FROM THE OFFICE OF PUBLIC AFFAIRS

Chairman Kolbe, Ranking Member Lowey, Members of the Subcommittee, thank you for the opportunity to testify today on President Bush's FY 2004 budget request for Treasury's international programs.

President Bush is deeply committed to promoting economic growth and stability, especially in those parts of the world where poverty is most acute.  Economic growth has been strong in some developing countries.  And in those countries, living standards have risen and poverty has been reduced.  However, it is hard to be satisfied with the overall progress in development results.  Many developing countries have not yet experienced strong sustainable economic growth.  As a result, billions of people still live in extreme poverty.  

I’m here today to discuss Treasury’s international appropriations requests.  While here I also wanted to take the opportunity to highlight two of the president’s other initiatives to help the poorest people escape poverty.  President Bush’s proposal to establish the Millennium Challenge Account is one of the most innovative ways of delivering development assistance that has ever been proposed.  The MCA takes the goal of providing incentives for nations to govern justly, invest in their people, and encourage economic freedom and turns it into an operational action plan.   More recently, the President also announced the Emergency Plan for AIDS Relief, an effort that goes well beyond existing efforts to help countries in Africa and the Caribbean wage and win the war against HIV/AIDS, with an emphasis on accountability for results.  As the President has said, "Persistent poverty and oppression can lead to hopelessness and despair.  And when governments fail to meet the most basic needs of their people, these failed states can become havens for terror."  

These initiatives and others that I will highlight today recognize the enormity of the challenge and the critical U.S. stake in the outcome.  With this in mind it is essential that our foreign assistance dollars be used effectively. 

 The more effective our economic development efforts, the greater the chance for democratic values to take root, the greater the likelihood that stable governments and social institutions will develop, and the greater the volume of mutually beneficial trade with Americans.

Over the past few years, the international community has worked at creating a set of development goals.  These goals include such ambitious targets as halving by the year 2015 the proportion of people whose income is less than one dollar a day.  Last year, President Bush added another ambitious goal – “we ought to double the size of the world’s poorest economies within a decade.”   Such goals will require developing countries to take vital policy steps to increase economic growth rates.  They will also require a serious commitment by the donor community and the multilateral development institutions.  If these ambitious goals are met, we can add another target that we should all want to achieve, and that is for the development institutions – bilateral and multilateral -- to start working themselves out of business.  While it may seem like a strange measure of success – think about it – such an achievement would mean that countries are relying on investment, private capital, and entrepreneurship instead of pledges, concessions, and debt relief.  It would mean that the people of developing countries will have governments that deliver basic services and provide for the rule of law; it will mean that they will have a chance to better their lives and see their children educated; and it will mean that they will know freedom and human dignity. 

Ambitious – yes, but I’m here today to tell you about a number of reform initiatives that President Bush has made to start us in that direction.  He set out a new economic growth agenda for the multilateral development banks that focuses these institutions on raising productivity growth and measurable results by channeling more funds to countries that follow pro-growth policies, and by structuring our contributions to create incentives for specific outcomes.  He called on the development banks to increase the use of grants, rather than loans, to the poorest countries, and the banks are already responding to this call.  Grants help the poorest countries avoid crippling their growth with a burden of debt they can never repay and create incentives for greater development effectiveness. 

Treasury's international programs -- oversight of the multilateral development banks, technical assistance, and debt relief -- are crucial instruments in promoting the Administration's international economic agenda.  They also help pursue specific U.S. foreign policy objectives, such as supporting economic assistance to key countries in the war on terrorism and combating money-laundering and terrorist financing.  Similarly, Treasury's international debt programs help support good policies in reforming countries, while technical assistance programs help reforming countries put in place the sound budget and financial systems needed for growth.

This year's request totals $1.96 billion.  It includes $1.4 billion in funding for our annual commitments to the Multilateral Development Banks, $196 million toward clearing a portion of our arrears to these institutions, $395 million towards debt reduction programs, and $14 million for international technical assistance programs.  It includes, following on last year's request, funding increases for several of the key institutions linked to progress on our reform efforts.  I am committed to ensuring that U.S. taxpayer resources are put to good use.  Treasury will continue to press its pro-growth agenda in the MDBs, holding these institutions accountable for achieving significant and sustainable improvements in the daily lives of people.  This agenda is being incorporated in many of the MDBs, but our work must continue until our objective is fully achieved.

Iraq and Afghanistan

Before reviewing the details of our FY04 request, let me say a few words about activities related to the urgent reconstruction efforts in Iraq and Afghanistan.  First, we have formed a task force at the Treasury Department to help address key financial and economic aspects of Iraq’s reconstruction.  This task force includes broad representation from US Government Agencies, including representatives of the Federal Reserve, OCC, USAID, and the State Department.  In conjunction with State, DoD, and others, Treasury will be working closely with Peter McPherson, who will be General Garner’s top assistant on financial matters on the ground in Iraq.  Treasury’s Office of Technical Assistance already has deployed 14 advisors to the Office of Reconstruction and Humanitarian Assistance (ORHA) in Kuwait, and additional personnel may be deployed as necessary to help staff ORHA, which is expanding in conjunction with its move to Baghdad.

Working in concert with USAID, State, and the emerging leadership of a free Iraq, Treasury will assist in the formulation and execution of financial and economic policies in post-war Iraq.  We start from the premise that our role is to help the Iraqi people rather than to impose changes upon them.  It will be a priority to restore essential operations of the Finance Ministry, the Central Bank, commercial banks and the stock market.  Where elements of the existing system are corrupt, ineffective, or inconsistent with a market-oriented economy, Treasury will work with the Iraqi people to begin essential reform and restructuring efforts.  A crucial near-term challenge will be paying civil servants, teachers, and pensioners in a fair, orderly and prompt manner --- and transitioning to a wage/pension payment process under Interim Iraqi Authority control.   Near-term goals include assisting the Iraqi people in the  development of a fair and transparent federal budget, creation of a responsible system of regulation and supervision for financial institutions, reform of the tax and customs regimes, design of a strategy for the management of domestic and external debt, and implementation of financial fraud, anti-money laundering and anti-terrorist financing measures.

Development of a system of commercial law, founded on a base of private property rights, is an essential element of developing a market-based economy in Iraq.  For this reason, we believe there are several areas in which the Iraqi people will need to focus, ranging from dealing with real estate and personal property to intellectual property rights.  These will also include establishing the legal framework for corporations, the banking system, and capital markets. Given the reach of commercial law, more than just Treasury will be involved in assisting this effort; it will also include the Departments of State, Justice, Commerce, and USAID.  However, each of us recognizes the importance of creating a free market economy in the country, and development of a sound framework of commercial law is key to this goal.

We also expect the international financial institutions to play an important role in supporting Iraq's reconstruction.   The World Bank is already forming a team of experts to conduct a needs assessment in Iraq, which will help focus attention on assistance priorities and lay the groundwork for economic recovery and growth.  Just yesterday, the Executive Directors of the World Bank met and gave full authority to Bank management to determine when the time is appropriate to send a mission to Iraq for a field-based needs assessment.  The IMF has provided general advice on the currency and monetary policy, and has also signaled that it is prepared to undertake a needs assessment at the appropriate time.

Shortly after the creation of the Interim Authority in Afghanistan in December 2001, Treasury’s Office of Technical Assistance sent an advisor to Kabul to conduct early assessments of budgetary, financial and economic conditions.  OTA Budget Advisor Larry Seale has since been in Kabul for over a year working closely with Finance Minister Ashraf Ghani in establishing modern budget mechanisms in the country.  Treasury consulted with the World Bank, the Asian Development Bank and the UN Development Program during their development of the Needs Assessment for Afghanistan, which was presented at the Tokyo donors’ conference in January 2002.  Treasury provided advice and assistance on the creation of a new, unified currency, which completely replaced the old afghani in January of this year.  Under Secretary Taylor has also played a key role in marshaling international financial support for the Afghan government’s day to day expenses through the World Bank-administered Afghanistan Reconstruction Trust Fund

The MDBs are providing critical support for economic reform in Afghanistan. The World Bank and the Asian Development Bank, together with UN agencies and international donors, are working closely with the Afghan government to respond to the country's urgent reconstruction needs.  Last year, the World Bank extended grants totaling $100 million to support public administration, infrastructure, education, and public works and provided a $108 million concessional loan in March this year to rebuild Kabul airport and a section of the “ring” road.  Last year, the AsDB moved quickly to offer grants assistance on roads, energy, and capacity building and to date has provided about $40 million in grant assistance.  Additionally, Afghanistan has received an AsDF post-conflict concessional loan of $150 million that is supporting urgent road building and another $150 million in concessional resources are expected to be approved for post-conflict reconstruction next month.

The MDB Growth Agenda

Productivity growth is the key to raising living standards.  Therefore, the U.S. has urged the MDBs to focus on projects that raise productivity growth.  This means placing a greater emphasis on health, education and private sector development to help individuals to realize their full potential.  It also means removing obstacles to productivity growth by aggressively promoting good policies.  One important mechanism for effecting this change is the adoption of policy-based allocation systems by all of the MDB windows that provide concessional finance for the poorest countries.  These systems provide more resources to countries that establish policies conducive to productivity growth, and fewer resources for those who do not. 

Raising productivity growth requires efforts to promote private sector development, including expanding small businesses’ access to credit.  The U.S. has proposed that the International Finance Corporation (IFC) -- the private-sector arm of the World Bank Group -- work with the International Development Association (IDA) to promote lending by financial sector institutions to small and medium-sized enterprises (SME) in Africa.  This is intended to build on a number of successful SME programs already in place, including those at the European Bank for Reconstruction and Development (EBRD) for Russia and Eastern Europe.  The IFC and IDA are now developing this program for African SMEs.

Focusing on measurable results requires fundamental changes in operating style, beginning with the creation of new measurement and accountability systems.  To drive this change, the U.S. has set up a structure of results-based contributions in IDA, the flagship of development institutions.  The U.S. has proposed to provide an additional $300 million in contributions if IDA produces a results measurement system, expands essential diagnostics and achieves progress toward concrete health, education and private sector goals.  A similar results-based mechanism was established for the Global Environment Facility (GEF), with the final $70 million of our contribution tied to the GEF achieving specified, quantifiable program goals.

The U.S. has also put a high priority on MDBs’ increasing the use of grants, instead of loans, to fund priority development activities in the poorest and least creditworthy countries.  Grants help poor countries make productive investments without saddling them with ever larger debt burdens.  Recipients view grants as more valuable than loans, permitting higher performance hurdles and thus enhancing development effectiveness and results.  Due to strong U.S. urging, both the World Bank’s concessional window – IDA – and the African Development Fund (AfDF) have agreed to sharply increase the amount of grant resources available to the poorest countries, so that 18-21 percent of total assistance over the next three years will be provided in grant form.  The poorest countries are eligible for 100% grant financing for HIV/AIDS.  Donors likewise committed to increase grants in the International Fund for Agricultural Development (IFAD) to 10 percent of total assistance.  This year we will seek to expand the use of grants further including at the Asian Development Fund (ADF) through new replenishment discussions which start in the fall.  In the context of these significant reforms, the U.S. has responded to critical regional needs with additional funding for the institutions. 

The FY 2004 Request

There are four basic components of our FY 2004 request: (1) annual funding for the MDBs, (2) MDB arrears clearance, (3) debt reduction programs and (4) Treasury’s bilateral technical assistance program:
 
1. Annual Funding for the MDBs ($1,359.0 million)

The Administration's request for the MDBs includes $1,359 million to fund fully our current annual U.S. commitments.  The request includes the second payment of our proposed contributions to the recent replenishments for the International Development Association ($950 million), the African Development Fund ($118 million) and the Global Environment Facility ($107.5 million).  It also includes the first payment ($15 million) of our proposed contribution to the new replenishment of the International Fund for Agricultural Development (IFAD). Replenishment negotiations for these four institutions concluded last year. 

The $950 million request for the International Development Association (IDA) includes $100 million for this year’s portion of the results-based Incentive Contribution.  I am pleased to inform you that we made the determination shortly before this spring’s meeting of the Development Committee on April 13 that IDA had met the Spring 2003 goals, and earned the results-based Incentive Contribution.  IDA is clearly making strong progress toward ensuring that development resources are invested effectively.  IDA has another set of even more challenging development outcome and diagnostic goals to meet in spring 2004 to earn the second installment of the results-based Incentive Contribution of $200 million for FY05.  Our total commitment to IDA, including our baseline pledge and both installments of the results-based Incentive Contribution, is $2,850 million, or 18 percent above the U.S. commitment to the last IDA replenishment in 1999.  This is the 13th replenishment and covers a three year period ending in June 2005.

The request also includes funding for an 18 percent increase in U.S. contributions for the African Development Fund (AfDF), which will total of $354 million over three years.  For the Global Environment Facility (GEF), the U.S. agreed to contribute a total of $500 million over four years, a 16 percent increase over the last replenishment.

2.  Arrears  ($196 million)
 
The $196 million request for arrears is part of an effort to pay down U.S. arrears to the institutions, which total $497 million as of the end of FY 2003.  It is critical that the U.S. meet its international commitments, thus helping to ensure U.S. leadership and credibility on global issues of vital importance to the United States.  In FY2003, we requested $177.7 million for the first year of a three year arrears clearance plan.  Congress reduced arrears by only $36.4 million.  We must do better.

3.  Debt Reduction Programs ($395 million)

The $395 million request for debt reduction programs includes $375 million for the Heavily Indebted Poor Countries (HIPC) debt relief initiative.  At the 2002 G-8 Economic Summit, President Bush committed to fund a share of the additional financing requirements for the HIPC Trust Fund that have emerged.  As a first installment on that commitment, we have requested $75 million for the Trust Fund.  The HIPC Trust Fund helps regional development banks and other multilateral institutions meet the costs of providing debt reduction to heavily indebted poor countries committed to economic, social, and governance reforms.  Our request also includes $300 million for the cost of 100 percent U.S. bilateral debt reduction for the Democratic Republic of the Congo, which is expected to qualify for debt relief under the HIPC initiative this year.  As a demonstration of the Administration’s commitment to better manage the world’s most valuable natural assets, we are also requesting $20 million for debt relief under the Tropical Forest Conservation Act (TFCA), which provides debt relief to developing countries that commit to use the savings to protect biodiversity and tropical forests around the world. 

4.  Technical Assistance ($14 million)

Our request also includes $14 million for Treasury technical assistance programs, which form an important part of our effort to support countries facing economic transition or financial security issues, and whose governments are committed to fundamental reforms. Treasury’s technical assistance programs were created in the early 1990s to assist countries in the Former Soviet Union and Central and Eastern Europe.  Beginning in FY 1999, a direct Congressional appropriation allowed expansion of the geographic reach of these bi-lateral assistance programs.  The FY 2004 request will allow us to continue current programs in Africa, Asia, Central and South America and to expand the assistance effort into other countries committed to sound economic reform policies.  Over half of the traditional programs will be in Sub-Saharan Africa, as has been the case for the past three years.  We expect to spend $5 million of the appropriated funds on anti-terrorist financing programs, in coordination with other U.S. agencies engaged in this area.  The interagency group will continue to focus on a program for about 20 countries that the Administration has identified as having financial systems vulnerable to misuse by terrorist organizations.
 
Authorization Requests
 
As part of this year's budget, the Administration is seeking authorization for additional commitments to the HIPC Trust Fund.  The HIPC authorization request supports the U.S. contribution for its share of additional HIPC financing agreed to by the President and other G-7 leaders.   We appreciate recent passage by the House of Representatives of legislation (HR 254) to help implement the President’s proposals to reform the North American Development Bank (NADBank) and Border Environment Cooperation Commission (BECC), and are working with the Senate to achieve enactment of this legislation as soon as possible.  The full package of reforms would make NADBank financing more affordable, expand the institutions’ geographic scope in Mexico, create a single board of directors for the two institutions, and conduct a business process review.

In addition, Treasury has resubmitted requests for Congressional authorization for U.S. contributions to the current replenishments of the International Development Association (IDA), the African Development Fund (AfDF), and the Asian Development Fund (AsDF).  Each of these funds provides critical development assistance to the poorest and most vulnerable peoples of the world.  In early 2001, President Bush requested the authorization for the latest replenishment of the Asian Development Fund (ADF-8).  In early 2002, he further requested the authorization for the latest replenishments of the World Bank’s International Development Association (IDA-13) and the African Development Fund (AfDF-9).  Most recently, the FY 2003 Consolidated Appropriations Resolution appropriated related funds but did not include authorization legislation for U.S. participation in these replenishments. This situation is undermining United States reform-minded leadership in these institutions.  If it continues, it also will threaten to slow the provision of critical assistance to the poorest countries and peoples in Africa, Asia and Latin America.  Without the U.S. contribution, to IDA-13, IDA may not have enough resources to make its normal lending and grant targets for its 2004 fiscal year, which begins on July 1, 2003.

As Treasury Secretary, I believe that it is critical that the Congress pass authorization legislation for these institutions as soon as possible.  I look forward to working with you and other members of Congress in achieving this end. 

Legislative Mandates and Reports

Finally, I would like to raise the issue of legislative mandates.  Currently, the Administration must execute -- to the extent consistent with the President's constitutional authorities -- an extremely large number of specific legislative mandates relating to U.S. participation in the international financial institutions, including requirements for directed voting, policy advocacy, certifications, notifications, and reports, that have built-up over time.  The U.S. government's policy development and implementation in these institutions would be improved by consolidation of these mandates.  Some mandates go back 50 years.  Some provisions overlap, or are inconsistent.  There are 37 directed vote mandates and over 100 policy mandates, plus numerous reports, certifications and modifications.  These actually impede the ability of the Treasury to keep Congress fully informed on the vital issues because the numerous vestigial reporting requirements require substantial amounts of time from staff and senior officials, diverting resources from the key issues of current Congressional interest that warrant serious concern and review.  I would like to work with you to rationalize and focus our mandated reports and requirements, so that Treasury can work as effectively as possible in pursuit of U.S. foreign policy goals.

Conclusion
 
Treasury will continue to work with MDB management and our fellow shareholders to ensure that the strong reform agenda that we have put in place is fully implemented.  I ask for your support as we strengthen these institutions in an effort to increase global economic growth, reduce poverty in the world’s poorest countries and support key U.S. foreign policy interests.

Thank you very much.  I would be happy to respond to your questions and suggestions.