of the additional capital being put into the 
World Bank over the next 3 years? Is that about right?
    Mr. Lerrick. It will be approximately--it has not been 
determined yet. It will determined next year, but it will be 
between $4 billion and $5 billion.
    Chairman Bayh. Mr. Tarullo, then help me explain to the 
average American taxpayer why--I would have to assume they will 
believe that this money is going for the very worthy purpose of 
helping to alleviate global policy and that kind of thing--why 
some of that should be invested in China----
    Mr. Tarullo. Dr. Lerrick, you are talking about IDA; right?
    Mr. Lerrick. Those funds will go to IDA.
    Chairman Bayh. Those are not lent to middle income 
countries?
    Mr. Tarullo. That is for the 80 poorest.
    Chairman Bayh. Great. That helps to clarify that then.
    Ms. Willkens, yes.
    Ms. Willkens. There is IDA going into China and there is 
some IDA money going into India, as well. By the most part they 
have graduated to IBRD. But for far western provinces, you 
still find IDA money mixed in.
    Chairman Bayh. Out in the weaker area?
    Ms. Willkens. Yes.
    Mr. Lerrick. Not for China. China graduated 3 years ago out 
of IDA. India--Ms. Wilkins is absolutely right. India is going 
to receive more than $2 billion this year of IDA funds. And you 
certainly can ask the question why India which is, as a 
government policy, limiting foreign private investment in order 
to maintain control over its economy, is borrowing at zero 
interest from the World Bank to finance projects that the 
private sector would be happy to fund. And that is in India. 
India is a continued IDA borrower. In fact, I think it will be 
the largest IDA borrower this year.
    Chairman Bayh. Any of you want to address--and our time is 
about running out. We have got five votes coming up here. And 
you have been very patient so far.
    Anything that can be done to perhaps address some of the 
internal incentives in the Bank, this culture of lending I 
think it is referred to? Is there really any accountability for 
loans that go bad? And is success--how do we deal with success 
being evaluated on the volume of activity as opposed to the 
effectiveness of the activity?
    Mr. Tarullo. Let me just mention two things quickly, 
Senator. One is changing the design of the lending itself to 
get away from what we call conditionality, conditions about 
what the government is supposed to be doing generally when it 
receives the money, and moving much more directly to outcomes 
as the goal of the loan and quite explicitly meeting those 
outcomes as a condition for renewal or supplementing of the 
lending.
    I think that kind of approach has manifold benefits. One is 
that it creates a kind of internal disincentive for there to be 
funds siphoned off for corruption or things to operate 
inefficiently because if they do that there is not going to be 
renewal.
    Secondly, it gives a different kind of criterion on the 
basis of which one can evaluate the loan officer's performance. 
Did the lending that she moved out the door end up having good 
outcomes as opposed to just looking at the net amount of money.
    Chairman Bayh. Doesn't this get to some of your concerns, 
Ms. Willkens, where the Bank has quite a cadre of excellent 
economists and people who can give a macro view of things but 
perhaps not enough people who are expert at actually making the 
resources translate into the on the ground results that we are 
looking for? Has that been part of your observation?
    Ms. Willkens. I was relieved, I think the direction you 
were heading, these internal measurements would be very useful. 
What the private sector has had a lot of concern with over the 
last several years, especially under President Wolfensohn, was 
the increased push out the door for what they called sectoral 
adjustment lending, $300 million to the health for Mexico for 
what?
    And then the issue came up how are you going to measure 
what was supposed to be achieved? And no one knew. And by the 
way, there were no procurement rules that applied to that $300 
million.
    So for internal measurements of effectiveness and 
satisfactorily addressing the objectives of the project, that 
has never been a strong suit of the Bank and that could be 
improved.
    On the ground yes, the companies we work with, all of them 
would say that the need for sector expertise and project 
management expertise on the ground is extra important. The 
banks have all declared they are going to increase their 
infrastructure lending over the next two to 3 years. Engineers 
are passe in the Bank in the last 10 years. So the Bank really 
needs to beef up in the infrastructure sectors, we think, to be 
able to support effective measurements and effective and 
actually timely implementation of the projects.
    Chairman Bayh. How vigorous do you think we should be in 
insisting on some of these internal reforms as going hand-in-
hand with the new tranche of funding?
    Mr. Lerrick. Senator Bayh, I think economists believe that 
bad incentives are the root of all evil. Clearly the Bank and, 
in fact, the entire aid business--the failure of aid are due to 
the bad incentives.
    Aid has clearly been a failure, development aid has clearly 
failed. The problem is that you need to reform the incentives 
throughout the entire system. Within the Bank the incentive is 
just the volume of lending. It has never been what results, 
what performance has been achieved by that loan or that grant.
    In fact, when it was mentioned what recommendations the 
Meltzer Commission came up with were implemented or not 
implemented, the key recommendation to do with the World Bank 
was to shift to a system of performance-based aid, that in 
essence you only delivered aid based on measured, verified 
performance. And it is not very difficult. We are not talking 
about complicated projects. How many children were vaccinated? 
How many cubic meters of water were treated? But the incentives 
are not there.
    In fact, the concept of performance-based grants which 
became the platform of President Bush----
    Chairman Bayh. Why is there a resistance to that sort of 
thing internally within the organization?
    Mr. Lerrick. It makes life hard. It is a lot easier to fly 
into Rio, Sao Paulo or Brasilia and sign a $500 million loan to 
the Brazilian government than to go off into the bush and try 
to measure 50 $1 million vaccination programs. It is a tougher 
job and the Bank does not really want to do that and it makes 
their life difficult.
    But I think when you go back, there is a fundamental flaw 
in the entire aid concept which is that the donors are more 
desperate to give than the recipients are to receive the money. 
Once you understand that problem it makes it almost impossible 
to make aid to work. Because if the World Bank comes to a 
country and says we want you to enforce these anticorruption 
standards and the country says we do not want to, and the Bank 
says OK, we will still give you the loan. What is going to 
happen? That is one of the great problems.
    The problem--and you saw it at the G-8 summit in 2005 in 
the world's leaders stood up and said we are going to give all 
the debt relief, we are going to double aid, and then we are 
going to double it again. And it is going to be focused on the 
very poor countries such as Africa. The problem is that if you 
actually enforce these anticorruption standards there would be 
no destination in Africa to ship the money to.
    And since the overwhelming goal of the aid community is to 
ship the money, they are going to keep sending it with or 
without the corruption. That is the main problem.
    Chairman Bayh. Ms. Willkens.
    Ms. Willkens. I agree with many of the remarks that were 
made. I think the World Bank, though, has an opportunity here. 
And one of it, as its core deliverables and its expertise.
    One of the reasons they have not been able to measure how 
many vaccines are being delivered out there in the remote areas 
is there have not been the tools, there have not been the 
technology, there have not been reporting systems, there have 
not been statistical collections able to then roll up and 
report out. But if you look at the World Bank's pipeline now 
you will see a handful of five to eight statistical projects 
under review in the pipeline for approval. And over time I 
think the Bank has an opportunity to take a leadership position 
to create those statistical gatherings that will empower 
analytical review of the projects.
    Chairman Bayh. Is it your impression in your dealings and 
the companies you deal with, their dealings with the Bank, that 
there is an openness to requiring more accountability in terms 
of insisting upon not just inputs but results? Or are they 
culturally resistant to that sort of thing?
    Ms. Willkens. Private sector, absolutely receptive to it--
--
    Chairman Bayh. No, no, the private sector. I am asking 
about the Bank.
    Ms. Willkens. The Bank themselves. In large part where the 
tools are available to measure we find receptivity to the 
measurements. Now understand I deal in the health and the 
information technology sectors and the like where these 
measurements are very core to the companies that are doing the 
business as well. So the two come together and there is a lot 
of alignment and partnership in proposing solutions.
    The other point I wanted to make on corruption though, as 
private sector we are quite concerned that we see the Bank 
lowering the floor on international standards. Again, I see 
this as an opportunity for the Bank to come in and use its 
bully pulpit and use its position to start creating a gold 
standard for positive efforts made, anticorruption efforts 
made, and in international best practice and to put them in 
place.
    And we are seeing a few African countries where leadership 
has changed fairly dramatically where we think, especially in 
Africa, there is a chance for several countries to take a--
become the gold standard--probably should use a different word 
than gold in Africa--but become the guiding Good Housekeeping 
seal of approval there for transparency and good governance.
    Chairman Bayh. Just two final questions, one Ms. Willkens 
for you and then one generally. There is a move afoot, as I 
understand it, at the Bank to give more discretion to the 
recipient countries in terms of managing these projects. Has it 
been your experience that when that has been the case too often 
the specifications for procurement have been so finely tailored 
as to make only one provider eligible for receiving the funds? 
Would that only run a greater risk perhaps of corruption? Or to 
play off on something Ms. Lissakers said, the countries 
providing the credit want their companies to provide it. 
Perhaps there is management on the part of the recipient 
countries, too.
    Ms. Willkens. The proposal you are speaking of is something 
known as country systems in procurement and it was a proposal--
you mentioned this in your opening--a proposal that the 
Congress, in the Foreign Ops bill of 2006 specifically 
conditioned 20 percent of the IDA funding on the basis that the 
World Bank withdraw their country systems proposal. That was 
done, the IDA money was released, but the new country systems 
proposal hit the table in May of this year. It looks worse than 
the proposal that was withdrawn at Congress's request.
    So what we are concerned about is yes--and I have a host of 
examples where the specifications look like a vested interest 
that has gotten to the government.
    What happens today for a company as we have, through a 
series of protections under the World Bank guidelines and the 
standard bidding documents, the ability to basically move into 
the World Bank procurement officers and get remedy before that 
procurement is completed and contracts are awarded.
    Under the proposal of the Bank that is on the table today, 
those contracts would be let and 2 years from now the World 
Bank would be able to come in and look at the project and see 
what went wrong. But we are very concerned about the lack of a 
methodology, a lack of a statement of international best 
practice in procurement by the Bank and really the kinds of 
safeguards that will keep U.S. companies--and I should say, 
Senator, as well, European countries involved in these 
projects. There is quite an alliance that has been built over 
the last 2 years to urge that the World Bank keep in place its 
procurement policies for international competitive bidding to 
protect against this kind of shenanigans and many, many more.
    Chairman Bayh. Mr. Tarullo, you mentioned that some of the 
loans perhaps are given to promote values that it is difficult 
for the marketplace to capture. Would one area perhaps be in 
the area of biodiversity, for example, projects related to 
that? Or projects that span national borders that perhaps it is 
difficult for a single country to capture the entire value?
    Mr. Tarullo. I would think again, Senator, in line with the 
notion that the Bank should be providing public goods, I do not 
know enough to make a judgment as to the conditions under which 
such lending or technical assistance would be useful. But you 
have defined a situation of a public good issue. That is where 
the Bank should be concentrating its efforts, not in areas 
where private investment, even without government guarantees, 
would be forthcoming.
    Chairman Bayh. A final observation, I gathered from all of 
your testimony that you all would embrace a robust focus upon 
eliminating corruption. I gather that there are some people who 
think that that is just sort of the cost of doing business in 
some of these countries and if that is what it takes to grease 
the wheels in the short run to get some of these things done 
well, that is OK.
    But I gathered from your testimony that in the long run 
that does more to undermine the cause of helping the poor than 
any sort of expediency in the short run might justify. Is that 
a fair observation? Anybody here today want to stand up for 
corruption?
    Ms. Lissakers. I would just like to say, in defense of the 
Bank, that I think that is an area where there is a genuine 
effort to move away from simply accountability in projects to 
the outside world to the Bank or to its members but to reach 
out to local civil society. In the countries where we work on 
the extractive industry transparency, the Bank has been quite 
supportive and is trying to do more to build up the capacity of 
local citizens to demand information and accountability from 
their own governments. That in the end is the only solution or 
cure to the widespread corruption problem.
    I do not think it is systematic enough in the Bank and I do 
not think it is embedded across the board in its activities. 
There is a long way to go. But I agree absolutely, the Bank 
should be a promulgator of best practice and it should be 
absolutely rigorous on that score, as should the member 
governments, which is why I mentioned the importance of OPIC, 
for example, saying if we are going in and guaranteeing a 
project in extractive industries that are highly prone to 
corruption, we are going to safeguard that by insisting that 
the companies that benefit from our guarantee publish what they 
pay to the government where this project is taking place. That 
is good for business. It is good for development.
    Mr. Lerrick. Senator, I would like to come back to a point 
you raised earlier which is the Congress next year is going to 
have an opportunity when the Treasury comes for an 
appropriation for the IDA funding, IDA 15, to focus on just the 
issues you raised. Should there be performance evaluation of 
IDA projects? Should we have transparency? Should we know what 
the project was supposed to do? Know what the project did do? 
Not just us, the public.
    And I think that is where the Congress has its ability to 
actually influence the outcome and help the poor in the 
developing world, which is to attach conditions to this funding 
which I do not think any reasonable person could object to, 
which is we want minimum standards of performance evaluation. 
We want minimum standards of disclosure and transparency to 
know that two things: one, the money of the industrialized 
world taxpayers are being well used. And when you go back to 
your constituency and say we just gave $4.5 billion to help the 
poor, I think you would want to know something more than well, 
it went to the central bank and who knows where it went after 
that. And say well this is the people--because the American 
people I think are very generous and would be happy to provide 
the funding if they know it is doing good. But they are 
suspicious that it is not, and rightly so. This is the 
Congress's opportunity to put in some standards of disclosure 
and performance monitoring.
    Mr. Tarullo. Senator, if you are going to take that 
opportunity, I would urge you to do it sooner rather than 
later. That is, do not wait until the Treasury Department is 
coming up looking for the IDA funding because then everybody is 
going to get in a crunch.
    Just let me hypothesize for a moment. A Dodd-Shelby-Bayh-
Martinez letter to Bob Zoellick saying we have conducted some 
hearings, we have listened to a lot of people. This is the way 
we are looking at the Bank and we know you are going to be or 
Treasury on your behalf is going to be up here next year 
looking for IDA funding. These are the kinds of things we are 
going to be looking at and we just want to let you know now.
    And then that last key little paragraph, we look forward to 
our staffs discussing this issue in the coming year.
    Chairman Bayh. I think that is an excellent suggestion, Mr. 
Tarullo. I have asked my own staff to follow up on that.
    I want to express my gratitude to all of you for your 
advice today, for your patience.
    Just one editorial comment of my own, with regard to the 
Bank, and then I will wrap it up.
    It seems to me that an entity devoted to alleviating global 
poverty has a special responsibility to operate efficiently and 
to not squander resources and perhaps to bend over backwards to 
ensure that the way it treats its own employees is generous but 
not lavish. That sends the wrong signal as well.
    Having said all of that, thank you very much. I think these 
are very important questions you have helped shed some light on 
here today. I look forward to following up with you.
    And I am going to follow up on your suggestion, Mr. 
Tarullo, to reach out to some of my colleagues and begin this 
dialogue with our policymakers sooner rather than later.
    Thank you all very, very much.
    [Whereupon, at 4:43 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]

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