FROM THE OFFICE OF PUBLIC AFFAIRS

Chairman Gallegly, Ranking Member Ackerman, and other Members of the Committee, I appreciate the opportunity to meet with you today to discuss the important role that the World Bank and the Inter-American Development Bank (IDB) play in promoting economic growth and poverty reduction in Latin America and the Caribbean. While most Latin American countries rely far more heavily on private financing and the multilateral institutions now provide only a small fraction of total resources flows, these institutions are central to the region's efforts to address its economic and development challenges. They promote growth, stability, open markets, and democratic institutions while advancing fundamental U.S. values throughout the region. At the same time, U.S. support for the World Bank and IDB operations in Latin America entails only modest budgetary costs.

Unprecedented globalization, supported by advances in technology and communications, has opened new opportunities for the world economy. Major political and economic changes are accelerating in many areas of the world. This is an era of great challenges. In our integrating world, the United States has a growing stake in the economic and political stability and success of other countries -we are now more likely to benefit from their success, and more likely to be damaged by their failures. And as you well know, Latin America is particularly important in this regard to the United States given our strong cultural, economic, and strategic interests in the region. For example, Latin America accounts for twenty percent of both U.S. exports and U.S. foreign direct investment.

The World Bank and the IDB are among the most effective and cost-efficient means we have to help the countries of Latin America and the Caribbean address their long-term economic and development challenges. Ultimately, it is a country's own commitment to sound policies that is the most critical factor in its ability to improve the economic welfare of its people. But when such a commitment is genuine and policies are sound, the World Bank and the IDB -- as well as USAID and other bilateral donors -- can provide valuable supporting roles in promoting sustainable economic growth, open markets, poverty reduction, environmental protection, and good governance.

I would like to discuss two broad areas today: (1) the current economic and social situation in Latin America, including the key development challenges the region faces, and, (2) the roles played by the World Bank and the IDB, as well as our development agenda for increasing the effectiveness of these institutions.

Latin America and the Caribbean have made important strides in implementing sound macro-economic policies, adopting more outward-oriented and private sector friendly environments, and improving public sector management. Despite individual country setbacks, there has also been major movement in the direction of democratic and more accountable government.

The region recorded real annual growth of 3.6 percent (1.1 percent per capita) over the 1991-98 period. This represented a significant improvement over the 2.6 percent annual increase (0.4 percent per capita) recorded over the previous 15 years. As a result of the adverse impact of the Asian crisis on the global economic environment through falling export prices and volumes, and reduced capital flows to developing countries, growth in Latin America slowed to 2.1 percent in 1998 and was virtually flat in 1999. Growth has subsequently rebounded to a projected rate of roughly 4 percent this year.

Although the pace of growth over the last decade is less than one-half of that recorded in Asia, it is still an important step in the right direction and was achieved against a background of financial crises, natural disasters, and fluctuations in commodity prices.

Latin America's economic growth has also translated into important social progress, e.g.,

• infant mortality rate has dropped from 61 per 1,000 live births in 1980 to 31 in 1998.
• Life expectancy at birth has increased from 65 years in 1980 to 70 years in 1998.
• Primary school enrollment has increased from 86 (male) and 85 (female) percent in 1980 to 95 (male) and 93 (female) percent in 1997. Latin Americans over 25 in the 1960s had only 3.2 years of education. This average reached 5 years in the 1990s.
• The percent of the population with access to sanitation (sewerage) has increased from 46 percent in 1982 to 68 percent in 1995.

At the same time, much remains to be done. Economic and social progress has been uneven both within and among countries, and Latin America's record in translating economic growth into poverty reduction has been very disappointing, e.g.,

• Latin American countries have the greatest income disparities of any region. The poorest 20 percent of the population receive less than 5 percent of total income while the richest 20 percent receive 53 percent.
• more than 15 percent of the population are living on less than $1 per day; more than 36 percent are living on less than $2 per day. (Brazil accounts for almost 40 percent of the population below $2 per day.) Unlike the East Asia and Pacific region where the incidence of poverty has been declining, these figures for Latin America remained roughly constant, with perhaps only a very slight decline, over the 1990s. The region is clearly not on track to meet the International Development Goal of reducing the incidence of income poverty by half by 2015.

While sound macro-economic policies are essential for the economic growth that is the most important determinant of countries' ability to raise incomes and reduce poverty and inequality, this must be accompanied by the right social sector policies to effectively achieve poverty reduction. Efforts to promote economic growth, poverty reduction, and economic inclusion should be mutually reinforcing. This is one of Latin America's most crucial development challenges as we enter the new millennium.

In addressing this challenge, we know some things about what contributes to equitable growth. For example, there is now a broad consensus on the need to focus more explicitly on attacking poverty, by concentrating resources and attention more effectively on the interventions that most affect poverty. Thus while it is crucial for the countries of the region to maintain sound economic management, they also need to prioritize investments in human development, particularly the provision of stronger and more efficient basic education and health services, and rural development, that expand opportunities for the poor.

Because Latin America's per capita income is relatively high compared to that of other developing regions, only a small portion of World Bank and IDB assistance is provided on concessional terms and this assistance is restricted to the region's poorest countries, currently Bolivia, Guyana, Haiti, Honduras and Nicaragua. During the last five years, total concessional lending by the World Bank's International Development Association (IDA) and the IDB's Fund for Special Operations averaged about $875 million annually ($365 million IDA + $510 million FSO). Bolivia and Honduras were the largest two recipients of both IDA and FSO resources, together accounting for just over one-half of the total.

The level of "hard loan" (based on the institutions' cost of borrowing) World Bank (IBRD) and IDB lending to Latin America varies annually. The long-term pre-financial crisis trend shows lending to the region relatively steady in the IDB (roughly $5.5 to $6.0 billion annually) and actually declining in the IBRD (averaging about $4.5 billion). In rough terms, the combined level of new hard loan lending commitments from the World Bank and IDB is normally around $10 billion annually.

• New IBRD commitments to Latin America declined from an annual average of $5.5 billion in FY 1992-93 to an annual average of $4.2 billion in FY 1996-97. During the recent financial crisis, lending reached $5.7 billion in FY 1998 and $7.2 billion in FY 1999. It is expected to drop sharply this year.
• New commitments of IDB ordinary capital lending exceeded $5 billion for the first time in 1992. Lending averaged $6.4 billion in 1995-96; falling to $5.7 billion in 1997. Lending reached $9.3 billion in 1998 and $9.1 billion in 1999 due largely to a substantial increase in assistance to help cushion the financial and development impact of the crisis on Argentina and Brazil and other economies in the region. Lending has now returned to more normal levels with lending for 2000 currently projected at about $6 billion.

In terms of net transfers, it is not unusual in the Latin American region as a whole for the aggregate repayments on hard loans plus interest and charges to exceed the level of new disbursements to hard loan borrowers. In the IBRD, the negative net transfer in FY 1997 and FY 1998 averaged $1.3 billion, although there was a positive transfer of $640 million in FY 1999 reflecting increased disbursements from crisis lending. In the IDB, the net transfer to Latin America was negative from 1990 to 1996, but has been positive since 1997 by an average of $2.1 billion annually as a result of increased disbursements from crisis lending.

Because of Latin America's increased ability to access private market financing, World Bank and IDB financing has declined in relative terms and now represents only a small share of total capital flows to the region. (Over the last decade, the share of total loan disbursements to Latin America attributable to the MDBs has declined from over 30 percent to about 10 percent; while the share of private lending has increased from less than 50 percent to around 85 percent.) Yet given their leverage with their borrowing members, the Multilateral Development Banks (MDBs) are well positioned to address the major economic weaknesses that both constrain countries' ability to attract private financing and undermine the sustainability of their long-term growth. There has also been a long-term shift in the focus of both institutions away from traditional infrastructure and energy projects and toward the social and financial sectors.

The effectiveness of MDB lending to Latin America varies by country. Overall, we believe the World Bank and the IDB have played a highly positive role in encouraging and supporting countries of the region to build economic frameworks necessary to make markets work more effectively and allowing private enterprise to grow. While countries themselves should take the ultimate responsibility and credit for their sound economic management, the MDBs have been indispensable helpful partners in promoting reforms in a broad range of areas which we now take for granted. These reforms include: allowing the market (not governments) to set industrial, energy, and agricultural prices; liberalizing trade and investment; prioritizing public expenditure on cost-effective programs; professionalizing and shrinking the civil service; reducing or eliminating public subsidies to public enterprises; privatizing and allowing private firms to operate in all sectors; reforming the banking sector through sound banking and credit policies; and advancing good governance by addressing corruption and promoting greater transparency, accountability, rule of law, and participation.

Argentina is a good example. Since 1991, when it began a dramatic turnaround in the management and performance of its economy, it has been the second largest Latin American borrower from both the IBRD (Mexico is the first by a small margin) and the IDB (after Brazil). Over this period, and in sharp contrast with past stagnation, economic growth averaged 5 percent per year. Total GNP doubled in real terms, and the economy was put on a sounder footing to address outstanding problems, particularly the stubbornly high level of unemployment and the need to improve certain social indicators -- such as income equity and poverty -- which have been deteriorating. Despite Argentina's relatively high per capita income ($8,970), approximately 35 percent of the population lack access to safe water with 25 percent lacking access to sewerage.

The World Bank's independent and highly respected Operations Evaluation Department (OED) recently evaluated the Bank's assistance strategy in Argentina. While the scale of the World Bank's assistance (and that of the IDB) in a large and sophisticated economy such as Argentina is relatively small, the OED evaluation was highly positive in terms of the total impact of the Bank's supportive financial and advisory role to a highly committed government. Over time the Bank's program - which totaled $12.6 billion over the nine years -- evolved from support for public sector reform and privatization to support for financial sector reform, and then provincial reform, focussed at first on provincial finances and increasingly on social sector issues. During the 1998-99 Asian financial crisis, Bank assistance, by helping to minimize the contraction in public expenditures, contributed to protect social expenditures, as well as to mitigate the crisis's impact on the poor. This overall strategy was judged largely successful, with high rates of achievement of project objectives and low levels of portfolio problems. The institutional impact of the Bank's program was also evaluated as substantial and, with the reforms it supported now fully imbedded in the Argentina's institutional setting, likely sustainable.

Bolivia, the largest Latin American recipient of IDA and FSO concessional funds over the last decade, has also experienced a dramatic economic transformation. Emerging from a period of severe economic and social chaos, Bolivia has compiled an impressive twelve-year track record on stabilization and reform despite major economic constraints including weak institutional capacity, major infrastructure weaknesses, adverse terms of trade, and vulnerability to climatic/geological shocks. (Although Bolivia's land area equals the combined area of California and Texas, there are only 2,400 kilometers of paved roads. Exports are heavily commodity-based and relatively undiversified, with manufactured goods accounting for less than 10 percent of exports.) As is the case in Argentina, in Bolivia it is the strong commitment of successive democratically elected governments that has been decisive, although the IDA and the IDB, as well as other donors, have provided crucial support.

• Annual growth averaged 4.3 percent (about 2 percent per capita) in the 1990s; after being at negative levels during the 1980s.
• Inflation has been reduced from 24,000 percent in the mid-1980s to about 5 percent today,
• Privatization has reduced state-controlled enterprises from 25 percent of the economy in the early 1990s to less than 2 percent.

Unfortunately, the resulting impact of economic growth and reform on poverty has been modest. While some social indicators show improvement, for example, infant mortality has been reduced from 100 deaths per 1,000 to 65 per 1,000 in three years, some 70 percent of the population remain poor. The government is strongly committed to addressing this problem and is currently in the process of developing, with civil society participation and in concert with a parallel dialogue organized by the Catholic Church, a Poverty Reduction Strategy Paper (PRSP) based on "growth with equity". PRSPs set out clear strategies for addressing the key constraints individual countries confront in their efforts to reduce poverty. Preparation of a participatory PRSP presents a complex and difficult challenge, but if successful would constitute a major achievement and establish a firm basis for a more credible long-term attack on poverty. The PRSP process has the strong support of IDA and the IDB, as well as the International Monetary Fund, USAID and other donors, for whom it would constitute the basis for all future lending.

The World Bank and the IDB plan to continue to support economic reform in Latin America, recognizing that many countries are now in the most difficult phase of the reform process (e.g., major public sector, pension, budgetary, institutional and judicial reform, frequently at both the federal and local levels) where implementation is complex and difficult and the efforts needed to build the necessary domestic public and political consensus are time consuming and vulnerable to protracted delays. The region also remains vulnerable to external shocks. There is also major public concern about income inequality and the difficulty in securing sustainable progress in unemployment and poverty reduction. As a result there is danger that these could undermine economic and social support for the ongoing reform process. In response, the future programs of both the World Bank and the IDB will focus heavily on reducing countries' vulnerability to adverse developments in the international economy and financial markets, while also concentrating even more assistance on the social sectors (e.g., health, education, and safety nets). As a recent World Bank study ("Securing Our Future in a Global Economy") concluded, much more needs to be done by governments to protect the sustainability of social service programs during times of economic and financial crises. The fact that Latin America has a relatively young population also provides a window of opportunity to strengthen social security and pension reform.

The World Bank and the IDB have also played active roles in responding quickly to facilitate recovery and reconstruction from natural disasters, such as Hurricane Mitch in Honduras and Nicaragua, the January 1999 earthquake in Colombia, and the adverse economic disruptions throughout the region resulting from El Nino. Both institutions also have leadership roles in aid-coordination where they collaborate closely with USAID and other bilateral donors.

The United States has played the leading role in helping to design and implement the HIPC Initiative. The enhanced HIPC Initiative seeks to improve prospects for long-term growth and poverty reduction by reducing debt for the poorest countries that have demonstrated good economic performance, in order to provide a cushion against future debt problems and free up significant new resources for productive investments to reduce poverty. Bolivia was determined eligible for enhanced HIPC relief in January and Honduras is expected to become eligible in early July. Two other Latin American countries -- Guyana and Nicaragua -- are also potentially eligible. HIPC is not a cure for the poverty of these countries, but one of a number of programs -- including the provision of concessional IDA and FSO resources - focused on deepening a long-term sustainable effort at poverty reduction.

The link between HIPC debt relief and poverty reduction has been strengthened by the introduction of Poverty Reduction Strategy Papers, which are prepared by national authorities with broad popular participation, are now an integral part of the HIPC framework. We have been working hard to ensure the HIPC/PRSP process emphasizes sound economic management, health, education and other programs critical to poverty reduction, monitorable poverty reduction targets, good governance and transparency, and civil society participation.

Overall the HIPC program is expected to benefit up to 33 poor countries, most of them in Africa. The cost to the United States of participating in HIPC is $920 million over three years. This includes the $320 million cost of bilateral debt reduction and $600 million that will be added to funds provided by other donors to the HIPC Trust Fund to help offset the cost of debt relief for regional multilateral institutions such as the IDB that lack adequate internal resources for full funding.

An Administration request to help finance HIPC is pending before the Congress. Passage is crucial for the Initiative as a whole, but particularly for eligible countries in Latin America where an agreement negotiated last week among the IDB and its member countries to finance the IDB's full HIPC costs is contingent on U.S. financial participation. The agreement symbolizes strong regional and non-regional cooperation in the IDB. While some technical details must still be worked out, it is a significant step toward the implementation and financing of the enhanced HIPC program in Latin America. The IDB will contribute at least $850 million of internal resources to help support its total HIPC costs of $1.1 billion. The agreed framework will also provide at least $250 million to support the participation of sub-regional institutions in HIPC. Without a substantial U.S. contribution, debt relief for near-term candidates will not move forward. The Administration strongly supports debt relief for the world's poorest, most heavily indebted countries. However, the U.S. delay in funding is having significant consequences. Bolivia, a good reformer and strategic U.S. ally in coca eradication, has met the requirements to receive debt relief under the Enhanced HIPC Initiative. However, debt relief for Bolivia will not occur until the United States contributes to the HIPC Trust Fund. In addition, if we do not contribute, debt relief for the other Latin American HIPCs will not move forward. As Honduras is expected to soon become eligible, the need for a sizeable U.S. contribution to the HIPC Trust Fund is urgent.

It should be noted that the U.S. budgetary costs, in terms of annual funding appropriations, for financing World Bank and IDB operations in Latin America are very modest.

• We no longer request funding for either institution's hard loan windows because we believe their existing capital bases are adequate to sustain lending indefinitely.
• The United States is participating with more than thirty other donors in funding IDA, but the U.S. costs attributable to IDA operations in Latin America - in rough proportion to the region's share ($604 million) of IDA commitments last year - are about $70 million annually.
• We last provided funding for the World Bank's International Financial Corporation in FY 1997. The IFC makes direct equity investments to promote private sector development, foreign investment, privatization, and efficient markets in developing countries. Latin America, with a total committed portfolio of $8.2 billion, is the largest regional recipient of IFC operations.
• This year's Administration request includes $16 million for the World Bank's Multilateral Investment Guarantee Agency. MIGA was established in 1988 to provide investment insurance (guarantees) against non-commercial risks in developing countries at market rates to private direct investors. Latin America has the largest regional concentration of MIGA's coverage.
• The latest replenishment for the IDB's FSO concessional window entails no new U.S. funding.
• This year's Administration request for appropriations also includes funding for two members of the IDB Group, the Inter-American Investment Corporation ($34 million) and the Multilateral Investment Fund ($25.9 million). The IIC provides long-term loans and equity investments in small- and medium-sized enterprises primarily in the smaller and poorer countries; the MIF focuses on catalyzing investment reforms through grants for technical cooperation, human resource development, and small (primarily micro) enterprise development as well as for micro-finance institutions.

We are counting on the World Bank and IDB to continue playing a vital role in promoting economic growth and poverty reduction in Latin America. However, like all institutions, they can be improved and their capacity to respond quickly and creatively to the evolving requirements of their membership strengthened. Both institutions must be alert to the opportunities for strengthening their development effectiveness. And, as the situation in Latin America demonstrates, efforts that more effectively promote growth need to be combined with a strong governmental and institutional commitment to poverty reduction.

The Administration has worked hard with the members of the World Bank and the IDB, and with their managements, to promote reforms that improve their development effectiveness. We have been successful in achieving significant changes in many areas, for example,

• More transparency and accountability in the institutions and their operations;
• Increased attention to poverty reduction;
• Greater attention to lending effectiveness and project quality;
• More focus on governance and anti-corruption; and
• Increased attention to environmental sustainability and core labor standards.

The issue of institutional reforms has been highlighted by the recent report of the International Financial Institution Advisory Commission and the Department of the Treasury's June 8, official response to the recommendations of the Report. As you know, Treasury disagrees in fundamental respects with the bulk of the Commission's reform prescriptions. I would like to briefly touch on three of these recommendations that are particularly relevant for Latin America: the recommendations to phase out lending to countries with annual per capita incomes above $4,000 or an investment grade international bond rating, to preclude the MDBs from financial crisis lending, and to shift World Bank operations to the regional development banks. In sum, we believe that these recommendations would eliminate the capacity of the World Bank and IDB to continue promoting economic reform and development in many Latin American countries that continue to face formidable development challenges.

• Because access to private capital for many of these countries is vulnerable to market disruptions and often unavailable in the volumes and terms appropriate for long-term development investments, graduation policies with a fixed and excessively low threshold risk worsening economic outcomes and increase the likelihood of future crises. This could undercut or prolong the path to sustainable market access, and ultimately delay the time when these governments will grow out of the need for official support.
• In those exceptional circumstances where crisis lending is appropriate, the emergency capacity of the MDBs can be essential to support an appropriate level of fiscal expenditures, to design and finance financial sector restructuring programs, and to further target assistance for critical social programs, such as education and healthcare.
• Eliminating the World Bank's financial role in providing development assistance would undermine the effectiveness of the overall development effort. Although the IDB has many strengths and plays a complementary role to the World Bank, it does not have the broad strengths of the World Bank across the development policy spectrum.

Latin American and the Caribbean still confront formidable development challenges in achieving sustainable growth and poverty reduction. The overriding objective of on-going reform in the World Bank and the IDB is to put in place more effective ways for these institutions to help members address these challenges. We believe the most promising approaches for advancing this goal lie in the following proposals:

• Improved performance and impact: with the MDBs relying on a smaller number of measurable performance targets, with a stronger link between disbursements and performance progress, and lending concentrated on countries that are performing well;
• Emphasis on economic growth and poverty reduction: with the MDBs focusing higher levels of assistance in areas that have the highest development returns, particularly health care, basic education, rural roads, and water supply and sewerage;
• Focused hard-loan lending to emerging economies: with the MDBs exploring innovative ways to catalyze private capital and establishing more selective lending frameworks to facilitate graduation;
• Transparency: with a stronger presumption in the institutions to publish key loan documents and to establish increased transparency in their lending operations at the local level so that programs can be more easily monitored;
• Global public goods: with a stronger focus on solutions to the problems of infectious diseases and environmental degradation, and the use of information technology to create and disseminate knowledge; and
• Improved collaboration and selectivity: with further efforts to reduce operational overlap among institutions, speak more clearly on priorities, and share the lessons of experience.

In concluding Mr. Chairman, I would to emphasize the importance that the Treasury Department places on working to help assure that our neighbors in Latin American and the Caribbean are successful in their efforts to achieve sustainable growth and poverty reduction. This is very much in our own national interests.

The Treasury Department remains committed to working hard with the management and members of both the World Bank and the IDB to ensure these institutions are able to work effectively in supporting those borrowing governments committed to sound economic management and reform. The challenge of reenergizing efforts to combat poverty in Latin America is multi-dimensional. It is also difficult and complex. In a good policy environment, economic assistance - multilateral and bilateral - can and does make an important difference both in spurring growth and in reducing poverty. We will work closely with the Congress to maintain a selective and well-targeted effort in this area. Thank you.