FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, members of the Committee. I would like to start by discussing the financial instability in Asia and the international response to it. Then I would like to discuss the key role the IMF is playing in addressing the immediate crisis and our efforts to modernize the architecture of the international financial markets to help prevent financial crises, or manage them should they occur.

But first, I want to welcome the support that Chairman Leach, Congressman LaFalce, and their cosponsors have expressed for much needed funding for the IMF.

The United States has critical economic and national security interests at stake in promoting restoration of financial stability in Asia. When we support IMF-led reform programs, our purpose is clear: to protect and benefit the American people.

The countries in Asia are our customers, our competitors and our security partners. 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, our agricultural products, and our services at home and abroad, the growth of our economy and, ultimately, the well-being of American workers and farmers. Thirty percent of U.S. exports go to Asia, supporting millions of U.S. jobs, and we export more to Asia than Europe. In states like California, Oregon and Washington, exports to Asia account for more than half of each state's total exports.

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 much smaller, companies. However, thus far, the effects on our economy are relatively moderate and the most likely scenario for the next year is continued solid growth and low inflation. But, if the financial instability were to spread more broadly to other emerging markets then the impact on American workers, farmers, and businesses could be much greater because roughly forty percent of our exports go to all emerging markets around the globe and the spread of the crisis could lead more countries to experience currency depreciation. By doing everything sensible to help address this crisis, we protect our workers and businesses. When financial stability is reestablished, these Asian countries will once again be strong markets for American goods, and have stronger currencies that will help the competitiveness of our goods in world markets, and the risk of financial instability spreading elsewhere will have been averted.

The United States also has critical national security interests in seeing a restoration of financial stability in the region, which Secretary Cohen will address.

The approach we have supported to resolve this crisis has focused on four key elements: supporting reform programs in individual nations; providing temporary financial assistance when needed; encouraging strong action by the other major economic powers to promote growth in their countries, particularly Japan, which, as the largest economy in Asia, would, if on a strong economic track led by domestic demand led growth, be a larger market for Asian goods, a source of greater bank credit and other capital flows, and a radiator of confidence for the region; and finally, fostering policies in other developing and emerging economies to reduce the risk of contagion and prevent future crises. Today, I'd like to focus on the first two, both of which revolve around the IMF.

First, and most importantly, our approach requires that these countries take the concrete structural steps necessary to reform their economies. These programs, which are designed with the IMF, address the specific causes of each nations' crisis and are adapted as the situation changes. They are not austerity programs. At their core, these reform programs aim to strengthen financial systems, improve transparency and supervision, eliminate the interrelationships between banks, the government, and commercial entities, open capital markets, and institute appropriate monetary and fiscal policies. Let me stress, Mr. Chairman, countries which fail to take these steps receive no financial assistance.

The second element of our approach is to support these programs of reform with temporary financial assistance if necessary. When a nation's financial stability is at risk, this money provides the breathing room for a nation to establish the conditions to restore economic confidence, attract private capital and resume growth. Without it, these countries face the risk of default, either by the sovereign or systemically in the financial sector, which could readily result in deep and prolonged distress in these countries, possible contagion effects for emerging and developing countries around the world, and potentially serious impacts on the industrialized countries, including our own, as developing country markets for our goods shrink and as their currencies increased depreciation undercut competitiveness of our goods in markets around the world.

Mr. Chairman, financial assistance, while critical for a short period, is not the key. Only when nations purse sound policies will confidence -- and private capital -- return.

The central provider of this financial assistance is the International Monetary Fund, with additional support from the World Bank and the Asian Development Bank. In addition, the United States has joined other industrial countries in indicating its willingness to provide supplementary financial resources in some situations if a country fully adheres to the reform program and further resources become necessary. Up to this point, we have not actually disbursed any money, and those disbursements -- to the extent they occur -- will be in the form of short term loans whose payment is fully guaranteed by the borrowing government.

Mr. Chairman, the IMF, which has had fifty years of bipartisan support, is the right institution to be at the center of these support programs. The United States has worked forcefully to help the IMF meet the new challenges of the modern financial system. With tremendous expertise and technical resources, the IMF has the ability to shape effective reform programs. As a multinational organization, it is able to require an economically distressed country to accept conditions that no contributing nation could require on its own. And, the IMF internationalizes the burden during a global financial crisis by using its pool of capital instead of the United States having to bear that burden alone.

The American people should also know this: over the past fifty years, our contribution to the IMF has not cost the taxpayer one dime. There are no budget outlays. Our contribution does not increase the deficit, or divert resources from other spending priorities.

Today we came here to ask you to support two critical funds: an increase in our quota subscription, and an augmented back-up facility, the New Arrangements to Borrow, to supplement the IMF's resources, if needed, to deal with crises such as this one. This funding is absolutely necessary to enable the IMF to respond effectively if this financial instability 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. Moreover, failure to provide funding could reduce our leverage in the IMF, and could shake confidence in American leadership in the global economy at a time when confidence and American leadership are so important in re-establishing stability in Asia.

Some have said that supporting the IMF and providing financial assistance to these countries shields investors and countries from the consequences of bad decisions and sows the seeds of futures crises. With respect to the countries, it should be obvious that they are not now shielded from the effects of their bad decisions. They may receive temporary financial assistance, but their people inevitably go through a very difficult economic period before recovery takes hold. Let me add that it is the crisis and the loss of confidence -- not the reform programs -- that leads to economic hardships for the population. Reform is the solution, not the problem. The alternative of not acting to address the root causes of the crisis would create a serious likelihood of default by the sovereign or systematically by the banking sector, which would then lead to far longer and far deeper economic duress for the people of these countries.

As to investors and lenders, the problem is more complicated. The right principle is that investors and creditors should bear the full consequences of their decisions. I would not spend one nickel for the purpose of protecting investors or banks. In fact, vast numbers of banks, investors and creditors have taken large losses in Asia. For example, three major U.S. banks -- J.P. Morgan, Chase, and Citibank -- have reported that developments in Asia have had a substantial negative impact on their profits. And just yesterday the largest bank in Germany announced it would set aside three-quarters of a billion dollars to cover potential losses on loans to the region.

However, it is true that 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 any action to force investors and creditors involuntarily to take losses, however appropriate that might seem, would risk serious adverse consequences. It could cause banks to pull their money out of the country involved. It could reduce that nation's ability to access new sources of private capital, and, perhaps most troubling, it could cause banks to pull back from other emerging markets, which could cause serious global economic disruptions, including in our own economy.

Having said this, it is critically important that we work toward changing the global financial architecture so that creditors and investors can bear the consequences of their decisions as fully as possible. But devising such architectural changes is difficult and complex. We cannot wait until that work is complete to take the steps necessary to deal with the crisis at hand that so powerfully affects our interests, or to provide funding that will equip the IMF to deal with a substantial spread of the present financial instability -- which we are all working to prevent -- a future crisis.

Others have said that these programs do not require nations to take specific steps to promote the environment, protect core labor standards and ensure human rights. Let me be clear: these issues are critically important to the United States-- because they reflect our core values and because they are central to a successful modern economy. We will work with the international financial institutions and with other countries around the globe to effectively promote these objectives. But designing and obtaining sustained adherence to programs to restore financial stability in countries in crisis is extremely difficult, given the wrenching changes that must be instituted in a relatively brief period of time. To try to accomplish additional objectives -- important as they unquestionably are -- in the same brief period of time would complicate and delay this effort and greatly reduce its chance of success. And, if one set of objectives were added, others would most surely seek to add still more objectives, and the whole undertaking would become impossible. Failure, in turn, would likely prolong and deepen economic duress in these countries, hurting their workers -- as well as our exports, competitiveness, and, ultimately, our own workers. Moreover, failure raises the further risk of spreading financial instability to other developing countries, with the additional adverse impact on our workers which would result. In contrast, financial stability and growth provide an environment most conducive to advancing human and labor rights and environmental protection -- instability and economic duress are inimicable to these objectives.

Mr. Chairman, even as we have worked to resolve this crisis, we have begun an intensive internal effort with the Federal Reserve Board and others, to identify and analyze possible mechanisms for dealing with new challenges to the international financial system. All of this follows on the work of the last four years, when we have been working with the international financial institutions to improve crisis prevention and crisis response to the global financial system.

This initiative will focus on four objectives: improving transparency and disclosure; strengthening the role of the international financial institutions in helping to continue to deal with the challenges of today's global markets; determining the role of the private sector in bearing an appropriate share of the burden in times of crisis; and strengthening the regulation of financial institutions in emerging economies.

While nobody can say for certain what will happen in the current situation, the countries in Asia have great underlying strengths, such as high savings rates, firm commitments to education, and strong work ethics and, with a sustained commitment to the necessary reforms, they are well-positioned to re-establish strong economic growth and sound currencies going forward.

Mr. Chairman, while some Members of Congress will doubtless disagree with specific details of the programs we support, I urge members not to let these differences stand in the way of our overall objective and support for the IMF. We must all join together and work vigorously to respond to the financial crisis and to prevent future such situations.

Mr. Chairman, a strong IMF has been critical to dealing with the financial instability in Asia. An IMF with the capacity to respond effectively if this crisis were to deepen and spread -- which we all want to avoid -- and to dealing with future crises is critical to protecting and promoting the interests of the American people. Thank you very much.