FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, it is a pleasure to testify today about the Administration's FY 1999 budget request for funding for the international financial institutions (IFIs) -- the World Bank, the International Monetary Fund and the regional development banks.

We live in an era marked by a global economy and global financial markets, which has brought tremendous benefits to American workers, farmers and businesses through greater exports, more high-paying jobs, higher standards of living and lower inflation. Countries in the developing world and emerging markets have attracted previously unimaginable flows of private capital for investment, which has helped foster growth and lift millions out of poverty and has helped turn the developing countries into markets that have been absorbing over 40 percent of our exports.

Yet just as this era brings great opportunities for the United States and the rest of the world, so does it present new risks -- as we have clearly seen in recent months with respect to the financial crisis in Asia. To make the most of the opportunities, and manage the risks, we must participate in -- and lead in -- the international institutions that help shape the global economy. Accounting for less than one tenth of one percent of federal outlays, these programs provide an enormous return for American taxpayers. They help build free markets and free trade, promote growth and reform, promote sustainable development -- and assist in responding to financial crises such as the current one in Asia. All of which importantly protects and promotes U.S. economic and national security interests.

Mr. Chairman, let me say that I very much appreciate the hard work of this Committee in furthering effective U.S. leadership in the IFIs. I am pleased that we have worked in partnership with this Committee to set priorities for the future. Last year we cleared our arrears to the World Bank's International Development Association and set a course to clear our remaining arrears to other IFIs. Because we have negotiated a 40 percent reduction in future U.S. obligations to the multilateral development banks, our annual commitment will be less than $1.2 billion, after we complete the arrears reduction process. On the basis of this annual U.S. investment, we will maintain our great influence in the multilateral development banks and in the decisions on the terms of tens of billions of dollars they lend annually.

At the same time, we have worked forcefully with these institutions to reform their operations, reduce overhead, become more open, do more to prevent corruption, promote the private sector, and become more sensitive to environmental concerns and labor standards and human rights. The World Bank is undergoing a major reorganization. Asian and European Bank budgets have been frozen for several years and the African Bank has cut staff sharply under a radical restructuring. The banks are now providing us with better value for the money than at any time in their history, even while we are reducing our contribution to them.

However, U.S. arrears to the MDBs are still well over $600 million and we are $75 million short of meeting our pledge to the IMF's Enhanced Structural Adjustment Facility. Our FY99 budget request includes $509 million toward these commitments. Our highest priority, as always, is the current contribution, but the arrears, too, are critically important.

Today, I'd like to touch briefly on a few items that bear special explanation.

First is funding for the Global Environment Facility (GEF). The GEF is a unique instrument to help developing countries deal with environmental problems that have cross-border effects, such as protecting the oceans or the ozone layer. Our $300 million request for the GEF, of which nearly $200 million is for arrears, is an investment in our own future health and prosperity.

Second, we are requesting $155 million for the African Development Fund, more than half of which would cover arrears. The African Bank, which includes the Fund, has made top-to-bottom reforms, and is a key instrument for a deeper American partnership with an emerging Africa.

Third, we are requesting $5 million for the Technical Assistance Program at Treasury, which assists developing and transitional countries in their efforts to establish market economies. In a large budget this is a very small amount of money, yet the expertise that Treasury and other officials can provide is invaluable for these countries in creating the basic elements of a market economy, and in some cases -- as the recent crisis in Asia -- it is important to deploy technical assistance more rapidly than is possible through current funding mechanisms outside Treasury.

Fourth, we strongly support funding for the World Bank's International Development Association. As you know, the Bank has taken major steps to improve project quality and maximize the development impact of its operations. To continue our leadership with respect to that reform, and for the Bank's ongoing activities, we need to continue to provide our fair share of the funding.

Mr. Chairman, the events of the past year validate the focus of this Committee on the important issues surrounding the IFIs, as financial instability in Asia has shaken the region and affected markets around the world and the IFIs have taken the lead in responding to the crisis. Let me say a word now about the effort to restore financial stability and growth to the troubled countries in Asia.

Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports to the region, the competitiveness of our goods and services in world markets, the growth of our economy and, ultimately, the well-being of American workers, farmers and businesses. Already major U.S. companies -- such as Boeing, Motorola, and Intel -- are reporting effects from the crisis, which impacts workers in these, as well as many smaller, companies. Roughly forty percent of our exports go to developing countries around the globe. If the crisis were to spread more broadly to other emerging markets, then the impact on our economy could be much greater. By helping to reestablish financial stability, we help these countries become strong markets once again for American goods, and have stronger currencies that will help the competitiveness of our products in world markets.

The program we have supported to resolve this crisis involving the IFIs has focused first on supporting reform programs in individual nations to address the specific causes of each crisis. At their core, these programs aim to strengthen financial systems, improve transparency and supervision, eliminate the interrelationships between banks, the government, and commercial entities, open capital markets, institute appropriate monetary and fiscal policies, and liberalize trade through measures such as tariff reductions and eliminating unfair export subsidies.

Second, if necessary, we support these programs of reform with temporary financial assistance to provide the breathing room for a nation to restore economic confidence, attract private capital and resume growth.

The IMF, World Bank, and the Asian Development Bank have all played key roles in the effort to resolve this crisis. The World Bank and ADB, both of which played a strong role in the development of Asia, have reacted quickly and effectively to the recent financial crisis in Asia and have directed many of their loans to the social sector to mitigate the effects of the crisis on the population. Our budget requests $13.2 million for the Asian Development Bank and $250 million for the Asian Development Fund, of which $150 million is for arrears, to help support their critical efforts. The Export-Import Bank and OPIC have also been very actively involved in the efforts in Asia.

As the central provider of financial assistance, the IMF has been key to the effort to resolve this crisis. To enable the IMF to respond effectively if this crisis were to spread and intensify -- which we all want to avoid -- and to deal with future crises that could similarly affect the interests of the American people, we are requesting funding for our IMF quota subscription, and a commitment for an augmented back-up facility to the IMF, the New Arrangements to Borrow. When the IMF draws on either of these commitments, we receive a liquid, interest bearing offsetting claim on the IMF of equal value. Our contribution does not result in a budget outlay and so does not increase the deficit, or displace spending on other domestic programs. Over the last fifty years, since the IMF's founding, our funding has not cost the American taxpayer a single dime.

Some have said that providing financial assistance to these countries shields investors from the consequences of bad decisions and sows the seeds of futures crises. Investors and creditors should bear the full consequences of their decisions and in fact, vast numbers have taken large losses in Asia, including U.S. banks. Deutsche Bank, the largest German bank, announced recently it would set aside a $777 million dollar reserve for possible losses for loans in Asia. However, a byproduct of programs designed to restore stability and growth may be that some creditors will be protected from the full consequences of their actions. But forcing investors and creditors involuntarily to take losses, however appropriate that might seem, could cause banks to pull their money out of the country involved, and, perhaps from other emerging markets, which could cause serious global economic disruptions.

Having said this, it is critically important that we continue to work toward changing the global financial architecture -- and we are now engaged, in conjunction with the Federal Reserve Board, in an active examination of these extremely complicated issues -- so that creditors and investors can bear the consequences of their decisions as fully as possible, as well as to improve prevention and various other matters. However, we should not wait until that work is complete to take the steps necessary to deal with the crisis at hand.

Another concern that has been raised is that these programs do not require nations to take specific steps to promote the environment, protect core labor standards and ensure human rights. We are committed to addressing these issues in other fora and to working with the international financial institutions to promote them on a regular basis. But there are a lot of practical limits on the feasibility of addressing them in the context of a program to restore financial stability in a country. Moreover, restoring financial stability, growth and prosperity provides the best environment to advance these objectives and benefit the workers of these countries as well as our own workers.

Mr. Chairman, let me conclude by reiterating how important these institutions are to our own economic well-being. They help promote growth and economic reform in developing and transitional economies, providing new markets for U.S. goods and services. And as we have seen in recent months in Asia, they provide expertise and resources to respond to global financial crises when they occur. In short, supporting the IFIs is very much in the interest of American workers, farmers, and businesses. Thank you very much.