[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                        IMPLICATIONS OF THE G-20
                     LEADERS SUMMIT FOR LOW-INCOME
                    COUNTRIES AND THE GLOBAL ECONOMY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                         INTERNATIONAL MONETARY

                            POLICY AND TRADE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 13, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-31



  


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
        Subcommittee on International Monetary Policy and Trade

                  GREGORY W. MEEKS, New York, Chairman

LUIS V. GUTIERREZ, Illinois          GARY G. MILLER, California
MAXINE WATERS, California            EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GWEN MOORE, Wisconsin                DONALD A. MANZULLO, Illinois
ANDRE CARSON, Indiana                MICHELE BACHMANN, Minnesota
STEVE DRIEHAUS, Ohio                 ERIK PAULSEN, Minnesota
GARY PETERS, Michigan
DAN MAFFEI, New York







                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 13, 2009.................................................     1
Appendix:
    May 13, 2009.................................................    29

                               WITNESSES
                        Wednesday, May 13, 2009

Adams, Hon. Timothy D., Managing Director, The Lindsey Group.....    15
Bhattacharya, Amar, Director, G24 Secretariat....................     8
Birdsall, Nancy, President, Center for Global Development........    10
Johnson, Simon, Professor, Sloan School of Management, 
  Massachusetts Institute of Technology..........................    12

                                APPENDIX

Prepared statements:
    Meeks, Hon. Gregory W........................................    30
    Adams, Hon. Timothy D........................................    38
    Bhattacharya, Amar...........................................    45
    Birdsall, Nancy..............................................    48
    Johnson, Simon...............................................    59

 
                        IMPLICATIONS OF THE G-20
                     LEADERS SUMMIT FOR LOW-INCOME
                    COUNTRIES AND THE GLOBAL ECONOMY

                              ----------                              


                        Wednesday, May 13, 2009

             U.S. House of Representatives,
                      Subcommittee on International
                         Monetary Policy and Trade,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks 
[chairman of the subcommittee] presiding.
    Members present: Representatives Meeks, Moore of Wisconsin, 
Driehaus, Maffei; Miller and Manzullo.
    Also present: Representative Hensarling.
    Chairman Meeks. Good morning. This hearing of the 
Subcommittee on International Monetary Policy and Trade will 
come to order. Without objection, all members' opening 
statements will be made a part of the record.
    Subcommittee chairs and ranking minority members will be 
recognized for 5 minutes, and all other members will be 
recognized for 3 minutes each.
    I will start with an opening statement. On April 2, 2009, 
the leaders of the G-20 nations gathered in London to address 
the global financial crisis which has gripped nearly every 
nation in the world.
    The resolution put forward by the leaders was broad and 
far-reaching, both in its scope as measured by the actions 
proposed, but also in its inclusion of nations which we may 
have been tempted to ignore in the past.
    Indeed, the very fact that the meetings in London were of 
the G-20 leaders, plus representatives from other key emerging 
economies and international financial institutions, is a 
testament to the global nature of the crisis and the imperative 
of a global approach to the solution.
    But the question remains as to why, when we are faced with 
the deepest economic and financial crisis since the Great 
Depression, we should allocate time, energy, and resources to 
poor and emerging economies beyond our usual aid and 
humanitarian activities.
    I believe that beyond the altruistic reasons for assisting 
poor and emerging countries, we have strong business, economic, 
and geopolitical reasons to follow through on the commitments 
made by President Obama and the other leaders of the G-20 
summit.
    Indeed, it is critical to note that when we are not 
present, either directly through bilateral assistance, or 
indirectly through international financial institutions and 
multilateral development banks, others will step in to fill the 
void. To do nothing, and look the other way, is in fact to do 
something.
    When we decide to walk away from our obligations under the 
pretext that the crisis is too severe to help others, we open 
the door for others to step in and fill the void we create. 
This is not just a theoretical threat, but in fact, a very real 
one.
    Institutions like the IMF and the World Bank and many 
others which America supports, and which were mentioned as 
critical to global economic recovery in the G-20 communique, 
act as ballast mediums to provide countries in need with much-
needed resources to forestall crises while moving these same 
countries to more stable, more sustainable, and more peaceful 
paths to economic growth. This is something we should all 
support.
    We have called this hearing to follow up on the G-20 
resolutions endorsed by our President, Barack Obama, which made 
explicit the importance of not just providing aid to those 
nations and communities in the most dire need, but rather, to 
include poor and emerging economies as full participants in any 
strategy to pull the global economy out of recession. The 
wording of the G-20 communique made this explicit.
    The reasons for following through on the commitments made 
by President Obama and the other leaders at the G-20 summit in 
London can be broadly grouped into three categories: One, 
supporting American industry; two, preventing further systemic 
risk in global capital markets and encouraging continued sound 
economic reforms; and three, promoting socio-political 
stability.
    Addressing these issues in order, I will begin by 
discussing the impact on American industry. As the G-20 
communique stated, emerging economies have been a true engine 
of global economic growth in the recent past. As we saw with 
the Asian financial crisis of the late 1990's, when the 
emerging economies of Asia stalled, world economic growth 
stalled. When the financial crisis that struck Asian economies 
was resolved, the world as a whole resumed on a path of rapid 
economic expansion.
    In many ways, we face a similar crisis today, on a much 
larger scale. As our economies have become increasingly 
interdependent, through trade and vertical outsourcing, 
American producers are directly and indirectly exposed to 
consumers and manufacturers around the world.
    Driven by their rapid economic growth, emerging middle 
classes, and young populations eager to consumer American goods 
and services, the emerging economies have become major 
consumers of goods and services produced by American companies. 
As a result, many American companies stand to gain from our 
efforts to support the continued economic growth in these 
countries.
    As was the case in the Asian financial crisis, restarting 
the economic growth in emerging economies will be a critical 
component to restart our own economy here at home.
    Looking at the second point, about preventing further 
systemic risk in global capital markets, it is important to 
revisit some important changes that occurred in the past decade 
or so.
    It has been well documented that, following the Asian 
financial crisis and the Argentinean crisis earlier this 
decade, the IMF experienced a dramatic drop in its lending 
activities around the world.
    This was in part due to what was seen as overly harsh 
conditionality on loans and stigma associated with turning to 
the IMF for balance of payment assistance, but this was also 
largely due to the availability of other sources of funding for 
many emerging governments.
    Indeed, as capital markets matured and expanded 
aggressively to the four corners of the world, companies and 
governments in emerging markets found themselves able to borrow 
from global banks, investment funds, and alternative investment 
vehicles, like never before. This enabled many of these 
countries to pursue their economic development strategies while 
building up healthy reserves.
    While the debt stock of poor and emerging economies would 
previously have been constituted nearly entirely of IMF, World 
Bank, or other international development institutional debt, 
increasingly, banks and investment funds account for a large 
share of that debt. This, of course, includes American 
investors and American banks.
    The risk of default primarily on solvent debt, but also by 
the largest companies in these emerging economies, is equally 
true in countries that follow what would be considered sound 
macroeconomic policy, building up healthy reserves and 
investing in the development and diversification of local 
industry.
    This is true because of the nature of the crises that they 
are facing. They are dealing simultaneously with falling demand 
for their exports, a steep fall in the commodity prices, 
collapsing remittances, drastic reductions of international 
aid, rising domestic unemployment, and returning emigrants.
    Even the best-prepared emerging economies cannot withstand 
such a confluence of negative shocks at once, and risk severe 
balance of payment pressure.
    As described, many poor countries and emerging economies 
have implemented sound microeconomic policies in the past 
decade or more. This, of course, has not been universally true, 
but evidence abounds of countries in Africa, Asia, Eastern 
Europe, and Latin America in applying more conventional trade-
driven free-market policies.
    These countries have reversed long trends of 
nationalization of industries, choosing instead to forge the 
entrepreneurships and competition, open their economies to 
international trade, and put in place the foundation of good 
governance.
    To fail these nations now, by not supporting their 
continued efforts of reform is to risk reversing a decade or 
more of economic achievement.
    And finally, the socio-political stability that should be 
on top of the minds of all nations seeking a way out of this 
global financial crisis. Simply put, we are at an inflection in 
this point in history, and our decisions in the coming weeks 
and months will define the future path of global economic 
growth and broader geopolitical events.
    As already explained, many poor and emerging economies face 
a perfect storm of external shocks, which is putting a great 
strain on their economies, both at the macroeconomic level, but 
also at the microeconomic level.
    Emerging economies and fragile democracies will be severely 
tested by collapsing demand and prices for their exports, 
rising unemployment, falling remittances, and unemployed 
migrants returning to their home countries.
    If nothing is done, these other factors will inevitably 
push some countries into civil unrest, if not outright war. It 
is in the interest of all peaceful nations to ensure that this 
is avoided.
    As we approach this inflection point in history, and accept 
that to do nothing is not an acceptable option, we now consider 
how our actions can set emerging countries on a path to 
sustainable, peaceful growth, sowing the seeds of freedom and 
democracy in regions of the world where they have been elusive.
    Trade, finance, and rejection of protectionism are critical 
components of the G-20 resolutions, but details are lacking, 
and present a great opportunity for us to put our imprint on 
the nature of this recovery and the structure of future 
economic relations between rich and poor nations of the world.
    I end as Frederic Bastiat, a 19th Century French economist, 
rightly said, ``When goods don't cross borders, armies will.''
    And I yield to my good friend, Mr. Miller from California.
    Mr. Miller. Thank you, Mr. Chairman, for holding this 
hearing today on the implications of the G-20 leaders' summit 
on low-income countries and the global economy.
    As we are seeing, nations across the world are experiencing 
unprecedented economic challenges as a result of the financial 
fallout.
    While low-income countries are not exposed to non-
performing mortgage assets and troubled financial firms, they 
have been directly impacted by the overall constriction of 
credit and decreasing investment, employment, and demand that 
developed as conditions in the financial circuit continued to 
worsen.
    Many emerging economies around the globe have made 
significant progress in implementing financial, government, and 
social reforms necessary to foster stable economic growth. The 
development of good economic policies, especially in a bleak 
period, required great sacrifice and tradeoff as spending 
scaled down.
    The United States should work to ensure that these 
struggling nations are successful in their pursuit of progress 
and their stability is not threatened because of actions and 
errors that occurred outside of their control.
    It is more important than ever to ensure that these nations 
continue a course of sound economic policies that allow them to 
move forward, building a strong middle class, and thus a 
sustainable foundation for recovery.
    As we all know, terrorism respects no national border and 
can gravely impair the economies of nations large and small. 
Poverty breeds unrest and instability that creates the type of 
conditions that allow dictators and extremists to thrive. 
Worsening economic conditions throughout the globe will foster 
terrorism and jeopardize our safety.
    U.S. policy should support and encourage responsible 
participation in the global economy in which we live. Just as 
low-income countries have been affected by downturns in the 
United States, the United States is impacted by downturns in 
emerging markets.
    These nations represent an ever-increasing consumer base 
for U.S. exports. When they suffer economic strife, global 
demand diminishes, and U.S. jobs are affected as a consequence.
    With that, I look forward to the hearing today, and 
further, to the review the subcommittee has made on G-20 in 
their April hearing. I'm looking forward to hearing the 
witnesses today and the input they have.
    But I would like to ask unanimous consent to recognize 
Congressman Hensarling for 1\1/2\ minutes.
    Chairman Meeks. Without objection, it is so ordered.
    Mr. Hensarling. Thank you, Mr. Chairman. I appreciate the 
committee allowing me to participate.
    I'm not here today to have the debate about how worthy the 
IMF may be, but I am here today to raise the question of 
whether or not today is the time that the United States should 
be committing an extra $100 billion of taxpayer money to the 
IMF. That's a commitment of $861 for every American household.
    This comes on top of $6,034 to fund the $700 billion worth 
of bailout money last September; $9,810 to fund the $1.13 
trillion government stimulus plan; and $3,534 per American 
household to fund a $410 billion omnibus spending plan. We are 
now borrowing 46 cents for every dollar that the government 
spends.
    Now, this Congress just passed a budget which will triple 
the national debt in just 10 years.
    Yesterday, we received the news from the Medicare 
trustees--no surprise here--that Medicare is going to go broke 
sooner than we had thought. It will be going flat broke in 
2017, 2 years earlier than projected, and they tell us the 
unfunded liability of Medicare over a 75-year period is up an 
additional $1.8 trillion.
    At some point, I think we have to ask ourselves the 
question, is there any limit to the liability exposure we're 
willing to place on the American taxpayer? Is there any limit 
to the amount of debt that we are willing to place on our 
children and our grandchildren?
    Now, I know some will argue that, for CBO scoring purposes, 
this shouldn't actually be scored. This is simply an asset 
transfer. We're just extending a $100 billion line of credit.
    Well, we heard the very same argument in favor of Freddie 
Mac and Fannie Mae. We were told there would never be any 
taxpayer liability there. Well, we kind of know how that story 
turned out. And if press reports are credible, we understand 
that this request may be attached to the war supplemental.
    I mean, how do we explain to our constituents, then, that 
Congress may be on the verge of committing more money to the 
IMF and to foreign nations instead of committing to our 
American troops in the field? That's certainly not something I 
care to try to explain.
    And when so many of our own citizens are having trouble 
paying for accessing credit to refinance their homes, their 
interest rates are going up on their credit cards, credit cards 
are being withdrawn from the market, and I believe certainly 
Congress has exacerbated that trend, how do we tell them that, 
``You can't get credit, but we're going to make you more 
exposed as a taxpayer to give foreign nations more credit?''
    I think this is an incredibly poor time to be putting an 
additional $100 billion of taxpayer liability exposure for an 
additional contribution to the IMF.
    And again, Mr. Chairman, I appreciate the indulgence of the 
subcommittee for allowing me to speak, and I yield back the 
balance of my time.
    Chairman Meeks. Ms. Moore of Wisconsin.
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman. And I will 
keep my opening statement brief.
    I guess I would like to build upon the comments of Mr. 
Hensarling by just pointing out that the collapse of these 
emerging economies bodes very poorly for the United States. We 
will not have the opportunity to export products, if we allow 
these emerging economies to fail.
    And what we're trying to do, the financial collapse that 
we're all experiencing globally, bodes for us to develop a 
sustainable world economy, and so while it is pennywise to be 
protectionist and to only look out for ourselves, it is pound 
foolish to think that we can allow the economic collapse of 
peoples and economies across the globe and expect that we're 
going to survive.
    So I think that the gathering of the G-20 was very 
significant in that it reinforced a truth that we're all in 
this together.
    And with that, Mr. Chairman, I yield back.
    Mr. Miller. Can I reclaim the balance of my time?
    Chairman Meeks. Yes.
    Mr. Miller. Mr. Manzullo is on his way. He was delayed by 
some traffic, as you all saw in the hallway, I think in the 
Judiciary Committee.
    Mr. Hensarling made some good points, and I don't want his 
argument to be taken improperly. I think we have a 
responsibility to the American people, like Mr. Hensarling 
said. We do understand that when smaller countries are 
developing and have problems, many times terrorists breed upon 
that.
    But I think it's incumbent upon us to look at all the 
aspects of what our government is involved in today, the amount 
of money we're spending, the amount of money that this type of 
a loan could benefit in the long run, too, to these emerging 
countries, and to create stability in those sectors, and I 
think it's very important that we look at that.
    But I think he made some valid points. I think that's 
perhaps something we should also address in this committee, 
because we know the President is looking to try to do the right 
thing in many of these countries, but we're also in a situation 
where the American people are suffering, and how the perception 
is taken by them as to where these dollars are invested is 
something I think we need to look at from a sincere perspective 
and understand really the positive and negative of doing what 
we're trying to do.
    And I think I could talk forever, and Mr. Manzullo might 
not show up, so I will yield back the balance of my time.
    Chairman Meeks. We will allow Mr. Manzullo, when he does 
show up, to have a few words, right after we hear from our 
distinguished witnesses.
    Mr. Maffei, do you have an opening statement?
    Mr. Maffei. I will just agree with the chairman.
    Chairman Meeks. Smart man.
    Okay. We have some distinguished witnesses that I'm 
delighted to have testify this morning.
    First, Mr. Amar Bhattacharya, who is the director of the 
Intergovernmental Group of Twenty-Four on International 
Monetary Affairs and Development, the G-24. The G-24 was 
established in 1971 as a representative body of finance 
ministers and central bank governors of developing countries 
with the objective of helping to articulate and support the 
position of developing countries in the discussions of the IMF, 
World Bank, and other relevant fora.
    Prior to taking up his current position, Mr. Bhattacharya 
had a long-standing career in the World Bank. His last position 
was as senior advisor and head of the International Policy and 
Partnership Group, and the Poverty Reduction and Economic 
Management Network of the World Bank.
    He was advisor to the president and senior management and 
focal point for the bank's engagement with key international 
groupings and institutions, such as the G-7, G-8, G-20, IMF, 
OECD, and the Commonwealth Secretariat.
    He is an Indian national who completed his undergraduate 
studies at the University of Delhi and at Brandeis University, 
and his graduate study at Princeton University.
    Second, we have with us Ms. Nancy Birdsall. She is the 
founding president of the Center for Global Development.
    Before launching the center, she served for 3 years as 
senior associate and director of the Economic Reform Project at 
the Carnegie Endowment of International Peace from 1993 to 
1998.
    She was executive vice president of the Inter-American 
Development Bank.
    Before joining the Inter-American Development Bank, she 
spent 14 years in research policy and management positions at 
the World Bank.
    She is the author, co-author, or editor of more than a 
dozen books and monographs on international development issues.
    Ms. Birdsall holds a Ph.D. in economics from Yale 
University, and an M.A. in international relations from Johns 
Hopkins School of Advanced International Studies.
    Third, we have Mr. Simon Johnson, who is the Ronald A. 
Kurtz professor of entrepreneurship at MIT's Sloan School of 
Management.
    He's also a senior fellow at the Peterson Institute for 
International Economics in Washington, D.C., and a co-founder 
of the BaselineScenario.com, a widely cited Web site on the 
global economy, and a member of the Congressional Budget 
Office's Panel of Economic Advisors.
    Professor Johnson is an expert on financial and economic 
crises, and as an academic in policy roles with the private 
sector over the past 20 years, he has worked on severely 
stressed economic and financial situations around the world.
    His research and policy advice focuses on how to limit the 
impact of negative shocks and managed risk faced by countries.
    He is co-founder and current co-chair of the National 
Bureau of Economics Research Project on Africa, and he is also 
a faculty director of MIT Sloan's New Moscow Initiative and 
former member of the Global Advisory Board of Endeavor, which 
promotes entrepreneurship in Latin America and around the 
world.
    And last, but far from least, we have Mr. Timothy D. Adams, 
who is the managing director of The Lindsey Group.
    Previously, Mr. Adams served as Under Secretary of the 
Treasury for International Affairs. As Under Secretary, Mr. 
Adams was the Administration's point person on international 
financial issues, including exchange rate policy, G-7 meetings, 
and IMF and World Bank issues.
    He regularly interacted with counterparts in key emerging 
markets, including China, India, and Brazil, and traveled 
extensively throughout Asia, the Middle East, and Europe.
    Prior to assuming his post as Under Secretary, Mr. Adams 
had served as Chief of Staff to both Treasury Secretary Paul 
O'Neal and Treasury Secretary John Snowe.
    He was policy director for the Bush-Cheney re-election 
campaign from November 2003 through the end of 2004, and also 
served as a full-time member of the Bush-Cheney campaign staff 
in Austin in 2000.
    In 1993, Mr. Adams co-founded the G-7 Group, a Washington-
based advisory firm. He later headed the Washington operations 
as managing director.
    Mr. Adams holds a B.S. in finance and a Master's in public 
administration and an M.A. in international relations from the 
University of Kentucky.
    So we have a group of distinguished witnesses, and we will 
first hear from Mr. Bhattacharya.

   STATEMENT OF AMAR BHATTACHARYA, DIRECTOR, G24 SECRETARIAT

    Mr. Bhattacharya. Thank you, Mr. Chairman. It is a 
privilege to testify in front of this subcommittee.
    Chairman Meeks. Let me just say before we start, that 
without objection, your written statements will be made a part 
of the record, and you will be recognized for a 5-minute 
summary of your testimony.
    Mr. Bhattacharya. It is a particular privilege to be here, 
given the very, very high stakes that emerging markets and 
developing countries have in your deliberations.
    I want to make three points, based on my testimony:
    The first, echoing very much what has been said, is that 
while the developing world is in many ways an innocent 
bystander in this crisis, they can be and must be part of the 
solution, the global solution. If you look at the record right 
now, there's no doubt that the crisis is having a 
disproportionate impact on the developing world.
    Unemployment, for example, in the developing world is 
expected to increase by maybe as much as 50 million this year. 
And in Sub-Saharan Africa, per capita income growth is expected 
to decline by 2.5 percent, something that we have not seen for 
almost 2 decades.
    So the crisis is really having a very, very serious impact, 
and assisting these countries is important for many of the 
reasons that you stressed.
    First, the fact that time around the emerging markets is 
not amplifying the crisis is good news, and helping them to 
ensure that they can contain the crisis is good for us all.
    Second, you have to remember that the developing world now 
constitutes three out of the four engines of global growth.
    So when you think about global recovery, helping these 
countries get back on their feet is good for the global world, 
and it's very good for the United States, which has exported 
more than 50 percent of its exports to the developing world 
over the last 3 years. So it is in everybody's self-interest.
    The very important point, Mr. Chairman, you made, about 
social stability and peace, in particularly the fragile 
countries, and particularly the poorest countries, is good for 
everybody in the world.
    The second point I want to make is that there is great 
urgency in giving effect to the decisions that were made by the 
G-20, especially with regard to the resources of the IMF.
    As no doubt Ms. Birdsall will make the point that she 
always has, the IMF is the world's fire brigade, and we have to 
remember that we are in the midst of a raging fire.
    Since the crisis broke out, the IMF has committed $147 
billion for 20 countries, including 3 countries under the new 
flexible credit line. That amounts to 60 percent of the 
available resources of the IMF, excluding the bilateral loan 
from Japan.
    There are many more countries in active discussions with 
the IMF, and as we know, the downside uncertainties are very 
large. So there is really great urgency to getting agreement on 
these arrangements to borrow.
    Does that mean that the IMF should be given a blank check? 
The answer is absolutely no, in three particular respects.
    First, this temporary borrowing must be seen as a bridge to 
a more permanent increase in quotas, and that's what the G-20 
committed to.
    Second, it must be linked with fundamental reforms in 
governance, governance with regard to voice and vote, in 
particular, a shift from Europe to the developing world; 
second, with regard to the selection process of the heads of 
the institutions; and third, with regard to conditionality.
    The IMF has put in place a new conditionality framework. 
Some will say that perhaps it's too lax. Others, like 
ourselves, will say perhaps it's not lax enough.
    But the key is that the decisions will be in the 
implementation, and it is important that the IMF implement it 
in a way that doesn't penalize the developing world and that 
recognizes that this crisis is exogenous.
    The last point I want to make is, important though the 
increase in the IMF resources is, the area where the G-20 was 
perhaps the least ambitious was with respect to the poorest 
countries.
    Yes, $6 billion has been put on the table, but the needs of 
the developing, the poorest countries we estimate are in the 
order or more like $35 billion to $50 billion.
    Hence, it's very important to follow through on the 
increase in concessional resources, not so much only for the 
IMF, but for the concessional arms of the multilateral 
development banks.
    At the moment, therefore, giving effect to IDA is very 
important, and it is simply not good enough to say, we are 
going to frontload IDA. We have to recognize that the amount of 
money that IDA needs now is much greater than what we had 
contemplated before the crisis.
    And so it's on that note of raising, in fact, even more the 
ambition of the G-20, where I think this body could make a 
great deal of difference.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Bhattacharya can be found on 
page 45 of the appendix.]
    Chairman Meeks. Thank you.
    Ms. Birdsall.

   STATEMENT OF NANCY BIRDSALL, PRESIDENT, CENTER FOR GLOBAL 
                          DEVELOPMENT

    Ms. Birdsall. Thank you very much, Mr. Chairman, Ranking 
Member Miller, and members of the subcommittee for your 
statements. I think you have already said much that is 
important, and said it very eloquently.
    But let me repeat that today's challenges in our global 
village do not respect borders, and that's true for human 
security, it's true about food safety, it's true about climate 
change, and now it's most evidently true with respect to the 
financial crisis.
    And we are complicit in the United States in starting a 
fire, or at least contributing in a major way to a fire in the 
global village. We're the biggest player, and we have a 
responsibility to raise the resources to deal with this raging 
fire, particularly as it affects the low-income countries, the 
poorest countries in the world, and the poorest people.
    We also need resources for the fire department, so that it 
is more capable and more effective in enforcing building codes 
in the future, and other measures that will make all the houses 
in the village more resilient and less exposed to the 
vulnerabilities that this financial crisis has demonstrated.
    Let me make four points very quickly:
    The first is that we need the IMF, we Americans.
    The second, that Congress should approve the overall 
package that the Administration has requested, including the 
$100 billion for the new arrangement to borrow facility.
    Congress should approve the sale of gold, and I would be 
happy to answer questions beyond what I say orally on how that 
gold should be--those resources should be allocated.
    And Congress should ensure that the governance reforms are 
a go-ahead, that Treasury is urged to push on those.
    Two reasons why Americans need the IMF, I think Amar 
Bhattacharya has also said very nicely, as have you. The first 
is that our own economic recovery does depend heavily on 
economic recovery in emerging markets and in other developing 
countries. And the second has to do with development more 
generally.
    Both the Bush Administration and the Obama Administration 
have said that our foreign policy relies on a three-legged 
stool: defense; diplomacy; and development. And the IMF can and 
must play a critical role in ensuring that the development leg, 
with U.S. leadership, is not weakened further than it already 
is.
    That has to do with insecurity, instability. It has to do 
with protecting the incredible progress most developing 
countries have made in the last decade in reforming their own 
governance, reducing corruption, managing their own 
macroeconomic matters much more effectively, and so no.
    So that's my first point.
    The second point is that the United States should agree to 
a loan of $100 billion to the IMF.
    Congressman Hensarling raised the question whether this 
would increase risks for Americans, and the answer is 
essentially that it would not. This is a credit to an 
institution that is extraordinarily sound, that follows 
extraordinarily conservative policies.
    This is not in my written testimony, but I'm saying it in 
response to his query, that there is absolutely no way to 
compare the situation of Fannie Mae and Freddie Mac prior to 
this crisis in terms of its soundness, to that of the 
International Monetary Fund today. There is no way that the 
taxpayers could be said to really be taking any reasonable risk 
in this kind of transfer, in effect, transfer of assets between 
the United States and the IMF.
    In addition, I support the idea of an additional $250 
billion of SDRs that are being created, as called for at the G-
20 summit in London, and I urge the Congress to endorse 
heartily this move. I believe the Administration has made the 
necessary notification to the Congress in order to go ahead 
with that part of changes at the IMF.
    Third point, the Congress should endorse the sale of IMF 
gold, for two purposes. I urge this subcommittee to push for 
approval of those gold sales, and to provide guidance to 
Treasury for its discussions with other IMF members on the 
allocation of the sales revenue between the two purposes, the 
one purpose being for the endowment at the IMF that would 
strengthen the fire department functions; and the second 
purpose being for additional resources for the low-income 
countries.
    I think on the issue of additional resources for the low-
income countries, the key issue is actually timing, and the 
Congress faces, the Senate now also faces the question of how 
urgently to move.
    My concern would be that it's important to move quickly to 
exercise U.S. leadership and to insist that the Treasury take 
steps to insist on the associated reforms that we have been 
talking about.
    I have comments on how the concessional resources should be 
used by the IMF, where this subcommittee may want to lend its 
guidance. And one of those comments has to do with, if 
possible, using the resources for grants, to minimize future 
debt.
    And a second has to do with ensuring that the IMF uses 
those resources in exactly the same way, in effect for standby 
type loans, as it does in the case of middle-income countries, 
the only difference being in the charges it charges.
    And finally, the Congress should push for faster and 
further governance reform at the IMF.
    It is in our direct national security and economic interest 
to make the IMF not only better resourced, but a more credible 
and effective global financial institution. That's only 
possible if China and other major emerging market economies 
have a much larger role in IMF decisionmaking, are brought into 
the process, and become also shepherds of the global economy.
    So the G-20 leaders recognized this at the summit in April, 
and the call for additional resources for the IMF where the 
United States did take leadership is twinned--and again, the 
United States has been a leader with calls for governance 
reform.
    You have heard a lot about the governance reform already 
today. You will hear more about them. I believe that despite 
the shortcomings of the current reform process, it's now 
sensible to go ahead with the overall package, including those 
governance reforms, with a lot of guidance from this committee 
and from your committee and from the Senate to the Treasury on 
how insistent the United States should be in pushing for even 
faster implementation of the reforms, and pushing for the next 
round to be less modest and more deep.
    Let me conclude by saying that the IMF is far from perfect; 
there have been a lot of concerns from many people over the 
years. But in the last couple of years, the IMF has made 
substantial progress in implementing a better approach to 
conditionality and beginning the reform process on the 
governance side.
    It is going in the right direction, and at this point, I 
think the urgency we should all face is the need for the 
additional resources to be put at the IMF.
    I urge the Congress, the House, and the Senate, therefore, 
to move quickly on the necessary legislation.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Ms. Birdsall can be found on 
page 48 of the appendix.]
    Chairman Meeks. Thank you.
    Mr. Johnson.

    STATEMENT OF SIMON JOHNSON, PROFESSOR, SLOAN SCHOOL OF 
       MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY

    Mr. Johnson. Thank you very much.
    Let me begin by emphasizing one piece of my bio I'm not 
sure was mentioned, which is I was the chief economist of the 
IMF until the end of August, and as a result, have a particular 
perspective on both the view of the global economy and the 
issues of IMF reform.
    I'm on the record as being strongly in support of the IMF 
on some dimensions, but certainly not on all dimensions. I 
would like to break that, my agreements and disagreements, into 
three pieces.
    Let me speak briefly about the global economy and the 
summit, the context of this discussion, and then spend a little 
bit more time on the proposals that are coming before you.
    First of all, on the global economy, I broadly agree with 
the numbers put forward, the summary by Mr. Bhattacharya. I 
actually think that the IMF baseline, which is regarded as 
being fairly negative in the context of overall global economic 
forecasts, to my mind is a little too optimistic, and if you 
read between the lines, and look at the way the report is 
presented, there's a lot of discussion there of downside 
scenarios.
    Believe me, these are not scaremongers, the IMF. These are 
very sensible, professional people. They are warning you in no 
uncertain terms that, while the global economic situation has 
stabilized to some degree, there is substantial potential for 
things to get worse, and I think that the chairman's opening 
statements about the social stability are absolutely critical 
in that context. That is exactly how the economy can worsen.
    We have seen many economic shocks. We're seeing a lot of 
the hits on the world's poorest people just now coming through. 
And we haven't yet seen the full social and political impact of 
that. So I think the global situation is extremely dangerous.
    Secondly, and speaking directly to that, I think the G-20 
summit was a remarkable success. I think in large part this was 
due to the efforts of the Obama Administration. It was a come-
from-behind win. The previous G-20 summit, which was held in 
Washington again, of last year, was a severe disappointment.
    And the Obama Administration rightly focused on certain key 
issues which they felt they could win, the central, most 
important one, of course, or set of issues, was around the IMF, 
and within the IMF context, the most important issue was money. 
How much money does the IMF have to lend, have available to 
lend, if times get tough, if the downside scenario 
materializes?
    And you need a lot. The downside scenario is very, very bad 
in this context. I called back in the fall for the IMF to have 
$2 trillion available to lend. This is when the IMF had $250 
billion total. And that call, I think, was regarded as somewhat 
exaggerated.
    Well, now the IMF is going to have, if the full set of 
funding proposals and special drawing rights allocation goes 
through, they'll have about $1 trillion available to lend. I 
regard that as a very sensible step in the right direction, but 
I'm still not sure that's enough. This is a very big world, 
with a lot of interconnected problems, and many things can 
still go wrong.
    The IMF is the fire brigade, as Nancy Birdsall stressed 
repeatedly, and Larry Summers is also stressing, and fire 
departments are essential, and you don't want to start from 
scratch and rebuild in the middle of a crisis, but you do want 
to make sure they're credible, legitimate, and they have the 
resources they need to fight the fires, and that's the context 
in which I support additional resources for the IMF.
    In fact, I would go further, and if Mr. Hensarling comes 
back in, I would be happy to discuss that with him directly.
    But, at the same time, I would stress, and absolutely 
emphasize in every context, the need to continue and follow 
through the so-called process of IMB reform.
    I put a long list of items that need to be addressed in my 
written statement, but let me close by emphasizing three of 
them.
    First of all, the process of selection for the next 
managing director of the IMF must be an open competition. You 
must look for, they must look for, and you should impress upon 
Treasury the importance of following through with this 
declaration of the G-20, that the next manufacturer of the IMF 
cannot be a European.
    It has always been a European, since the end of the Second 
World War. There is no good reason for this. It is regarded in 
some quarters as having become a sinecure. That is not what you 
need for the top position of the world's leading financial fire 
department.
    I think the leaders agreed to change that, and I think it's 
most important to make sure there's no backsliding on that 
whatsoever. Anything less than that, I think, will be regarded 
with derision and scorn around the world, and it will further 
undermine the credibility and hamper the rebuilding of 
legitimacy of the IMF.
    Second, in terms of IMF resources, there has been an 
unconscionable gaffe, if I may use a technical term. The IMF 
was forced to cut its budget a year ago. This was a process 
that had been long in the making, and we can go back and argue 
about whether it was right or wrong at the time the decisions 
were made.
    But the point is, it was implemented just as the global 
crisis was beginning to become more severe, and, as the IMF 
itself was warning about that, the fire department was cut 
back.
    You have five fire engines, and then you're told to go to 
three, and you're saying, ``The forest fire is coming.'' They 
say, ``No, actually, go to 2\1/2\ fire engines.'' That's crazy. 
It's irresponsible. That budget must be reversed.
    The IMF has plenty of cash on hand. The IMF is earning 
money from its loans. It's earning money from its new flexible 
credit facility, which has a potential also to generate revenue 
during stable times, as well as unstable times.
    The IMF staff levels must be returned at least to the level 
they were at at the end of 2007. You cannot reasonably and 
responsibly call on the IMF to do the job that the G-20 is 
asking to do with the reduced level of resources. It's just not 
serious.
    Thirdly, and finally, the job of exchange rate surveillance 
is absolutely essential. This responsibility has traditionally 
been with the IMF, and particularly because of issues around 
the undervaluation of the Chinese exchange rate over the past 5 
to 8 years, it has become more severe.
    The IMF has unfortunately, for reasons we can discuss 
separately if you're interested, dropped the ball on this 
issue. You cannot rebuild confidence in the global system, you 
cannot persuade developing countries to cooperate fully and not 
to try and run big current account surpluses, accumulate lots 
of reserves, and undervalue their currencies, and take jobs 
away from America, and generate resentment among your 
constituents, unless and until somebody manages the exchange 
rate system properly.
    This is how the flow of trade, the flow of goods across 
borders breaks down, and this is how the flow of soldiers 
across borders starts, with this kind of mismanagement.
    So the IMF reform process must be completed.
    Thank you very much.
    [The prepared statement of Mr. Johnson can be found on page 
59 of the appendix.]
    Chairman Meeks. Thank you, Mr. Johnson.
    Mr. Adams.

STATEMENT OF THE HONORABLE TIMOTHY D. ADAMS, MANAGING DIRECTOR, 
                       THE LINDSEY GROUP

    Mr. Adams. Thank you, Mr. Chairman, Ranking Member Miller, 
and members of this subcommittee.
    For the sake of brevity, and to avoid duplication, I will 
be quite brief.
    I agree with Dr. Johnson that the global environment, the 
global economy is very fragile, and as he mentioned, I think he 
used the phrase ``extremely dangerous,'' I think is an accurate 
description of economic conditions.
    Two, let me say that I agree with the G-20 agenda that was 
laid out in London on April 2nd. I, too, applaud the President 
for his leadership at that summit and for helping shape the 
outcome of the G-20 meeting.
    I also fully endorse the sub-component of that agenda, 
which is directly focussed on the IMF. There have been times 
where I have been a harsh critic of the Fund, but I think even 
prior to this crisis, but certainly in this crisis, they should 
be applauded for their creativity, their imagination, and the 
speed with which they have jumped into the trenches to try to 
craft new programs and retool old programs to meet the changing 
nature of this crisis and to be relevant, given the nature of 
this crisis.
    But I want to address the point that the Congressman made 
earlier, about why do we want to do this. It is a tremendous 
amount of money. We're spending a lot of money.
    We're going to the, as one of my old bosses once said, to 
the plumbers and carpenters of Chicago and asking them to spend 
more of their hard-earned money and send it to Washington. Why 
should we do that? And I'll note, for a number of reasons.
    One is because we need to reward good performers. We need 
to send signals to countries that taking the political risk of 
doing the right thing on policy will be rewarded, and they 
should continue doing it in the future.
    I strongly think that incentives matter, so it's an 
important signalling effect to all those countries out there 
that have done the right thing over the past 5 or 10 years.
    Two, it's in our national security interest, without 
question. If you look at some of the countries that the Fund 
has provided additional assistance to, Pakistan, 170 million 
people and a very fragile economy that appears more perilous by 
the day.
    We should do everything in our power--I know the Congress 
is even looking at bilateral assistance--we should do 
everything in our power to help countries like Pakistan remain 
a stable, vibrant democracy as part of our overall national 
interest.
    And there are other countries that receive support: 
Colombia, which is on the front lines of fighting narco-
terrorism; Mexico, which is an important partner and with which 
we share a border and many challenges; and the Ukraine, which 
is a way-point for Russian energy into Europe.
    Europe's energy security depends on the gas that flows 
across the Ukraine, and I can only imagine that if there is 
political turmoil in the Ukraine, might our friends in Moscow 
decide to redraw the map of Europe.
    A place like Tajikistan, which relies on a tremendous 
amount of remittances for its budget, 45 percent--remittances 
account for 45 percent of the GDP of Tajikistan. Why is it 
important? Because it's a northern way-point of terrorists, 
terrorist resources, and those hostile to the United States to 
gain entry into Afghanistan, where our men and women in uniform 
are dying every single day, and is also a through-point for 
poppy and for opium to find its way out. Most of it goes to 
Europe, but some of it ends up in the streets of the United 
States.
    It is in our national security interest to ensure the 
stability of fragile states everywhere.
    Thirdly, it's in our economic interest. Some of the 
statistics that were noted, I just want to re-emphasize, 
because I think they're important.
    Sixty percent of U.S. exports since 2004 have grown at 3 
times the pace--to emerging markets--have grown at three times 
the pace to the developed markets, and that has grown at 60 
percent since 2004.
    Ninety-five percent of the world's population resides 
outside the United States, and 98 percent of population growth, 
between now and mid-century, will occur in developing and 
emerging markets.
    It's where the middle class is growing. It is consumers for 
U.S. goods and services. And the IMF estimates that non-
advanced economies will account for 70 percent of global growth 
over the next 5 years.
    Our economic future is tied to the prosperity and stability 
of the emerging and developing world, without question.
    Fourth, we should reward institutional reform. It goes back 
to the same point I made earlier about countries.
    The IMF is reforming itself. It is changing. It needs to do 
more. We all have a number of suggestions on how it could do a 
better job. But we should reward that behavior.
    Institutional change in international organizations comes 
infrequently, and I applaud the Fund for the changes they are 
making.
    And lastly, this is an important time for U.S. leadership. 
I spend a tremendous amount of time traveling around the world, 
and everywhere I go, there is a belief that somehow U.S. power 
is on the descent, that U.S. values, U.S. principles are no 
longer relevant, that we live in a multi-polar world, that 
possibly the Beijing agenda will become paramount or on the 
ascendancy. The United States needs to maintain its important 
leadership role in the global economy.
    So let me just conclude by saying, I strongly endorse the 
G-20's agenda; I strongly endorse the IMF component; and I 
would strongly urge this committee, this House, and this 
Congress to move as quickly as possible.
    Thank you.
    [The prepared statement of Mr. Adams can be found on page 
38 of the appendix.]
    Chairman Meeks. Thank you. Thank you very much. And I think 
that you have given us all some food for thought.
    Let me start out by asking a series of questions.
    The G-20 agreed that the new arrangements to borrow should 
be expanded by $500 billion, and we have talked about and we 
have heard some, which is the topic that is among many of us 
here, that the Obama Administration has proposed that the 
United States participate in this plan by extending a $100 
billion line of credit to the IMF through the NAB.
    Now, the G-20 also said that the enhanced NAB would be more 
``flexible'' in its operations, though it is not clear what 
flexible means, you know, what is proposed by flexibility and 
what might be entailed therein.
    So my questions are, have the terms for access and use of 
the current NAB been too restrictive, first; and if you think 
so, how might they be improved?
    Should Congress require the Administration to provide it 
with the ground rules for the new enhanced NAB before it goes 
into effect? These are decisions that we have to make.
    And are there any ground rules that you believe Congress 
should mandate for U.S. participation in the new NAB program?
    And so I throw those out to you first. Anyone can jump at 
it who wants.
    Mr. Bhattacharya. The NAB of the past was essentially a 
fairly complicated legal instrument, as we understand it, which 
restricted, in many ways, the speed and the flexibility of the 
use of resources.
    So when the new Japanese loan, which is $100 billion, was 
negotiated, the IMF and Japan agreed to several improvements 
that would allow for considerable flexibility in the use of the 
Japanese money in association with programs that were put in 
place. And the aim is to move towards a more multilateral 
version of that, through the new arrangements to borrow.
    As I said, the only other point I would make, though, is 
that this is a temporary arrangement, and there must be a 
balance between the temporary arrangement and the permanent 
size of the Fund.
    It wouldn't seem unseemly to have temporary arrangements of 
twice the size of the Fund, so a very important part of the 
conditions that I was saying is that there must be a bridge to 
an agreement to increase the permanent size of the Fund through 
quota increases.
    Now, that is in the G-20 agreement that would be done by 
January, and that's something that could be part of the 
guidance that could be given.
    The other part of the guidance on the NAB, of course, is 
that it must be linked to some of the governance reforms that 
many of us were talking about.
    Ms. Birdsall. My view would be that the relevant issue in 
terms of flexibility is associated not only with the NAB but 
with the operations of the IMF in general.
    And here, I think what's useful to recognize is that the 
IMF has been going through a process of reform, in terms of 
streamlining and reducing conditionality, for some years, and 
that recently, with the agreement on what's called a flexible 
credit line, the IMF has finally set up an instrument.
    It's only available to a limited number of countries that 
have a record of good macro-policy, but it's going in the right 
direction. It allows them to have access to resources when they 
need those resources, without really paying much, if anything, 
until they actually ask for those resources.
    A number of countries, as mentioned, Mexico, Poland, have 
already applied for this flexible credit line, which is a very 
good sign that there's something about the way this was set up 
that is reducing the domestic political problem that many 
leaders faced within countries because of the stigma of going 
to the IMF.
    I think there are other issues around the NAB that are 
specific, such as other countries being able to contribute than 
were originally, so I'm not sure, frankly, what the leadership 
meant by more flexible, but I do think that the Congress should 
emphasize the need for the Treasury, in implementing lending in 
the future from the IMF, particularly in the light of the 
crisis, to be more flexible and to push in the direction it has 
been taking already.
    Chairman Meeks. Here is the difficulty--and then I'm going 
to ask Mr. Johnson, and then I'm going to yield to the ranking 
member, Mr. Miller.
    But I think, and what I have heard both of you say thus far 
is that everyone agrees that there needs to be some kind of 
reform and, you know, we have to move, and though the progress 
is starting to happen, we still know that reform is generally 
slow.
    And what I have also heard from many who have come before 
me is the urgent need, and I have heard--I think I am hearing 
some of that from you--of the recapitalization of the IMF and 
the World Bank and other institutions.
    There is a tradeoff, though. You know, we are pressured 
here in Congress, talking about there has to be reform. And 
then there's an urgency for recapitalization.
    How does that tradeoff play? You know, and that's the 
difficulty I think some of us will have in deciding which way 
we go on this committee and in this Congress.
    Mr. Johnson. I think, to answer your original question, the 
Treasury should come and explain to you much more precisely 
what they have in mind with regard to the flexibility. They are 
obviously just one voice at the table, but they are a very 
important voice at the IMF.
    I think part of the flexibility we're seeing around the 
flexible credit line is sensible, but it's a pretty small step. 
Only three countries so far have signed up. I think you need at 
least a dozen to really establish the credibility of that.
    And secondly, around conditionality, some of the progress 
we're seeing, for example, protection social spending, is very 
sensible and long overdue, but some of the retreat from 
structural conditionality is, I think, a mistake.
    And so there are a lot of details getting lost in the 
translation here between the various statements, that you 
really need to follow-up on, and pin down Treasury on exactly 
what they have in mind.
    Ms. Birdsall. Mr. Chairman, let me just add that I don't--I 
think it's very important to recognize that this kind of 
hearing, in itself, helps create the right kind of benign 
pressure, both on the Administration and the Treasury, and 
indirectly, on IMF management and staff, and board.
    So my view is that the direction is right, and that it's 
very important to continue providing a lot of guidance to 
Treasury on the position the United States should be taking on 
increasing its flexibility while retaining, as I say in my 
written testimony, the rationale behind some conditionality at 
some times in some settings.
    The point is that, right now, we have a global economic 
emergency, and this is the time to provide the resources and to 
be sure that those resources are used as quickly and urgently 
as particularly the poor countries need them.
    It is useful, also, to push for the idea of something like 
the flexible credit line being made available to low-income 
countries. At the moment, that facility is really meant for 
middle-income emerging market economies.
    There should be something absolutely comparable, with the 
exception of the cost, for the poorest countries. Many of them 
meet the standard in terms of macroeconomic management and good 
governance that some emerging market economies have met.
    Chairman Meeks. Mr. Miller?
    Mr. Miller. Thank you.
    I think it's incumbent on us to demonstrate to the American 
people that we're trying to do the right thing, and as you all 
recognize, we're in most unusual times for this country. We 
have a budget deficit of about $1,830,000,000,000 that, I mean, 
is staggering when you look at that.
    And in California, specifically, we have an unemployment 
rate of about 11.2 percent, and in the Inland Empire region of 
our area, which has been an economic engine for California, 
it's actually in excess of 12 percent.
    And it's actually greater than that in reality, because you 
figure one out of six people work for the government, and 
government unemployment is virtually zero, so when you add that 
number of the equation, unemployment amongst the private sector 
is really much greater, in the 11.2 percent in California, than 
they show out there.
    Now, if we're going to commit $100 billion to the IMF, how 
do we ensure that these resources are being used to address 
economic stability and assist in our global economy recovery? 
How do we show that is going to be done? Can you try to address 
that? Because there is great concern about that.
    Ms. Birdsall. I'm sorry, was that addressed to any of us?
    Mr. Miller. Yes, whomever would like to--I mean, it's a lot 
of money, especially during our economic times, and you have 
justified a great need, and you demonstrated how that need will 
benefit the overall, you know, developing countries of the 
world, but how do we ensure the resources are being used to 
address stability? How can we guarantee that?
    Mr. Adams. I'll take a crack at it, Congressman.
    First of all, this is an insurance policy. It's a 
contingent line of credit. So it's only used if called upon, 
and it is, Dr. Birdsall noted, it is for the best performers, 
those who have achieved a certain level of performance 
standards that I think are pretty rigorous.
    So it is for those who have done the right thing, who have 
been good performers, and for no fault of their own, they are 
the collateral damage, suffering the collateral damage of a 
crisis which, in some ways, really started here in the United 
States.
    Two is, I was just looking at a report from JPMorgan, put 
out yesterday, that said strong--if you support international 
financial institutions, support appears to be working to 
address the fears of extreme balance of payments risks in 
emerging markets.
    So there's a sense that just the signalling effect of the 
desire to use these resources, and have these new resources, it 
in fact is having a stabilizing impact on global markets.
    So in some ways, it has already begun working. We just have 
to ensure that the resources are there to support the 
signalling effect.
    But I think it goes back to an earlier point, with greater 
flexibility for managing these programs, which I think are 
important, but the Treasury will have to have appropriate 
oversight, and this body will have to hold the Treasury 
Department accountable for these actions, too.
    Mr. Miller. But you used a real term out there, that the 
economy recognizes right now, when you said line of credit.
    And I can name business after business, industry after 
industry, that normally had lines of credit that had been 
completely terminated because of the economy today, through no 
fault of their own. They have done the right thing. They have 
tried to pay their bills. Many are current.
    But the lines of credit that they need to continue their 
business have been terminated, just because the industry is so 
questionable.
    So although it's a line of credit, I recognize that, but 
the American people are looking at that as hard dollars, 
because that's what lines of credit are; if you need the money, 
it's going to be there.
    And we just need to demonstrate to the American people that 
their global recovery is going to benefit them, in us making 
the investment.
    So if the other three would like to respond to that, I 
would really appreciate it.
    I'm not arguing. Don't get me wrong. I think we have a 
level we must meet as elected officials to say we're doing the 
right thing with these type of dollars.
    Mr. Bhattacharya. I want to just put it in perspective in 
terms of the original sin.
    There has been a withdrawal of something like $1 trillion 
of finance from the developing world, through no fault of their 
own. So this is a tsunami of gargantuan proportions.
    And the money that is being used is really not money in 
some sense, you know, to make up for some fault of theirs. It's 
essentially a firewall to ensure that the crisis doesn't get 
deeper in that part of the world, and that helps, in at a 
moment of extreme fragility in confidence, you don't want other 
sources or worries to come up, and by preventing it, you are 
helping us all, and you're not going to use that money in these 
cases, as was pointed out, with much risk.
    There are some other cases, which are the more difficult 
cases, for example, some countries in Eastern Europe, which are 
facing somewhat more difficult circumstances.
    So what are the protections there?
    And as Ms. Birdsall pointed out, the IMF is a very 
conservative institution. It may be the lender of last resort 
in some ways, but it is also the lender that gets paid back 
first, and that's been the track record.
    So this is relatively smart use of very limited money to 
produce a world in which we can climb out of this crisis in a 
way that manages the risks and manages the spillovers from it.
    The part where you really do need some generosity is for 
the poorest countries, but that's a very different part of the 
equation from the NAB.
    Mr. Miller. And I really appreciate that comment. You said 
they were in a situation due to no fault of their own.
    And see, we have to justify what we're doing to the 
American people who have lost their jobs, due to no fault of 
their own.
    And so I know $100 billion, with what we're trying to do, 
may seem like a paltry amount, but to real people in this 
country, that's a lot of money.
    And Ms. Birdsall, I know you had a response, and Mr. 
Johnson.
    Ms. Birdsall. I just wanted to reiterate a point made 
earlier in a slightly different way, that in 2008, the U.S. 
economy grew very little, if at all.
    Virtually all of our growth in 2008 was associated with our 
exports, with the increases in our exports, and a substantial 
amount of those exports went to developing countries.
    So I think that makes--that is an argument, I hope, that 
can help make sense to even those American businesses that have 
had their own lines of credit terminated, that to the extent 
that jobs in the United States depend in part on ensuring there 
is this firewall that prevents the rest of the world from 
sinking further into difficulty, and not having the wherewithal 
to purchase our own exports, we are better off to deal with the 
fires everywhere.
    Mr. Miller. I recognize what you said about the exports. 
Many people think that their jobs were also exported to other 
countries, and that's a difficult thing for them to understand 
right now.
    Mr. Johnson?
    Mr. Johnson. I think the way you're framing the question is 
entirely appropriate, and I would suggest two answers.
    First of all, the United States has a veto. There's no 
major decision that the IMF can make without the United States' 
approval and agreement. And the IMF is located two blocks from 
the White House for a reason. Okay.
    No, this is very important. It's absolutely the way the IMF 
operates, the way the IMF thinks is very much related to, and 
influenced by, what the Administration is doing, and that's why 
you need to understand what Treasury wants them to do, because 
Treasury is not--they're not calling all the shots, but they 
have a huge influence there.
    And the second thing is, much more bluntly than exports, 
the price you pay on your credit, as an American business, the 
risk premium that is demanded, from all of us, whether we want 
to borrow against our mortgages, is determined by the level of 
risk in the global financial market. It's a global financial 
market.
    Right now, the major risks, not just according to the IMF, 
but according to everybody who looks at it seriously, the major 
risk is outside the United States. The United States, if it was 
just up to the United States, we would begin to get on our way 
to a decent recovery. It is the instability in emerging 
markets, and frankly, in Western Europe, that is really the big 
danger here, and that comes back and hits every household and 
every firm in the United States smack in the face if it goes 
wrong.
    Mr. Miller. Thank you for your thoughtful answers.
    Chairman Meeks. Ms. Moore?
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
    And I certainly feel very grateful to this distinguished 
panel for visiting with us today.
    Mr. Chairman, are we going to have more than one round of 
questions?
    Chairman Meeks. I see that we have votes coming up.
    Ms. Moore of Wisconsin. Okay. All right. So I have to pick 
and choose.
    Chairman Meeks. I would like to have more than one round.
    Ms. Moore of Wisconsin. Okay. I guess one of the first 
things that--my time is limited, so I will--I want to 
straighten something out between Ms. Birdsall and Mr. Johnson.
    I heard you, Ms. Birdsall, say that we needed to continue 
governance reforms at the IMF, and China should be brought in.
    But I also noted from Mr. Johnson's testimony that the IMF 
credibility has been damaged by our inability to follow through 
on the exchange rate surveillance, particularly with regard to 
China, and that these competitive devaluations or even 
accidental undervaluations will lead to greater global 
imbalances and potential instability as countries compete to 
get current account surpluses over other countries.
    And I guess I need a little bit more appreciation for this. 
I think this undervaluation of currency, particularly in China, 
and the fact that they ought to be brought in, really is 
something that I have been struggling with for a very long 
time, so I appreciate having your expertise today to address 
that.
    Ms. Birdsall. Yes. Let me try to address that, and see if 
Simon wants to add to what I say.
    He's absolutely right. I don't disagree at all with the 
point he's making, which is--can be put this way, that the IMF 
has been relatively toothless, unfortunately, in addressing the 
global imbalance, which I would characterize in simple terms as 
follows: The Chinese are doing all the saving and exporting, 
and the United States has been doing all the borrowing and 
importing.
    So the global imbalance was the outcome of difficulties and 
poor arrangements, both in China and in the United States, and 
the reality is that the IMF unfortunately, despite its 
warnings, it's not as though there were not--there was not 
written down, from time to time by the staff, and by 
management, an explication of this problem. It's difficult to 
discipline major powers.
    So it's in the interests of the United States to have China 
at the table and to be engaged more and more in the discussions 
of how our behavior and China's behavior create risks for all 
of the rest of the world.
    It's not going to be perfect, ever, but my own view is that 
we need, in addition to clubs and networks where countries get 
together, we need to bring as many countries that are powerful, 
like ourselves, and like China, into institutions where they 
can be subject to, and make themselves subject to rules of the 
game, and honor those rules. That makes everyone better off, 
both Americans and those in the rest of the world.
    I don't know if Simon would put it differently.
    Mr. Johnson. Yes, I would put it slightly differently, 
although I broadly agree that there is, of course, a major 
difference between the United States and China, in which the 
United States has a floating, flexible exchange rate in which 
we don't intervene on a systematic basis, whereas the Chinese 
exchange rate is, for all intents and purposes, a fixed, 
managed exchange rate, which means that if they want to--if 
they fall into an undervalued situation, for whatever reason, 
and they wish to remain there, they have to accumulate--the 
process of keeping that exchange rate undervalued means they 
will accumulate a large amount of foreign reserves, and what 
has happened is, they have amassed almost $2 trillion in 
reserves.
    Now, I'm not saying this is the main driver of the crisis. 
I am saying that it has undermined the IMF's ability to deal 
with this, undermined their credibility, but going forward, 
think of it like this. Every emerging market and developing 
country that has this potential thinks, ``Wow, I would love to 
have $2 trillion equivalent for my size of country. That's 
clearly a big stabilizer for me individually.''
    At the level of the system, that's a huge destabilizer. The 
only way you can have more accumulation of reserves, more 
current account surplus, is if somebody is running a deficit. 
Well, that might be the United States, it might be the Euro 
zone. Whoever it is, it's not going to be a stabilizing force.
    You need the countries to buy into the system. You need a 
governance change. You need relegitimization. I advocate an 
emerging market person to head the IMF next time the job comes 
up, which I think will be quite soon. We must have some teeth 
on the exchange rates available.
    Ms. Moore of Wisconsin. Okay. So is this part of the reform 
that is occurring at the IMF now? What ability do they have to 
enforce this--I see my time is expiring, and I--
    Chairman Meeks. Finish up the question, and then I want to 
make sure we get to Mr. Manzullo, if he has time, and then we 
can go back around if we have time before the votes.
    Ms. Moore of Wisconsin. Is this a reform that the IMF is 
undergoing, and is it--how do they get this club, this billy 
club, to enforce it?
    Ms. Birdsall. You know what, I would say at the moment, 
that the most important thing is for the IMF to have additional 
sufficient resources, so that the countries that--the other 
emerging market economies see collective insurance as the--they 
can count on the IMF. They do not need to build up their 
reserves. They do not need to abandon flexible exchange rates.
    And the same might be said for China, which is trying now 
to increase domestic demand. It has a very big stimulus 
package.
    So, you know, you could argue that it's maybe not enough, 
but it's moving in the right direction. But none of these 
countries will go to a position where it works for the overall 
global economy, unless they are reassured that they have 
someplace to go in the event of a shock.
    So what we want is collective insurance, instead of all 
this self-insurance, which contributed to the imbalance, which 
in turn contributed to our current problem.
    Ms. Moore of Wisconsin. Thank you so much. Mr. Chairman, 
this was a very important question, but it prevented me from 
asking some other questions, so I hope there is another round.
    Chairman Meeks. Hopefully, we will get a chance to come 
back around.
    Mr. Manzullo?
    Mr. Manzullo. Thank you very much.
    I have a question to ask you, Ms. Birdsall, and then the 
clerk is passing out a document that was agreed to, ``The 
Global Plan for Recovery and Reform,'' on 2 April 2009 at the 
G-20.
    You had mentioned in your testimony that, ``No way U.S. 
taxpayers would be taking a risk.''
    The issue here is that the Congressional Budget Office, on 
the initial draw of $100 billion, is unable to score it at this 
point, either the full cost or, as opposed to a zero score, 
which the White House had requested.
    But it's true, is it not, that if these nations default on 
these loans, that the default runs up the line and that the 
American taxpayers could end up losing some money?
    Ms. Birdsall. I don't know if others can speak more 
effectively to this point, but were those borrowers to default 
on the IMF, the IMF does have the resources to pay back the 
line of credit to the United States.
    Mr. Manzullo. Then, is that the reason why they would sell 
the gold?
    Ms. Birdsall. For example, in addition to the current plan, 
gold fails--
    Mr. Manzullo. Right.
    Ms. Birdsall. --they could call on other assets. Simon is 
probably better--
    Mr. Manzullo. I want to go to something else, then we can 
come back to that.
    We just passed out this document, ``The Global Plan for 
Recovery and Reform.''
    Are you folks familiar with this, the document that was 
signed--
    Ms. Birdsall. Yes.
    Mr. Manzullo. --or agreed to at the G-20?
    And if you take a look at paragraph 15 on the third page, 
it talks about establishing a new Financial Stability Board 
with the strength and mandate in that it should corroborate 
bullet point 2 with the--collaborate with the IMF to provide 
early warning of financial risk, but then that bullet point 
says, ``To extend regulation and oversight to all systemically 
important financial institutions, markets, and instruments.'' 
This includes, for the first time, systemically important hedge 
funds.
    The fourth bullet point is, ``To endorse and implement the 
FSF's tough new principles on pay and compensation, support 
sustainable compensation schemes, the corporate social 
responsibility of all forms.''
    This is perhaps why the European Central Bank came out and 
attacked the infusion of $100 billion into the IMF, and why 
they called it possibly containing the seeds of a global 
currency in its own right.
    What does this document intend to do? I mean, what is the 
purpose of it? It specifically mentions the $250 billion new 
allocation in paragraph 5.
    Mr. Adams. Congressman, obviously, it's a product of a 
committee, so it represents enormous compromise.
    With respect to the Financial Stability Board, is a 
recognition of the work of the former Financial Stability 
Forum, which when I was at Treasury, I actually participated 
in. So that is just, that is giving it formal recognition as a 
body to coordinate and share best practices among and between 
the regulators.
    Mr. Manzullo. But it says, ``To extend regulation and 
oversight to all systemically important financial institutions, 
instruments, and markets,'' and also, tough new principals on 
pay and compensation.
    Isn't this an international standard to determine the pay 
and compensation of banks that may be parties, banks whose 
countries are parties to the G-20?
    Mr. Adams. Well, I can't speak to this particular--I don't 
know the origin or the negotiations that went to this.
    I think the idea was, again, to try to create an 
environment where you could exchange ideas and--
    Mr. Manzullo. No, I understand that. I understand that. But 
one of the statements made by Ms. Birdsall was, ``We need to 
bring the big countries together to make them subject to the 
rules of the game,'' to make this illegal document binding upon 
the G-20 countries.
    Mr. Adams. No, I think she meant, and I'll let her speak 
for herself, but it's a phrase we have used before with respect 
to exchange rate surveillance, is within the Fund, you have a 
sense of the rules of the game, of what is appropriate behavior 
and what is not appropriate behavior and what will the 
institution, the Fund specifically, accept as appropriate 
behavior, with particular reference to foreign exchange--
    Mr. Manzullo. So you were referencing just foreign exchange 
rules and not binding IMF rules and regulations upon the 
countries that are signatories to the IMF; is that correct?
    Ms. Birdsall. I certainly was not endorsing what is in that 
April statement from the summit, which, as Tim Adams was 
suggesting, is the outcome of a number of compromises.
    My understanding is that these sorts of principles dealing 
with compensation schemes, probably that was a position taken 
by--not by the United States, by this Administration 
necessarily, but the idea is that there would be principles.
    I think that there has been no agreement, however, amongst 
the G-20 leaders, that could be said to be reflected in that 
statement--
    Mr. Manzullo. Well, I understand that.
    Ms. Birdsall. --that there would be international rules 
imposed on all members.
    Mr. Manzullo. But don't you think that this is pretty 
shocking, that this agreement should be literally endorsed by 
the G-20, Spain, the signatories to the FSF, that attempts to 
set an international standard for compensation to financial 
institutions, markets, and instruments?
    Ms. Birdsall. Well, I think it says new principles--yes, go 
ahead, Simon.
    Mr. Johnson. Sorry. I don't think it's shocking at all. I 
think the point is, and this is I think exactly what the 
committee is trying to get at, which is that should the global 
financial system become unstable--
    Mr. Manzullo. No, I understand. You don't--
    Mr. Johnson. They're trying to address this, and they're 
trying to establish--
    Mr. Manzullo. No, I understand that, Mr. Johnson. You 
don't--
    Mr. Johnson. --the compensation that will reduce that 
instability.
    Mr. Manzullo. But you don't think it's shocking that an 
international body would attempt to control the salaries of 
executives of financial institutions whose countries are 
members of the G-20, you don't consider that to be shocking?
    Mr. Johnson. I don't think they're trying to control the 
compensation levels at all. What they're trying to do is 
address the issue, which has been raised by the financial 
industry itself, in this country and in Europe, that there is 
unnecessary, excessive, and mismanaged risk-taking in the 
largest financial--
    Mr. Manzullo. That's not what the bullet point says.
    Chairman Meeks. The gentleman's time has expired, and we 
have a vote going on.
    So let me take this time to thank this distinguished panel. 
I will tell you, on behalf of this subcommittee, that I think 
your testimony was excellent, and very thought-provoking.
    I look forward to working with you in the future as this 
committee continues to delve into the issues that you have 
talked about, and I think, in more detail, especially the 
plight of the least developed countries of the world, and how 
we can help those economies in dealing with some of the socio-
political realities.
    Let me note that some members may have additional questions 
for this panel, which they may wish to submit in writing. 
Without objection, the hearing record will remain open for 30 
days for members to submit written questions to these witnesses 
and to place their responses in the record.
    And at this time, this hearing stands adjourned.
    [Whereupon, at 11:26 a.m., the hearing was adjourned.]







                            A P P E N D I X



                              May 13, 2009

  



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