[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF THE MULTILATERAL
DEVELOPMENT BANKS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 9, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-54
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Monetary Policy and Trade
BILL HUIZENGA, Michigan, Chairman
MICK MULVANEY, South Carolina, Vice GWEN MOORE, Wisconsin, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma BILL FOSTER, Illinois
STEVAN PEARCE, New Mexico ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
MARLIN A. STUTZMAN, Indiana JOHN C. CARNEY, Jr., Delaware
ROBERT PITTENGER, North Carolina TERRI A. SEWELL, Alabama
LUKE MESSER, Indiana PATRICK MURPHY, Florida
DAVID SCHWEIKERT, Arizona DANIEL T. KILDEE, Michigan
FRANK GUINTA, New Hampshire DENNY HECK, Washington
MIA LOVE, Utah
TOM EMMER, Minnesota
C O N T E N T S
----------
Page
Hearing held on:
October 9, 2015.............................................. 1
Appendix:
October 9, 2015.............................................. 31
WITNESSES
Friday, October 9, 2015
Chovanec, Patrick, Managing Director and Chief Strategist,
Silvercrest Asset Management................................... 8
Karlan, Dean, Professor of Economics, Yale University............ 3
Morris, Scott A., Senior Fellow, Center for Global Development... 9
Ravallion, Martin, Edmond D. Villani Chair of Economics,
Georgetown University.......................................... 6
APPENDIX
Prepared statements:
Chovanec, Patrick............................................ 32
Karlan, Dean................................................. 37
Morris, Scott A.............................................. 46
Ravallion, Martin............................................ 60
THE FUTURE OF THE MULTILATERAL
DEVELOPMENT BANKS
----------
Friday, October 9, 2015
U.S. House of Representatives,
Subcommittee on Monetary
Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:34 a.m., in
room 2128, Rayburn House Office Building, Hon. Bill Huizenga
[chairman of the subcommittee] presiding.
Members present: Representatives Huizenga, Mulvaney,
Pearce, Pittenger, Schweikert, Guinta, Love, Emmer; Moore,
Perlmutter, Himes, Carney, Sewell, and Kildee.
Ex officio present: Representative Hensarling.
Chairman Huizenga. The Subcommittee on Monetary Policy and
Trade will come to order. Without objection, the Chair is
authorized to declare a recess of the subcommittee at any time.
Today's hearing is entitled, ``The Future of the
Multilateral Development Banks.''
I now recognize myself for 5 minutes to give an opening
statement, which I hope not does not consume all 5 minutes. But
I first want to thank our witnesses today very much for your
patience.
I know that we gave you notice late yesterday about moving
the time of the start of this hearing from 9:00 a.m. till 10:30
a.m., so the ranking member, as well, thanks you for your
understanding. She asked how the family was doing this morning.
We are healing. So, hopefully, we will be able to get some good
progress.
But that is not why we are here today. We are here today
because of multilateral development banks (MDBs). And the
origins of those MDBs lie within the creation of the World Bank
at Bretton Woods in 1944. Its initial purpose as the
International Bank of Reconstruction and Development was the
reconstruction of war-torn countries after World War II.
Today, the MDBs include not only the World Bank, and its
other lending arms, the IBRD and the International Development
Association, IDA. But it also includes four regional banks: the
African Development Bank; the European Bank for Reconstruction
and Development; the Inter-American Development Bank; and the
Asian Development Bank. Their core mission is to provide
financial assistance such as loans and grants to developing
countries to promote economic and social development.
MDBs were created by their member countries, which provide
capital to sustain MDB operations. Member countries are awarded
shares in MDBs proportionate to the amount of capital they
provide. Because member nations provide the MDBs with a large
capital base, MDBs have a AAA credit rating, which allows them
to borrow at favorable rates from private lenders.
The United States is a member of each of these
institutions, therefore Congress plays an important role in
determining U.S. funding for MDBs, and engaging in the
oversight of the Administration's participation in those.
The MDBs have played a key role in the progress in reducing
poverty and hunger--we certainly saw that after World War II--
while improving global health and women's rights.
The MDB's goal is to draw in member nations' contributions
to leverage additional private sector financing. However, MDBs
are facing different development challenges than those they
previously faced. The number of people around the world living
on less than $1.25 a day has been halved since 1990, which, I
would think, we would all agree is a very positive thing.
And there have been major strides in expanding access to
schooling and medication for poor children around the world. In
addition, governments' commitments to fight poverty has
noticeably increased, with development assistance from rich
countries reaching $134 billion last year, up from $81 billion
in 2010.
Today, the MDBs are operating in the world of new
challenges and competitors. Many emerging economies have far
greater access to capital markets for funding that I will note
that capital that many times was locked up, and not available,
starting after World War II has loosened up.
And, additionally, a newly ambitious China has spearheaded
the creation of the Asian Infrastructure Investment Bank, the
AIIB, the development bank, or the BRIC's Bank as it is known,
to finance projects in developing countries.
Meanwhile, researchers have developed new tools to help us
understand which MDB programs have or do not have an impact.
Given this new environment, this hearing will explore how MDBs
should adapt.
I look forward to hearing from our witnesses today
regarding the future of the MDBs, and how their operations and
organizational structure have changed, and should continue to
change in order to maintain their relevance.
And, with that, I would like to recognize the ranking
member of the subcommittee, Ms. Moore, for her opening
statement.
Ms. Moore. Thank you so much, Mr. Chairman, and it is
always good to be here with you. I think the work of this
subcommittee is very significant and I am looking forward to
hearing from our witnesses here today.
I just want to join Chairman Huizenga in welcoming you all.
In particular, Mr. Morris, welcome back to this room. I am
really excited. You have tremendous credentials here, and I am
sure that we will be justly informed.
My perspective on the work that these banks do around the
world is that I think they represent a source of real strength
for the United States, and a source of positive change in the
world.
We see the impact of poverty in our own country here:
unfulfilled dreams; lost generations; and lack of opportunity
leading to frustration, which leads to all kinds of social
problems.
And these problems spill out into all aspects of society.
People are victimized by crimes, and no one--not even the very
wealthy--is immune or escapes the adverse impact of poverty.
And so the impact of poverty abroad is no less devastating and
in a global world, the problems of far-off places are our
problems as well.
Now, development banks don't impose world order with force,
military might. They promote it through understanding and
economic stability. And I do believe that American leadership
in multilateral development banks is critical to our world
leadership. That is why I have been pushing the World Bank to
negotiate strong, enforceable safeguards, including labor
standards, LGBT rights, road safety, women's rights, and
accommodations for the disabled.
It is so humbling when I consider how this committee, and
particularly this subcommittee, is really at the center of so
much in terms of global leadership. And I truly hope that we on
this committee can figure out how to agree to get some of this
important work done.
It is not just reauthorizing the EX-IM Bank, to give our
workers a fair shake in global markets. But--and I know it is
not necessarily the subject of this hearing--also to improve
the IMF quota reforms.
I will commit to working with you, Mr. Chairman, in good
faith on addressing some of the concerns of the Majority, but I
believe that we must work with some urgency to immediately
approve quota reform.
And I also want to work with the World Bank to figure out
how to make sure that its premiere development, because it is
the premiere development institution in the world. To borrow a
phrase from the Department of Labor Secretary Perez, we need to
agree on a North Star, and to work on a path to get there.
And with that, I yield back, Mr. Chairman.
Chairman Huizenga. The gentlelady yields back. We will now
hear from our witnesses. And our first witness is Dr. Dean
Karlan. He is a professor of economics at Yale University, an
affiliate of the Bureau of Research and Economic Analysis of
Development, also known as BREAD, and the president and founder
of Innovations for Poverty Action.
His research focuses on microeconomic issues for public
policies and poverty. Dr. Karlan is the author of the book,
``More Than Good Intentions: Improving the Way the World's Poor
Borrow, Save, Farm, Learn and Stay Healthy.''
And with that, I will recognize you for 5 minutes for your
opening statement.
Thank you.
STATEMENT OF DEAN KARLAN, PROFESSOR OF ECONOMICS, YALE
UNIVERSITY
Mr. Karlan. Thank you. Thank you, Chairman Huizenga, and
Ranking Member Moore, for hosting this hearing, and giving me
the opportunity to provide this testimony. The charge that I
took here is to talk about evaluation at the multilateral
development banks, which is a critical issue to improve the
return on investment that we get as taxpayers from our
investments in the multilateral development banks.
So, in the coming decades, most of the poor are going to
live in fragile and economically deprived states. And this
makes it even more important for U.S. interests and leadership
to address issues of extreme poverty. But I want to be clear:
we are not going to end extreme poverty. That shouldn't be the
aspiration. We can do a lot to fight it, and a lot to reduce
it, but ending it is not actually a realistic goal.
What is important is that we can make major inroads if we
do it well, and if we are surgical about what we can do.
It is also important to realize that we have made huge
progress. This is not--we have made tremendous progress in the
past few decades in fighting poverty around the world, but more
can be done. So, I want to focus on three areas where we can
help the MDBs do better, and with that, we can do better.
The first is through generating rigorous research on what
works in development. Like I said, this is something the MDBs
already do some work on, but we could do more to encourage that
kind of research.
The second is that we can do more to build stronger links
within the MDBs, between those who are doing the research
within the MDBs, the research groups, and the policy, so that
the knowledge that is acquired from the research that is done
can actually get into the policies of the people on the ground,
doing--setting--working with countries on the specific
programs.
The third, and this is in some sense the most important, is
to think about the MDBs as a global public good of knowledge,
that what they are doing is they are creating knowledge that
the world can use. They use it internally, yes, but even
better, other countries can use it for setting their policy.
The United States can use it, we can see benefits to the USAID,
Millennium Challenge Corporation, and how they set policy based
on knowledge created at the MDBs.
My written testimony details five different examples of
exactly that process having taken place. But five is not too
many, and we should have a lot more.
There are two things I want to note about what I have just
said. One is that the MDBs are doing the three things I just
said. They just need to do more of it, and we can help them do
more. So, I am not--these are not completely brand new ideas,
right?
The second is that I would like to think that this is
something that can get bipartisan support, right? If someone is
skeptical of aid, there is nothing better than rigorous
research to help understand what is not working, so that those
things can stop, and the other things can happen.
If you are someone who is an enthusiast for aid on a
particular policy, there is nothing better than rigorous
research to help further that. The nice thing is that there is
a clear winner in all that, and it is the U.S. taxpayer. If we
have better knowledge on what is actually working, we get more
leverage for our money, and higher return on investment.
Let me share a specific example of this from my own work,
and work that was done collaboratively with the Consultative
Group to Assist the Poor (CGAP), which is housed at the World
Bank. So, it started--one way of thinking about is it starts
with microcredit, which is a set of programs around the world
that have been very, very popular. And they had an initial
promise of reaching the poorest of the poor to raise average
income.
We have now seen eight randomized trials done of
microcredit, some done by the multilateral development banks,
some by me and others. And they found important benefits,
things that are really helping people, but are not achieving
the two things they set out to do: they are not reaching the
poorest; and they are not increasing average income. They are
good, and we should help markets make those things work.
Instead, when CGAP came to me, along with the Ford
Foundation, and they had a particular program that they had
seen work, and they wanted to know--let's test this in six
other locations. So, it was an integrated program that was a
grant program, and instead of lending money, it provided a
grant for goats. It provided healthcare, access to savings, and
training and coaching.
And the basic idea here was that the problem with being
poor is not any one thing; if it was that simple we probably
would have solved it long ago. To do lots of things at once,
there is a big push at the household level. It is actually very
successful.
And, now we are seeing that the knowledge from that, we
published this paper in, ``Science,'' and now we are seeing it
in the hands of, with the help of the group from the World
Bank, as well as others, get into scale-up mode. We are seeing
it scaled up in India, Pakistan, Ethiopia, and Ghana already.
So to conclude, I want to lay out two basic ideas from this
that are kind of broad policy points. The first is to think
about evaluation at the MDBs as a portfolio. It is not right to
take any one approach. I have just told you a lot about
randomized trials, but the last thing in the world you want to
do is encourage everything to have a randomized trial. That
would be an awful overinvestment in a lot of inappropriate
research being done.
So, we should think about the two basic purposes you want.
One is accountability. Did an organization do what they said
they would do? And the other is research, which helps us learn
about whether they achieved what they said what they would
achieve.
The second point to leave you with is to think about the
global public good created through this research, the knowledge
spill-overs, the benefits we get to MCC, USAID. And frankly,
also issues that this committee faces in America on things like
the underbanked and the unbanked. A lot of research has been
done at the Millennium Development Banks that actually speaks
quite well to issues we face here in America as well.
Thank you.
[The prepared statement of Dr. Karlan can be found on page
37 of the appendix.]
Chairman Huizenga. Thank you. The gentleman's time has
expired. With that, I would like to welcome Dr. Martin
Ravallion, who is the Edmond D. Villani Chair of Economics at
Georgetown University. He has also been a director of the World
Bank's research department.
He joined the bank in 1988, and from 2007 until 2012,
served as the director. And in 2012, he was awarded the John
Kenneth Galbraith Prize for the American Agriculture and
Applied Economics Association. So, with that, Dr. Ravallion?
STATEMENT OF MARTIN RAVALLION, EDMOND D. VILLANI CHAIR OF
ECONOMICS, GEORGETOWN UNIVERSITY
Mr. Ravallion. Thank you very much. Thank you for inviting
me. Following up on what Dean said, I actually do think it is
feasible to virtually eliminate extreme poverty in the world.
We can lift 1 billion people out of extreme poverty by 2030
with the right policies. And that is continuing the policies in
developing countries over the last 20, 30 years.
It is not like a major overhaul of existing policies, but
we would also need some good luck. Obviously, major crises
could overturn that objective. But I really do think we are at
a really critical moment for achieving that.
I do believe that the development banks have a major role,
but the other thing we have to realize is that a lot has
changed in that 70 years since the Bretton Woods institution,
and I think the role of an institution like the World Bank has
also changed, fundamentally changed.
When the institution was formed, there was no global
financial market. There was virtually nothing. The institution
was the main lender, the main source of money, to developing
countries. That has changed dramatically. The bank accounts for
maybe 5 percent of the capital flows to developing countries
today. That is not the rationale today.
Today, the rationale is anchored very much with the ability
of the World Bank and institutions, and other development
banks, and the IMF to deal with problems of global public good,
and those problems center fundamentally on knowledge.
The bundling of knowledge with lending, the bundling of the
ability of an institution like the bank to combine those two
elements is what is really unique.
I don't see the private sector doing that. And I don't see
the private sector investing in very risky environments as
well. But I also don't see them dealing with the public good
problem I have talked about.
That public good problem essentially is about two things:
dealing with the constraints that countries face in escaping
poverty, how do we achieve that 1 billion target; and what are
the specific things we need to do in each country?
That is an important role for the bank to develop the
knowledge, which is analytic, it is database, but it is also
analytic. About how we actually do that in those countries.
What are the binding constraints in each country and how do we
tackle those constraints? And we have to make that step if we
are really going to achieve that goal.
One reason I am optimistic about that goal, by the way, is
that this country did it. This country was just as poor as many
countries in Africa in the early 19th Century. This country did
it. And, actually, a developing world is escaping poverty at a
pace now which far exceeds the long run pace in the United
States.
So, there are reasons to be optimistic, but I think that
the key issue is tackling the specific constraints in each
country, identifying those constraints, and addressing them
fully.
I don't think the bank is doing as well as it could, in
this respect. And I think one of the limitations is that there
is an excessive focus on the volume of lending, and this
permeates--this lending culture permeates thinking within the
bank. Managerial and staff incentives do have to change. The
lending culture has to change. I am not the first person to say
that. People within the bank, reviews of the bank have been
saying this over many years. But it really does need to change.
Knowledge must drive the lending, not just be a residual
claimant. You don't just turn to knowledge when you are not
sure exactly what to do in a particular situation. The
knowledge, particularly in addressing those binding constraints
at the country level, has to drive the bank's lending.
And a second area is global public goods in not just
knowledge, but in the global public bads. We are going to have
more pandemics. We are going to have more global financial
crises. The bank has to be mobilized to deal with that.
Unfortunately, the country model, which developed for out of
Bretton Woods, which was targeted very much to delivering
money, borrowing from rich people in the world, and lending to
poor people in the world, that country model is not ideal for
dealing with global public good.
It needs coordination--a different model, a model that
coordinates people and information in a much more effective way
globally. Because those global public goods are threatening all
of us, and it is a global problem.
We all saw it with Ebola. Suddenly people realized just how
bad the health systems were in poor countries. We saw that
graphically with the Ebola pandemic, but that is only the first
of many going ahead. So, dealing with that global public goods
problem is going to require some significant changes, I
believe.
Thank you.
[The prepared statement of Dr. Ravallion can be found on
page 60 of the appendix.]
Chairman Huizenga. Thank you. With that, we go to Mr.
Patrick Chovanec, who is the managing director and chief
strategist at Silvercrest Asset Management. He also teaches
part-time as an adjunct professor at Columbia University's
School of International and Public Affairs.
But prior to that, he was a practicing associate professor
of practice at Tsinghua University's School of Economics and
Management in Beijing, where he also served as chairman of the
Public Policy Development Committee for the American Chamber of
Commerce in China.
And, with that, welcome to you, and you have 5 minutes for
your opening statement.
STATEMENT OF PATRICK CHOVANEC, MANAGING DIRECTOR AND CHIEF
STRATEGIST, SILVERCREST ASSET MANAGEMENT
Mr. Chovanec. Chairman Huizenga, Ranking Member Moore, and
members of the subcommittee, thank you very much for inviting
me to talk, and for asking me to talk specifically about
China's recent initiatives in development funding, development
financing, including the establishment of a number of
institutions such as the AIIB, the BRIC's Bank, and the new
Silk Road Initiative. I will very briefly summarize my written
testimony, and cover the main points.
The first thing to recognize is that although these
initiatives have attracted a great deal of tension recently,
they do not represent a new trend, or a completely new trend.
China has--back in 2007, China founded the Sovereign Wealth
Fund, China Investment Corporation, to help deploy capital
abroad.
It is not mainly focused in that case on development
funding, but for the past several years, China Development Bank
and China Export-Import Bank have actually provided more
funding to developing countries than the World Bank. And that
has raised both interest and concern. So, what we are seeing is
a further development of an existing trend.
Why are the Chinese doing this? And that is what I focus
on, because I think to understand the implications, we need to
understand the motivations. And there are multiple motivations,
and some of them are actually conflicting.
The first is to find a better use for China's foreign
exchange reserves. China has accumulated huge amounts of
capital, both from inflows of investment and also from running
chronic trade surpluses. That is, right now, at about $3.5
trillion. Most of it goes into very liquid sovereign bonds,
like U.S. Treasuries that earn, especially these days, a very,
very low return.
And, so, the purpose behind establishing CIC, for instance,
was to generate a higher return. Now, this kind of motivation
places an emphasis upon disciplined investment practices, and a
disciplined attitude towards risk.
The second motivation is driving Chinese growth, in
particular absorbing China's overcapacity. One of the results
of all this capital accumulating in China has been an
overinvestment boom in China, a buildout of too much capacity
in a whole host of different industries.
And, so, in the past China has looked to drive growth by
making foreign investments, but that motivation has intensified
because now there is this desire to have some of that
overcapacity absorbed.
The danger, of course, is that China, up until this point,
has not followed OECD principles in its investment practices,
which basically bar offering subsidized financing in order to
buy business.
And one of the problems with buying business, subsidizing
contracts through cheap financing, is not just that it is poor
governance, but also that it conflicts with China's first goal,
which is to earn a higher return on their investment.
The third goal is securing access to natural resources.
Some of the motivation for this has lost its rationale, given
the steep decline in commodity prices recently, over the past
year, led, in many cases, by declining Chinese demand.
The fourth is enhancing China's soft power abroad. Winning
friends and influencing people has some obvious advantages, but
the politicization of investment decisions, again, potentially
conflicts with other goals, and when investments go sour, can
create some real problems.
China has already--China invested about $37 billion in
Venezuela that has already had to be renegotiated because the
Venezuelans cannot pay it back. If the Venezuelan opposition
ever came to power, there is a good chance that they would
simply default on that. So, China is investing in some risky
places in order to make friends, but whether it actually will
end up making friends is another story.
And, it is important to remember that gunboat diplomacy
developed because people were trying to collect on debts that
had gone bad.
The fifth is rivaling the World Bank and the Asian
Development Bank. But again, establishing multilateral
organizations to do this can constrain China just as much as it
creates an opportunity. China doesn't actually have to rely on
multilateral institutions to invest its wealth.
And, sixth, establishing China's Renminbi as the top global
currency.
I will just conclude by making a note that it is very
important to realize that although--the world is really awash
in savings. What the world needs is not so much more savings
from China as reform that generates demand. That includes for
the purposes of development.
A lot of development projects would be more stimulated by
the Chinese turning their savings into consumer demand than it
would by adding that much more capacity to the global economy.
And, with that, I conclude my remarks and welcome your
questions.
[The prepared statement of Mr. Chovanec can be found on
page 32 of the appendix.]
Chairman Huizenga. Thank you. I appreciate that, Mr.
Chovanec. And, with that, last but certainly not least, we are
welcoming Scott Morris back to the House Financial Services
Committee. Previously, he had served as a senior Democratic
staff member on Financial Services, where he was responsible
for the committee's international policy issues.
He went on to much bigger and better things when he became
deputy assistant treasury of development, finance and debt at
the U.S. Treasury Department during the first term of the Obama
Administration, and he currently is the senior fellow at the
Center for Global Development. And he works on issues related
to the international financial institutions, and particularly
at the relationships between IFIs and the United States.
So, with that, Mr. Morris, you are recognized for 5
minutes.
STATEMENT OF SCOTT A. MORRIS, SENIOR FELLOW, CENTER FOR GLOBAL
DEVELOPMENT
Mr. Morris. Chairman Huizenga, Chairman Hensarling, Ranking
Member Moore, thank you for this opportunity to testify before
your subcommittee on a topic that I believe is of critical
importance to U.S. interests in the world.
Earlier this year, the United States faced a gut-check
moment when it comes to its leadership in the multilateral
development banks. In June, 56 countries, including important
U.S. allies like Germany, the U.K., and Australia, joined the
Chinese government in creating a new MDB, the Asian
Infrastructure Investment Bank.
I think much of the criticism leveled at the United States
has been misguided in putting the focus on poor diplomatic
outreach, or Congress' failure to pass IMF reform.
While I very much believe that action on the IMF quota
package is critical in its own right, the challenges to U.S.
leadership in the MDBs run deeper. If Congress and the
Administration are unwilling to address these deeper
challenges, then we are likely to see a world in which
institutions like the World Bank are eclipsed by new actors
like the AIIB, and where the United States finds itself
increasingly on the outside looking in.
So, why should we care about that? Broadly speaking,
institutions like the World Bank and the Asian Development Bank
are important strategic and economic partners that have been
shaped by U.S. leadership over many decades. And I will
highlight five ways that they deliver particular value to the
United States.
First, the MDBs amplify U.S. assistance. In 2013, the
United States contributed $2.8 billion to MDBs, leveraging over
$100 billion of on-the-ground assistance from the MDBs
themselves.
Second, the MDBs operate at a scale and across a range of
sectors that the United States alone cannot. This is why the
African Development Bank is a key partner in the
Administration's Power Africa initiative. And it is also why
MDBs have garnered praise from the U.S. military leadership for
their infrastructure investments in fragile states.
Third, the MDBs can pursue U.S. objectives more effectively
as an honest broker in countries and environments where a
visible U.S. role can be problematic. I point to a country like
Pakistan as emblematic of this.
Finally, the MDBs have been rated as the most effective
development institutions by multiple independent reviews of
foreign assistance.
So, how are all these benefits at risk today? The answer
rests on whether the United States is willing to embrace
ambition for the MDBs in which it already leads, or whether we
will simply be satisfied to watch as other countries play that
role through new institutions.
Ironically, the AIIB episode shows that much of the rest of
the world is actually looking to embrace division of the MDBs
that the United States itself first laid out, over 70 years
ago, at Bretton Woods. In particular, that these institutions
are primarily banks, not charities. And, as Ronald Reagan put
it in 1981, that their aim is to ensure that economic growth
and development would spread to all parts of the globe. That is
a broader and more ambitious goal and one that is almost
exclusively focused on direct poverty alleviation in the
poorest countries.
But the Bretton Woods architects understood then what still
holds today: a world in which a growing number of countries are
prosperous and economically integrated is also a more peaceful
world and one that ultimately benefits the United States.
So, when U.S. officials resist calls for MDB capital
increases, or press MDB borrowers to graduate from assistance,
they are taking positions that are increasingly out of step
with the rest of the world. It shouldn't be a surprise, then,
that the Chinese found so many willing partners when they
conceived a new MDB without the United States.
So how can the United States not only get back in step with
its multilateral partners, but actually lead on a new MDB
agenda? In short, it is about money and policy. The United
States needs to show greater ambition when it comes to MDB
financing. It can do so by channeling a larger share of its
existing foreign assistance resources through the MDBs, and
showing more flexibility around compelling uses of MDB capital
and grant money.
When it comes to policy, U.S. leadership is critical. And I
want to highlight how it is being undermined in one area. The
rise of MDB-related policy mandates attached to appropriations
bills has become problematic.
Yes, Congress has a key role to play in setting U.S. policy
direction in the MDBs, but I strongly believe that work should
be spearheaded by this committee, and its counterpart in the
Senate, with the histories they have of transparent
deliberation, robust debate, and open markups.
I have been troubled by the growth of policy mandates
emerging in spending bills with little explanation and no
history of hearings or debates around them. This has led to
hollow victories for the advocates of these policies when there
is no wider buy in for the mandates themselves. At worst, it
sometimes leads to conflicting mandates and messages which have
undermined the ability of the United States to pursue policies
internationally, when there is just a basic amount of confusion
about what the U.S. position actually is.
So, I believe it is this authorizing subcommittee, in
particular, that can play a crucial role in fixing these
particular problems, but more importantly helping to set a
strategic vision for the U.S. role in the MDBs going forward.
So, I am greatly encouraged by your calling this hearing,
and I very much hope that it will be followed by more hearings,
debates, and even markups in the months and years ahead.
Thank you.
[The prepared statement of Mr. Morris can be found on page
46 of the appendix.]
Chairman Huizenga. Thank you. I appreciate that, and with
that the Chair recognizes himself for 5 minutes of questioning.
And Mr. Morris, I will start with you, maybe not so much a
question as a comment.
Could you please let our colleagues in the Senate know that
we, too, would like to go through with the appropriations
process; continuing C.R.s indefinitely does not allow anybody
within any body to advance that debate and to figure out what
is working and what is not working. So, I will just make a
special note of that.
Dr. Ravallion, I would like to ask you about a little bit
about MDBs. You were asking, how do we do that? How do we lift
those billion people, as you were saying, out of poverty? You
talked a little bit about how the lending culture needs to
change. And I guess one of my questions is how, specifically?
And are the MDBs really prepared to focus in on this?
I am afraid, and, Mr. Chovanec, you might be able to go
into this, or Mr. Karlan as well, are they so diffused at this
point that we need a refocus? Or is it fine with the various
issues that they are sort of dealing with?
So, Dr. Ravallion, I would like to hear from you first.
Mr. Ravallion. Thank you. Yes, a refocus is going to be
needed, but that is not the main problem. I think, as I said,
the challenge of getting out of poverty is very country-
specific, right? It is not a generalized thing. I can't give
you an answer. I just wrote a 700-page book, and it is coming
out in 2 months, which is essentially trying to address your
question. And I am not sure the 700 pages was enough.
[laughter]
And I don't have--this clock is ticking.
But I do want to emphasize very much that the specifics of
how you deal with poverty is figuring that out at the country
level. That is how we have done it in the past. That is how
China did it.
Chairman Huizenga. So, you might have been leading up to
this. You had an article in April 2015 where you wrote, ``A
veritable gauntlet of procurement rules, safeguards, and
approvals at the World Bank has sort of blocked a lot of
that.''
And I think there was a senior official at the World Bank,
David Dollar, who had said that an Indian official once told
him, ``Mr. Dollar, the combination of your bureaucracy and our
bureaucracy is deadly.''
So, how do we cut through that?
Mr. Ravallion. Well, let me assure you nothing compares to
Indian bureaucracy.
[laughter]
I work on India, and have done so for 30 years. In the
present situation, the reality is that bank staff are assessed
by the volume of their lending, dollars of money lent. And that
is just a poor indicator of impact on poverty. You have impact
on poverty sometimes when you don't lend at all.
You just argue it out in your policy dialogue at the
country level to get the kinds of reforms that are needed to
deal with the specific problems in that context. Or you use
money, you use lending bundled with knowledge and bundled with
good evaluation, feeding back into future lending.
And it is that bundling of lending and knowledge that you
can't just measure success by the dollar value of the lending.
As long as the incentives of staff and managers are tied to
that goal, you are not going to have the impact the bank could
have.
Chairman Huizenga. So is it fair to say that many assume
that MDBs are fighting poverty, and that is their focus, even
though nonconcessional lending to middle-income countries can
actually equal or exceed the loans to poor countries?
Mr. Ravallion. Yes, but the bulk of poverty is in those
middle-income countries.
Chairman Huizenga. You believe that is a proper--
Mr. Ravallion. That is not a huge problem. Also, those
categories, low income, middle income are very arbitrary--
Chairman Huizenga. Okay.
Mr. Ravallion. --and disappearing. But thankfully, the task
of realigning, as I keep emphasizing, realigning incentives
towards that goal, I think the recent reforms have been a step
in that direction. But it is not about the organogram. It is
not about the way you organize the bank. That is one aspect,
but it is a minor aspect. And, in fact, the old organogram
resolidified quite quickly. It is about those incentives at the
staff level. That is the culture that has to change.
Chairman Huizenga. In my remaining 35 seconds, Mr.
Chovanec, we talked a little about the AIIB, and Silk Road, and
a number of other initiatives. Is this a threat, is China's
involvement a threat? Or is it really just a modern reality of
global financing of what is going on, and there are just more
people who are out in that space?
Mr. Chovanec. It can be either. It is a reality. The fact
that China has accumulated so much capital that it wants to
deploy, the United States is not in the position of being able
to tell China what to do with its money. China can deploy that
capital with or without the assistance of other countries.
However, and the reason why I focused on the different
motivations that China has, is that some of those motivations
are things that we can live with. Some of those things are
things that we actually would like to encourage. And some of
them are actually problematic.
So, I think the response should be how do we shape the way
that China interacts with the world, not can we stop China from
providing capital.
Chairman Huizenga. My time has expired. And I will just
note that Professor Karlan, I would like to follow up with you
in writing, and talk a little bit about your research on the
effectiveness of microfinancing, and how much or how little
should that be regulated as we are moving forward.
So, thank you.
With that, I now turn to the ranking member for 5 minutes.
She wanted to know if I was going to gavel myself. Yes, I was--
I am trying to be that evenhanded. I was going to gavel myself.
So, with that, the ranking member is recognized.
Ms. Moore. This hearing certainly has met my expectations
in terms of just the collective knowledge that you all have.
And, it is--I would be really interested almost in a colloquy
between Mr. Karlan and Dr. Ravallion regarding the importance
of research in alleviating poverty.
It seems that Dr. Karlan, you gave some examples of stuff
that has really worked, like in Mexico, the Progresa
Opportunidades, where women win conditional support and, Dr.
Ravallion, you have said that we just haven't employed research
enough. So, I guess I am just sort of interested in what the
disconnect is? Or am I perceiving something that is not there?
Mr. Karlan. No, I would say there is--and I think,
actually, that part of what we were saying is that we agree
very much that there is tremendous value in the knowledge that
is generated out of those types of research examples.
My point was that there is just a--I gave a few examples of
which you named one, and I think we can do a lot more. And, in
that sense, what Professor Ravallion was talking about was the
same basic idea: how do we get that knowledge actually into the
hands of the policymakers.
Ms. Moore. Okay.
Mr. Karlan. And linking it more tightly with loans, for
instance, so that we very proactively think about our value
added in the MDBs is--I shouldn't say our, I mean, I am not
there. But is by not just making loans, but bringing knowledge
to the world.
Ms. Moore. And Dr. Ravallion?
Mr. Ravallion. Very quickly, I have a worry, a concern that
the volume of research is increasing, but I don't see it fully
deployed towards our key knowledge gaps. Think about it this
way: there are knowledge gaps coming out of the problems,
finding those binding constraints at country level, what--how
do we deal with them. There is a disconnect--the key disconnect
is between essentially policymakers and research.
Ms. Moore. Yes.
Mr. Ravallion. Right? They are asking questions, and we are
answering some of them, but not all of them. And to bring the
two together, in a more effective way, is the charge.
Ms. Moore. It--like, the United States, for example, just
hit--just mentioned some research that had been done on
poverty, that--where we haven't deployed that information
toward alleviating poverty here.
Mr. Ravallion. What is the question?
Ms. Moore. I'm sorry. As an example, is there some body of
research out there regarding poverty in the United States,
which we haven't deployed on a policy level?
Mr. Karlan. No, I think there isn't, actually. It goes a
little bit to what was referred to earlier, there is a lot of
work on the unbanked and the underbanked in America. And this
is actually a perfect--not to say that it is right--segue in
the sense that some of that research that actually should
influence U.S. policy was done by MDBs.
But that link wasn't made. I think there are people trying
to make it. I am trying. Others are trying. It is not to say
there is no effort, but that is exactly where the research--
Ms. Moore. I would love to follow up, and my time is
waning. Mr. Chovanec, you--I read, perused your testimony, and
then I heard you talk, and I was waiting to hear whether or not
the Renminbi part of the basket of currencies in the SCR. And
what impact would that have?
Mr. Chovanec. It is another question, but yes, I think the
economic and financial significance of the Renminbi part of
being--part of the SDR is insignificant. I don't think--
Ms. Moore. Is insignificant--
Mr. Chovanec. Insignificant. I don't think it has any
significant economic and financial impact. The thing that makes
a reserve currency a reserve currency is not some kind of
official imprimatur. It is the role that it plays in the global
economy, and it requires a currency to be both desirable and
accessible.
Desirability--on the one hand, a lot of people want to use
the Renminbi to buy things from China. But on the other hand,
it is not very easy to hold it. There are not that many places
where people can invest it.
The other aspect, though, which a lot of people ignore, is
accessibility. In order for China's currency to function as a
reserve currency, it has to move from being an importer of
foreign currency to being an exporter of foreign currency.
Ms. Moore. Thank you. And, Mr. Morris, I have to ask you a
question. You have been critical of the United States' foreign
aid budget. We should do more with multilateral. How would it
be better to provide it to multilaterals rather than bilateral
support? I ask for indulgence, Mr. Chairman.
Chairman Huizenga. Ms. Moore, I gave myself 30 seconds, so
keep going.
Mr. Morris. Thank you, no, just very briefly, and I did try
to outline why I think these institutions provide particular
value to the United States. I think it is important to
recognize how small of a share of the foreign assistance budget
they account for, and as I advocate for more of that share, I
am not talking about dramatic changes here. Really, very small
shifts in how much we rely on these institutions, which, in a
strictly financial sense, leverages our money tremendously. We
could get a lot out of that. And that is really what my point
is.
Ms. Moore. Thank you for your indulgence, Mr. Chairman.
Chairman Huizenga. The gentlelady's time has just expired.
With that, we recognize the vice chairman of the subcommittee,
Mr. Mulvaney of South Carolina.
Mr. Mulvaney. I thank you, Mr. Chairman, and Ranking Member
Moore, and I thank all of you gentlemen for being here. Dr.
Ravallion, I actually thank you most especially. Unbeknownst to
you, you are a part of an important friendly competition
between myself and the chairman.
You will notice that he has stepped out. As a person who
holds a degree in economics from your fine institution, I will
inform you that the competition now between witnesses from
Georgetown University versus witnesses from Texas A&M is
dramatically in the Hoyas favor. But the chairman left before I
had a chance to have some fun at his expense.
I want to try and draw some themes together. If I heard
this correctly--and that is what I enjoy about these hearings
is actually trying to find out information--Dr. Karlan, Dr.
Ravallion, and Mr. Morris, I think what I heard was that there
was a common theme. I heard Dr. Ravallion talk about public
common good. Dr. Karlan talked about microfinancing.
And if I looked for a theme between those two things, it
might be that those two things, in my mind, are things that the
private sector might not be doing. Certainly, they are not
doing it for the public goods. And they are doing it a little
bit, I think, in micro. And then I think about Mr. Morris'
arguments saying, well, we need to be doing more and more. But
then he uses a quote from 1981.
Dr. Ravallion, I think, mentioned that one of the biggest
changes in the last 30 years has been the globalization of the
economy, and the fact that a lot of what the World Bank,
especially, used to do is now done by the private sector.
So, I want to drill down for a few minutes on this concept
of filling in the gaps where the private sector does not
provide liquidity, credit.
Dr. Karlan, am I right on that? What is the private sector
doing with microcredit, and could the World Bank be doing more
in a more effective way?
Mr. Karlan. I think there are two basic thoughts here. One
is that there is--what I think to Professor Ravallion's points
that I completely agree with is that the knowledge, the private
sector is not going to provide the knowledge, and that
knowledge is a great public good that the MDBs can provide.
Mr. Mulvaney. And for the benefit of--
Mr. Karlan. And that is knowledge at micro as well as macro
kind of--
Mr. Mulvaney. And for the folks who might not be familiar
with the term ``public good,'' why won't the private sector do
it?
Mr. Karlan. The private sector is not going to do that
because it costs too much money relative to the profit that
they will make as an individual firm. The society as a whole
benefits, and so it is worth it for society to do it, but for
any one firm, the money is just not there. It is just not that
valuable for any one particular firm.
On the micro side, the second thought is that one of the
striking things with the microcredit industry is it started off
as a subsidized program around the world. And, basically,
people learned that actually this can be done in a profitable
way, and make people's lives better off. It just isn't solving
some of the issues that it set out to solve initially.
So, I think one of the things we can do here is let markets
work with--regarding microcredit. Do some things, there are
some regulations that are needed to help make it work well. But
let the markets work for that.
But meanwhile, let's not forget the original goal that we
set out with, which was alleviating poverty and increasing
income for the world's poorest, and for that microcredit is not
doing that, and we need to address some other--look for other
paths to do that. And that--some of those things do actually
require a subsidy. There is not a market solution for some
issues.
Mr. Mulvaney. Thank you, Dr. Karlan. Dr. Ravallion, I want
to come back to something you said, because you talked about
knowledge, which I understood, and I understood perhaps the
connection between a development bank, like the World Bank,
getting involved in that. But then you went someplace I want to
press you on a little bit; you talked about health. You talked
about the Ebola crisis.
And, just without knowing the answer to the question, is
the bank really the best vehicle for doing that? Wouldn't a
health organization be best suited to do that, instead of a
development bank?
I get it on knowledge. You sort of lost me at health, and I
am just asking you to fill in the blanks.
Mr. Ravallion. It is sad--somewhat sadly the case that
there is really nobody doing it. That is the problem. Now, if
we could get the WHO to reform, we could get the--it to be
properly funded, maybe. But it needs a global institution. I
think the funding role, and the convening role of the bank
would remain even if we got the WHO working better.
Mr. Mulvaney. Give me an example of how the bank--what the
bank could do to help build this public body of knowledge
regarding health?
Mr. Ravallion. Yes, it has a lot to do with building health
systems in poor countries, right? And that is also about
information. Dealing with a pandemic is about information; it
is amazingly important to know what is happening locally, what
is happening in the next country, and getting that information
really quickly, and being very responsive. The fundamental
infrastructure on health systems, and the information just
flows have to be much more effective.
Mr. Mulvaney. Super. Gentlemen, thank you very much. I
appreciate the input and I thank the chairman for the time.
Chairman Huizenga. The gentleman yields back. With that, we
will recognize Mr. Carney for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman. This is a very
interesting conversation. I must admit ignorance on what these
development banks do, and trying to figure out what our role is
as Members of Congress, and members of this committee.
So, maybe we should start at a basic level. Where do each
of you feel that the banks are not serving American interests
as well as they could? Why don't we just go right across,
starting with Dr. Karlan.
Mr. Karlan. So, first of all, I do think they are serving
U.S. interests well. They can just do better. And I think--
Mr. Carney. And how could we do better?
Mr. Karlan. Basically, by drawing tighter links between
knowledge and policy. By making it so that others can use that
knowledge that they are creating more, and that, internally, to
the multilateral development banks. That it is kind of like the
way Professor Ravallion described: it is not just--the banks
are not just going out and making a loan to another country.
But bring with that loan knowledge about how to set policy, and
help that country learn themselves in their context what is
working best.
Mr. Carney. So, Dr. Ravallion, and I am going to come back
to ask the question, what countries are more successful than
others that are not so successful. Dr. Ravallion?
Mr. Ravallion. Which countries are more successful? And
which are--
Mr. Carney. No, I am going to come back to that question.
You are the one who said these--
Mr. Ravallion. Yes, okay, on your first question, I love
the way that the senior member put it, that poverty is a global
problem. It is a--poverty in Africa, Sub-Saharan Africa is a
problem for America. We are global citizens.
But it is not just our citizenship, it is not just the
moral and ethical argument. It is the spillover effects. The
way poverty costs people globally, we see that in things like
the Ebola crisis and the risks that has to this country. The
world as a whole is better off.
So, all of the issues we have addressed, about how the
banks, banks plural, could be more effective in supporting
knowledge based financial intervention to assure poverty
reduction in those countries is in America's interest.
Mr. Carney. So, maybe you can answer the second question
now. Where in Africa is it more successful than others? Or
where has it been successful, and countries where it has not
been so successful?
Mr. Ravallion. Actually, Sub-Saharan Africa as a whole has
been on a new trajectory since the turn of the millennium that
is really impressive. People don't realize the success story.
We used to say it was mostly the work of China and India in
reducing global poverty. That is no longer true.
The trend rate of poverty reduction in Sub-Saharan Africa
went up from a trend of just a miserable 0.4 percent per year
in reducing the poverty rate by $1.25 a day, to a very
respectable 1 percent trend rate of reduction since 2000. So
the region as a whole--now, obviously, there are exceptions.
Zimbabwe is doing very badly, and we know why. But we are
seeing it, it is not just a few little--
Mr. Carney. One country that stands out?
Mr. Ravallion. I am talking in over 48 countries, so you
just go through the board. You are seeing progress on some or
all dimensions of poverty across Sub-Saharan Africa, with a few
exceptions. So, in other words, I would answer your question by
pointing out the cases where it is not happening.
Mr. Carney. Okay. Mr. Chovanec?
Mr. Chovanec. I don't want to claim to be in a position of
critiquing the existing development banks. What I would say is
that with the new Chinese development banks, the concern is
that they may not bring the same level of governance to the
table that the existing banks did. And that concern is based
upon the lending practices already of China Development Bank,
China Export-Import Bank, and some of the kind of mixed
motivations that they have brought to the table.
Maybe other countries flocking to join these banks will
actually be a blessing in disguise in the sense that it gives a
higher level of transparency and a higher level of attention to
governance. But--and that is one of the reasons why perhaps we
should--we, the United States should consider taking an
observer role, even if we don't participate, taking an observer
role with some of these new institutions.
Mr. Carney. Mr. Morris?
Mr. Morris. I guess the one area I would point to where the
MDBs have struggled, and have not shown as much success as we
would like, is the relatively small set of countries that we
consider fragile and conflict-affected. And here, I think it is
not the MDBs alone. I think the international community
struggles with these situations, but it is of great importance
for the United States. And I think for the MDBs they have to
find a way going forward to be more effective in these
environments, and particularly to be more agile.
I think, if you look at a case like Cote d'Ivoire a few
years ago, where after a great deal of instability you finally
have a democratically elected government coming in, the MDBs
struggled greatly to respond quickly to that situation, and
show support. Once they did, it is a good news story. I think
there is tremendous success happening now in that country, and
the MDBs are actually playing a good role, but it took them a
while to get there.
Mr. Carney. I see my time has expired. Thank you, Mr.
Chairman.
Chairman Huizenga. Thank you for your honesty. I was just
trying to give a light gavel. So, with that, I would like to
recognize Mr. Pittenger, the gentleman from North Carolina, for
5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman. I thank each of you
for being here. I would like to follow up on Mr. Mulvaney's
questioning, and get some clarity on the role of the MDBs as it
relates to the reduction of poverty. Were they the primary
factor? Were there other factors involved? Did the private
sector play any role? Give me some additional information, Dr.
Karlan and Dr. Ravillion.
Mr. Ravallion. It certainly wasn't just the banks. The
biggest single thing I would point to is the change in the
policy environment. The more market-friendly policies--I am not
a pro-markets guy all the time, and I am all the time talking
about problems like market failures and addressing those, but
there were some major reforms starting from the mid-1990s that
put a lot of the developing world on a new trajectory. And we
have to realize that.
Macro stability was key. This is something that the banks
and they fund, encourage in dialogue, but the attribution
problems are huge in terms of saying, well, how much was
there--the external players versus the internal domestic
players.
We are in a kind of dialogue all the time about better
policies, ranging from macro stabilization, macro instability
is one of the worst things for poor people. People don't
realize just how bad that is often.
All the way through to the micro policies that Professor
Karlan talked about on microcredit, for example. All the way
through, it is really--the best way to think about is the
institutions--the international institutions are in a dialogue
with policymakers in countries, trying to encourage, and learn,
too. We are learning from one country to help another. Learning
and encouraging a better policy--evidenced based policy
environment.
Mr. Pittenger. As you look toward, I think you said 2030
and the elimination of poverty for 1 billion people, what role
do the MDBs play? And what other factors are involved there?
Mr. Ravallion. A big factor is going to be in the global
finance going to developing countries, and maintaining that is
going to be key. Now, that is hardly about the direct financing
of the banks, but also about their facilitating role, and their
leadership role. You have to realize there are many countries
where there is risks, for example. The private sector, one of
the problems in private sector lending is getting to risky
places. The World Bank has persistently identified places being
the first in lead the private sector into that country.
Mr. Pittenger. When you look at risky places are you
referring to countries that have an intense amount of
corruption? What role does corruption play in terms of how
assistance is given out?
Mr. Ravallion. Part of what we do, what we--not we, I am no
longer part of what the World Bank does--is very much building
the institutions that will be more robust to the existence of
potential corruption. It is not like you get rid of corruption
and suddenly everybody is going to behave differently. You just
have to make the institutions, and the capacity of the state
itself is key to that.
One of the mistakes that we make is we think that--we
abandon the states because we see corruption. You have to make
those states stronger. You have to increase capabilities for
monitoring. You are strengthening legal systems and property
rights is part of the process of better development policy,
facilitated in part through lending. Lending is also--the bank
does, is also part of the process of ensuring those things
don't happen as much. It will never go away, though.
Mr. Pittenger. Sure. Dr. Karlan, your research is it--
regarding the poor, what have you learned or discovered about
institutions like MDBs that has altered your thinking, and
upended maybe some of the essential understandings that we have
had about MDBs?
Mr. Karlan. Well, there we go. Not sure, you know--
Mr. Pittenger. Are there blind spots that you discovered
about MDBs that we didn't have before?
Mr. Karlan. Any what spots?
Mr. Pittenger. Blind spots.
Mr. Karlan. Blind spots. So I think what we have seen is a
dramatic increase in the past 10 years, 10, 15 years, in doing
careful randomized trials of micro level policies. So, not the
kind of macro structural types of issues, and there are a lot
of other issues out there that the World Bank has also been
working on. But we have seen a huge increase in micro level
studies that help understand did this particular policy
actually change outcomes for a set of people.
It kind of goes to the question you asked, how do we
attribute the global changes in poverty and it is saying, no,
no, that is--for exactly the reason Dr. Ravallion said, it is
very difficult to actually establish attribution, or what
caused poverty to drop in Ghana.
But what is possible to do is say this particular policy
over here, what effect did it have in this context? And, so,
this is one of the areas that the MDBs have made massive
inroads in, in the past 15 years, doing that kind of research.
And it--you would basically think about it as kind of a three
prong attack.
It is, first, establish causality, establish that in this
context this micro policy had this impact. Second, is have some
understanding as to why it worked. And, third, is to then
replicate and test this elsewhere, and see how do you take this
lesson from that context and bring it somewhere else, bring it
to another country, et cetera. And that is the knowledge
spillover that we keep talking about that is essential, is to
make sure that you have kind of thought through those things.
But this is about micro level policy, and I just want to be
clear what I am talking about. That is not going to be--you
don't use that tool to answer the question why has poverty
dropped around the world.
Mr. Pittenger. Thank you. My time has expired.
Chairman Huizenga. The gentleman's time has expired. With
that, the gentleman from Michigan, Mr. Kildee, is recognized
for 5 minutes.
Mr. Kildee. Thank you, Mr. Chairman. I want to thank my
friend from Michigan for holding this hearing. It is an
important discussion. I want to start off with Mr. Morris, and
ask you to make some observations on the global need for water
infrastructure.
And I just want to point out a bit of an irony. I come from
Flint, Michigan, which is currently going through its own
emergency related to available drinking water. It has been
revealed that the water source that the City has been using is
highly corrosive, and has led to lead levels in the water that
have made it very dangerous, undrinkable, and has forced
unanticipated expenditures in the tens of millions of dollars
for a City that has an annual budget of $50 million.
I point this out because this is a situation, a condition
occurring in my district, in the State of Michigan, in the
richest country in the world, at the richest time in its
history, and we have a hard time finding ways to sustain water
infrastructure.
I wondered if you could discuss, and I would ask maybe each
of you to offer any observations on the difficulties in
developing water infrastructure in economies that are far less
robust than the one that I represent. And what the hurdles look
like, and, I guess, maybe even further, how water
infrastructure fares in terms of project selection as a
priority for MDBs.
Mr. Morris. Thank you, Congressman. This is a very
important point, and there was this earlier discussion about,
well, let's look globally at all the money that is flowing
today, and capital flows, and of course the MDBs are a
shrinking--ever shrinking share of global capital flows.
But it is important to focus on where they actually lend,
and what situations, and what we would call market failures.
And water infrastructure, and infrastructure more broadly, is a
very relevant example of, among all those capital flows that
are flowing from private sources, they aren't reaching what are
often pressing needs, water is one area. And, yes, there are
some models that bring in private investment to develop water
infrastructure. But they aren't meeting the needs that we face
globally on this.
I did want to make another point, because you raised the
situation in Flint. I think it is important, from a U.S.
perspective, to recognize--we think of these multilateral
development banks, and development banks, as something that we
give money to so that stuff can get done elsewhere. And then
you rightly observed, in fact, we have the kinds of needs that,
water infrastructure needs in the developing world, we have
them here, too.
One thing to recognize, and this, frankly, is within your
jurisdiction is the United States has, in fact, saw fit in the
past to create this kind of model for itself. We have something
called the North American Development Bank, which does
infrastructure projects along the southern border, on both the
U.S. side, and the Mexico side.
And it is well worth looking at that model as something,
and more generally, realizing that it is not so much the MDBs
operating in a very small group of countries we consider poor.
They actually are operating in a diverse group of countries,
some of which look, in many ways, a lot like us.
Mr. Kildee. Would any other panel members like to comment
on water infrastructure? Or the particular challenges? I guess,
the question I have really has to do with developing these
sorts of infrastructure which traditionally we think of as
being sort of rate-based, or supported on a market basis. And
communities, even challenged communities in this wealthy
country, see that as a difficult prospect. What about in
nations that have far less robust economies?
Mr. Ravallion. Very quickly on that, a couple of points,
most developing countries today are a long, long way from a
point where you could consider the water drinkable. A key
behavioral thing is then how you deal with that. You boil the
water, which means that the problems of water and ill health,
particularly in kids, diarrhea, diarrheal diseases is a huge
problem.
How you deal with that is about other aspects of what we do
in development, and particularly in maternal education. A huge
factor in the interaction effect between bad water and child
ill health is maternal education.
But this is a long, slow road for building that basic
infrastructure in water and sanitation, and that is something
the development banks do a lot of. But we have to be realistic
here. It is going to be a long time before that happens.
Mr. Kildee. Thank you. My time has nearly expired. I just
want to say thanks to the chairman for holding this important
hearing.
Thank you.
Chairman Huizenga. Thank you. The gentleman yields back.
With that, Mrs. Love, from Utah, is recognized for 5 minutes.
Mrs. Love. Thank you. Thank you, Mr. Chairman. First of
all, I understand that the MDBs may be feeling some competition
from the Chinese development banks, and the BRIC bank--the
BRIC's banks. And that perhaps they may be lowering their
standards in order to meet the competition.
What do you think we need to do in terms of the standards
and the safeguards in this new landscape? And I ask each one of
you, do you think that we need to adjust traditional methods?
Do you think that we need to adjust a little bit to accommodate
for what is happening in this type of landscape?
Mr. Karlan. So, I have a thought from afar.
Mrs. Love. Okay.
Mr. Karlan. It is not like I have dealt with that directly,
but the thought would be if the loans that are being offered by
the MDBs are actually attached to better information about how
to implement better policy, that would be a good way of
winning. And if there was some sort of competition between
development banks.
But realistically, I don't see that kind of directly hands-
on. So, it is not like I have been at the table, where I have
experienced this kind of competition to be able to speak--
Mrs. Love. Okay.
Mr. Karlan. --too well.
Mrs. Love. Okay. Thank you.
Mr. Ravallion. Very quickly, the World Bank will not be, I
am very sure, lowering its standards as part of competition
with the China banks. The China banks will be raising their
standards, and we are seeing that already. I was also, for many
years, one of the few, I think the only, international advisor
to Chinese government on aid policy. And I saw this in that
experience.
I saw the change. I saw from a great naivete about things
like evaluation, assuring that the processes work on the
ground, to a great sophistication. So, China is capable of
raising its standards in all of this to a global, international
level. And I think we will see that. It might be--
Mrs. Love. So you think you will see them raising them
their standards?
Mr. Ravallion. Exactly.
Mrs. Love. Okay. I will just move on. Professor Karlan, in
reading your testimony, you highlight the value of translating
knowledge and you have mentioned that several times today, into
policy and practice. In other words that the MDBs can provide
great value through the research they conduct, and determine
which programs have the great--have the greatest positive
effect on development, and therefore give us the best return on
investment.
So, the MDBs collectively have many decades of experience,
and you give some examples of specific programs, such as Kenya,
and the public transportation there. In my view, they are very
micro level programs, so my question is: what are the broader
conclusions, do you think we can draw about the types of
reforms that would be most effective in spurring development?
For example, the policies that encourage the private sector to
grow as a key to sustainable growth.
Mr. Karlan. So, I think--that I go back to kind of Dr.
Ravallion's answer, which is that would require longer than a
700-page book, to really get at very, very specific things. And
the reality is that there is no generalized answer to that
question.
There are guiding principles that we have seen consistently
happen over and over again. But I think the most important
thing is to put in place a process of learning, so that in a
particular context you can use information from elsewhere, but
if you have a process of learning in that context what then
works, you can then learn better how to implement policy.
So, there are some general guiding principles we have seen,
take--the example of the study that I referred to that worked
with the ultra-poor. A guiding principle there was very simple,
which is it wasn't any one thing that was a problem.
And so policies which just go and try to tackle one thing
at a time, we are having issues. And they weren't achieving
their goals. But an integrated package was. And this does speak
to an important theoretical idea that there is interlinking--
Mrs. Love. I have one more question I need to get in,
because this is an important question for me. How do you think
the MDBs can better support entrepreneurship in business-led
growth, as a foundation for stronger economic growth and higher
living standards? I can ask you, Mr. Morris, do you think that
we can?
Mr. Morris. Sure, no--and I agree it is an important
question. And it is a dilemma for the banks, frankly, because I
think there is broad recognition over many years that private
sector development is central to development--
Mrs. Love. Yes.
Mr. Morris. --and job creation. The model the MDBs have
tends to be dominated, and it is some of the concerns that Dr.
Ravallion raised, they are essentially lenders to private
firms, and sometimes private equity funds effectively. And it
has tended to crowd out probably more focused efforts, whether
its micro, SME, their dominant approach is to go after,
frankly, what in too many cases what is safer investments, and
raising questions about how much value they are bringing to the
transaction that wouldn't happen anyway from other sources of
investment.
I think they really have a lot of work to do to figure out
how to be more innovative in this area.
Mrs. Love. Yes. Thank you.
Chairman Huizenga. The gentlelady's time has expired. With
that, the Chair recognizes Mr. Schweikert, from Arizona, for 5
minutes.
Mr. Schweikert. Thank you, Mr. Chairman. I am actually
elated that we are having this hearing, and by looking around
you can see how many of us truly are geeky enough to love this.
I want to do two things. I was actually, and I am hoping I
am not too much of an outlier here, I was not enraged but I was
close. I thought it was inappropriate, I thought the United
States should have participated in the chartering of the
Chinese-sponsored Asian Development Bank for the governances. A
quick question, and then I want to get into something I have a
great interest in. The four of you obviously know this area
well, am I right or wrong in that position?
Mr. Chovanec. I would say that you are not wrong. I don't
think is a right or wrong position on whether the United States
wants to join the AIIB. I don't think--I think what the United
States did, though, was fall into the trap of simply thinking
that it could oppose it without offering--
Mr. Schweikert. As you see--
Mr. Chovanec. --any kind of--if it had issues, it needs to
offer a compelling, competing vision.
Mr. Schweikert. Look, it is a little duplicitous to say, we
don't want to play because we are worried about governance
issues, but if we don't show up, we can't have influence on
governance issues. Meaning you can't have both. So, and you see
the number of our allies, who we care about that we tried to
influence not to participate and they did.
Mr. Chovanec. Right. I think to be fair, though, some of
them of them were also motivated by less high-minded--
Mr. Schweikert. Oh, of course.
Mr. Chovanec. --ideas.
Mr. Schweikert. There is money involved.
Mr. Chovanec. The U.K.--there is this idea that China is
sort of doling out money and you want to be there when it
happens. And the U.K. in particular, which was the first one to
break, was driven very much by this desire to be the center of
Renminbi trading. So, I think everybody kind of brings some
mixed motives to the table.
Mr. Morris. If I could--
Mr. Schweikert. Mr. Morris.
Mr. Morris. --to the degree we pose this question today,
look, I don't think when it comes to being country number 58 in
the new institution I don't think there is tremendous value. We
can go back and look at the earlier question.
Going forward, to me the obvious area of emphasis for the
United States from a perspective of leadership is how are we
leading in the institutions where we are already the number one
shareholder.
Mr. Schweikert. And that is fair, but look, we know we have
some bureaucratic problems. We had some allocation problems. We
also have some decision-making design problems. And I am hoping
over this next few months, we can actually sort of dig down in
that.
A one off, but I think it is actually not focused on
enough. Doctor, you eloquently spoke about the microfinancing,
the layering within there. Something I don't--and I would love
to find someone who has a publication where I can delve into
this, someone has researched it, is micro trade. Before I got
this job, I was blessed to do lots and lots of traveling to a
lot of unusual places in the world.
And had to--a 30 second example. A family I met about 70
kilometers north of Bagan in Myanmar, carved tables. A couple
of months ago, I was playing on the computer, and I found out
they have this little tiny website selling their carvings, and
their version, I guess, of PayPal.
I just bought a table from them, from someone who is in a
rural area in Burma. If you care about micro financing, if you
care about economic growth, if you care about the empowerment
of the poor, isn't my ability using the new platforms, we are
all walking around with these supercomputers, to engage in that
type of trade. How do we promote that?
Mr. Karlan. Great question, and I can send you some papers.
There has been work on it. It is much newer, I would say, but
it is one of the--and I am not--I can't, like, in this time, go
into all the details, but there are a lot of market failures
that do exist there, and just as you said, there are gadgets
out there that are reducing the transaction costs, making
transactions and trade that was not previously possible,
possible. But there is a lot of work to figure out how to make
those markets work exactly right. And there is recent research
that I can forward.
Mr. Schweikert. And generally, because so many of us have
focused on the capital facilities, infrastructure facilities
down to the micro financing, how about also now on the sort of
micro production side? The ability to produce and sell your
products. The ability to communicate you have the availability
of those products to a world market. I have always thought that
was the portion that was missing in this discussion for
alleviating poverty around the world.
Mr. Ravallion. That is interesting, actually, because I
never thought it was missing. In some sense I always thought
that trade, micro trade, all kinds of trade between people, is
one of the things that gets sorted out, that just starts to
happen once you deal with the fundamentals: access to credit,
access to information, access to infrastructure. And that
development was about working on those things.
Now trade between people is one of the things that happens
when you get the fundamentals in place. No, I am not trying to
avoid the question--
Mr. Schweikert. I would love to give this a little
intellectual thought, and I am way over time, but this is
something I--
Chairman Huizenga. The Chair is prepared to move forward,
though, with a second round of questioning, and seeing no
objection, we have gotten an okay. If the gentleman will yield
back.
Mr. Schweikert. I yield back.
Chairman Huizenga. What I would like to do is recognize
myself for a brief question, and then we can go to you for a
second round, if that is okay with our witnesses? I want to
make sure everybody is able to make their trains and planes
after we have delayed you somewhat today already.
So, I guess, Dr. Karlan, I would like to revisit you,
instead of writing to you. I would really like to know a little
bit more about your research on the effectiveness of
microfinancing, and really how much or how little should
microfinancing be regulated, as we are in a very--in an
increasingly regulatory mind bent by government.
Mr. Karlan. Sure. There is a lot that can be done to
facilitate markets, but yes, there are some regulations that I
do think need to be put in place. So, I will give you an
example of one study that actually has implications for here in
the United States. It is a study we did in Turkey.
Whether people are aware of the price they are paying, and
any sort of hidden fees in terms and conditions is obviously an
important issue for regulatory purposes. How to make it so that
people are aware of the prices, and how to actually write those
disclosure policies is not so easy and obvious.
Chairman Huizenga. Who is the appropriate governing body to
be doing that? Should it be the MDBs that are then giving some
of these grants?
Mr. Karlan. In this context, no. It is not the MDBs, but it
is research MDBs can do to figure out how to do this, and that
they then work with the regulatory bodies, for instance. So,
there is one instance in Malawi, where a World Bank researcher
did work to help understand how to get better biometric data
into the use by the banks, so that when you take out a loan you
know, kind of, who you are borrowing from. And then that
information now is in the hands of the banking system, and the
central banks to try work with other banks, such as when you
try to encourage that type of exchange. So, it is not coming
through the loans. That is coming directly from the research
group.
Chairman Huizenga. Okay.
Mr. Karlan. To the--
Chairman Huizenga. But the MDBs do have some involvement
with these microfinancing organizations, correct?
Mr. Karlan. Yes, but it is actually a little bit more
removed. So, there is this--there is CGAP, which is a unit that
is housed at the World Bank, which does a tremendous amount of
work to try to influence policy, and establish regulations that
are appropriate for the markets, to let markets work, but not
hinder them. But it is not that CGAP is making direct loans.
That is just--it isn't--
Chairman Huizenga. No, I understand it may not be direct
loans but their involvement in there, could they not be helping
to then set the parameters of disclosure or any other?
Mr. Karlan. Exactly.
Chairman Huizenga. Okay. Would anybody else care to comment
on that? All right. With that, I yield back my time and
recognize the gentleman from Arizona for his additional
question.
Mr. Schweikert. Thank you, Mr. Chairman. Gentlemen, first
off, if my sort of outlier question or dialogue we are having
in regards to that ability to sort of engage, and I use the
term micro trade because I haven't come up with a better one,
and I am actually not familiar with what is actually in the
literature, but if you look at the technology platforms in
Africa, you know, where this is also your bank, that should
empower the ability to engage in other levels of trade.
Can you share with me your experiences of what you are
seeing out there in this happening? Because, it may be a little
more chaotic, it may be outside a more structured, but you
could also get some pretty good data on its philosophy. What do
you see happening? And that is an open question, because I have
no idea who should respond to it.
Mr. Karlan. I can give you an example of some research
which shows that, and it is not going to get at velocity in
terms of international trade, but trade just more commerce and
trade improving outcomes. So, and this goes to, I think
understanding what the market failure is, at the first place,
that was preventing trade from happening. It is kind of like
what Dr. Ravallion was saying, was it a credit market failure?
Was it information failure?
So, this is a perfect example of cell phones actually
changing something. There are two different examples I can give
you. One is from fishermen in India. So, when cell phones first
got built, and towers got put up in--for the fishermen in
India, in--beforehand they would have to just dock, and take
the price whatever it is.
A lot of fish were literally thrown away because they would
dock, and there were no more buyers that was it, they couldn't
go back to sea and go to another dock. When cell phones came
out, they were--in that basically, it is just improving
information from markets.
Mr. Schweikert. The price efficiency.
Mr. Karlan. Price efficiency, yes, and all of a sudden what
happened was the fishermen could send a text, find out the
price at the different docks, and go to the right place. All of
a sudden, you saw smooth prices across the villages on the
shore, and much less waste. More trade was taking place. More
efficiency. And that was a direct byproduct of understanding.
In this case, they didn't set up cell phones to solve this
problem, but it was the case that they reduced transaction
costs and made that happen.
In Kenya, a much shorter example, but mobile money, the
ability to send money cheaply from one place to another, is
reducing a transaction cost, making transactions that were not
otherwise possible, possible. And that has increased people's
ability to share risk, so that when something bad happens to
them, others are able to help them.
Mr. Schweikert. But in these examples, if we start to think
about, if our passion is dealing with global poverty, and a
path out of it, I am concerned or hopeful that the new
information age, the fact that I often have very poor citizens
around the world who are still holding some type of smart
phone. And the information, the ability to move money now on
those platforms, but also the ability to offer services or an
indigenous product, or an enhanced--a value added product.
How do I see the layering of, okay, yes, we have the huge
development banks over here, they are going to build a bridge
and a dam, but I have this other world that has also focused at
the poverty level of providing at the community, at the
individual, at the village level.
And how do we, as Members of Congress, also make sure that
we understand it, and are actually promoting those things that
help the poorest around the world?
Mr. Ravallion. Okay, I think what you have to realize these
days is a place like the World Bank is not just doing big
infrastructure, big dams and so on. In fact, it is not doing
much of that. In fact, dams are pretty much out of the picture
these days. Rather, it is trying to--a lot of it is community-
based work, which is exactly what you are talking about, in
countries, which isn't necessarily the kind of World Bank
lending to a village.
It can be the World Bank setting up a social fund to which
villagers apply, or individuals apply. It is creating a kind of
infrastructure at another level, which tries to facilitate
those things. And the community-based aspect, based on
individuals own initiation is key.
Mr. Schweikert. Now, years ago, just as in that same line,
rural India and the participation of an NGO that I believe had
some resources, they actually weren't giving money to the
village, they weren't giving money. What they were doing is
they were subsidizing the transportation of the product to go
from here to here, so it was economical.
So, I accept it is complicated. There are lots of layers.
But do understand there are a number of us who are just really
interested in how commerce, the ability to work and trade, is a
key solution to dealing with world poverty.
And, with that, I yield back, Mr. Chairman.
Chairman Huizenga. The gentleman yields back. I want to
again thank the witnesses for their flexibility today, as we
had a few things coming up. And I really appreciate that.
The Chair notes 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 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And again, I would like to thank each one of you for
joining us today. I think this was very enlightening. It is
very helpful, as we are looking at examining the various roles
that we play around the world. And with that, the hearing is
adjourned.
[Whereupon, at 11:58 a.m., the hearing was adjourned.]
A P P E N D I X
October 9, 2015
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