FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Ms. Pelosi, I appreciate the opportunity to testify today about the Administration's FY 2000 budget request for Treasury's international programs. Last year, the leadership of this Committee was critical in approving the increase in our quota to the International Monetary Fund and our participation in the NAB, and that, in turn, was critical to dealing with the financial instability abroad that could so affect our own economy. This year, continued support of Treasury's international programs, which are central to the ongoing response to the financial crisis and to the overall effort to foster a healthy global economy, will promote the economic well-being of American workers, farmers and businesses.

Our FY2000 request for these programs totals $1.523 billion, an increase of less than one percent from FY1999. Our investment in these programs supports the international financial institutions -- the World Bank, the International Monetary Fund and the regional development banks -- in helping to restore financial stability where needed, in promoting long term sustainable growth in developing countries, and in working with developing countries committed to economic reform to reduce unsustainable levels of debt.

With respect to the financial crisis, the International Monetary Fund, in close collaboration with the World Bank and the regional development banks, has developed new programs to bolster needed structural and policy reforms in the countries experiencing crisis, while at the same time helping protect the most vulnerable.

I believe that, on balance, the IFIs have made sensible judgments in confronting the enormously complex and, in many ways, unprecedented issues posed by the financial crisis, and have adjusted their judgments when appropriate.

In those countries that have taken ownership of reform, for example, Korea and Thailand, there has been considerable progress toward a return to stability. Korea, which had $4 billion in usable reserves when the crisis came to a head in December of 1997, now has $52 billion. Short term interest rates, which were as high as 35 percent at the end of 1997, now are at 5 percent.

But despite this progress, much remains to be done. The problems that gave rise to the crisis took a long time to develop, and they will take time to work through.

Here at home, while the most likely scenario remains solid growth and low inflation -- subject to the usual ups and downs -- certain sectors have been impacted by the crisis, some because of increased imports, and others because of decreased exports. Moreover, problems in the global economy do constitute a risk to our overall economic well being. That is why we have been enormously focused on the effort to restore stability and growth to troubled parts of the world, and the IFIs are at the center of this effort.

Now, let me make several observations with respect to why the IFIs are at the center of our efforts to promote growth in the developing and transitional countries, as well as being at the center of our work to deal with the financial crisis.

First, they internationalize the burden. In 1998, $1.4 billion in U.S. appropriations gave us great influence with respect to $57.1 billion in total MDB lending.

Second, our FY 2000 request for the IFIs is about 5.5 percent below last year's appropriation, with both years having included funds to pay arrears. On-going U.S. financial commitments to MDBs have been negotiated down by $700 million dollars per annum, or more than one-third since the mid-1990s, without a reduction in our influence. The United States has been a leader in shaping policies in the MDBs and most of our key developmental objectives are now broadly shared by other members.

Third, because they are multilateral, these institutions have the ability to induce recipient countries to accept conditions that no assisting nation could obtain on its own.

Fourth, each institution has expertise special to itself to shape effective reform programs.

The United States, in concert with the international community, has 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, core labor standards and human rights. Under the leadership of Jim Wolfensohn, the World Bank has taken significant steps to improve operations. The United States and the international community are also looking very closely at the role of these institutions in the future international architecture.

Mr. Chairman, let me now comment briefly on long term growth promotion in the developing world.

The IFIs have been instrumental in helping countries throughout the developing world embrace market-based economic systems and become more fully integrated into the global economy. As a result, even taking into account the adverse impacts of the recent crisis, the last few decades have witnessed substantial improvements in living standards in most of the developing world. Infant mortality rates fell by nearly 50 percent from the early 1970s to the mid-1990s and life expectancy has risen by four months on average each year since 1970. Adult literacy has risen from 46 to 70 percent. As they have grown, these nations have turned into new markets for U.S. goods and services. In 1997, before the recent crisis, the developing world absorbed somewhat over 40 percent of U.S. exports.

As an example of the IFI role, IDA is the world's largest lender of concessional resources for projects in areas such as health, primary education, nutrition, safe drinking water, and proper sanitation. For every dollar the U.S. contributes, IDA lends about 8.5 dollars for programs that promote higher standards of living and foster stability.

Even so, the vast economic and human potential of the developing world has barely been tapped. Just last summer, for example, I visited Africa, a continent with enormous potential and enormous challenges and still largely left behind in the global economy. Clearly, in Africa, and elsewhere, the need for -- and the importance of -- the IFIs helping to bring developing nations into the economic mainstream has not abated.

However, Mr. Chairman, bringing these countries into the economic mainstream often requires us to review the debt burden that they have accumulated over the years. Yesterday, the President announced a major debt reduction initiative to help promote the integration of the poorest countries into the world economy. It includes components providing for deeper or accelerated debt reduction, and inclusion of additional countries into existing debt reduction programs, both multilateral and bilateral. Our policy tries to strike an economically sensible balance between competing considerations with respect to debt reduction. Firstly, debt reduction is unlikely to have lasting benefit if not accompanied by meaningful economic reform, so that the resources freed up by debt reduction are used for good purpose. And as the President said yesterday, "the more debtor nations take responsibility for pursuing sound economic policy, the more creditor nations must be willing to provide debt relief." Secondly, our approach is designed to support substantial reductions in debt service payments and total debt burdens to levels consistent with what these countries can reasonably be expected to afford. And, here, there is a tension with respect to debt relief, and we have tried to find sensible balance. On the one hand, many developing countries are simply overwhelmed by unsustainable debt burdens. On the other hand, if the private sector does not believe that a country has a culture of credit in which there is a commitment to repaying debt, private sector capital probably won't flow to that country, and private sector capital is an absolute requisite for economic growth over time. In addition, if borrowers feel they are not going to have to pay back debt, it may result in unsound borrowing, which will then lead to future problems.

In line with this analysis, our budget request includes $120 million for debt programs, broken out as follows: $50 million for the Initiative for Heavily Indebted Poor Countries, which was launched by the World Bank and the IMF in September 1996, to reduce debts to sustainable levels for those poor countries prepared to pursue economic and social policy reforms; $20 million for the traditional Paris Club mechanism to reduce debt; and $50 million to finance Debt Relief for tropical rainforest countries, as called for under the Tropical Forest Conservation Act of 1998.

Before concluding, let me note that, with the leadership of this Committee, we have made great progress in clearing our arrears to the Multilateral Development Banks. If the FY2000 request is fully funded, our arrears will be reduced to $141.9 million. Delays in paying U.S. commitments on internationally negotiated agreements come at a high price in terms of our influence and effectiveness with the institutions and their members. We want to continue working closely with this Committee and the Congress to fully meet U.S. financial commitments.

With respect to U.S. financial commitments, let me say a word about the proposal before Congress to rescind appropriated U.S. callable capital. If enacted, the rescission of U.S. callable capital could be perceived as a major reduction in U.S. political support for the institutions, and could lead to a serious market reassessment of the likely U.S. response to a call on MDB capital should one ever occur. Such a reassessment could increase borrowing costs for the institutions, costs which would then be passed on to the developing countries they are mandated to help. At a time when the global economy is facing difficult new challenges every day, I believe that a rescission of callable capital would be an extremely negative message.

I would also like to bring to your attention an item that has been of great interest to this Subcommittee in previous years. We have worked hard to make the domestic window of the North American Development Bank fully productive. It is fulfilling its mission, and I urge you to support this year's request.

Mr. Chairman, Ms. Pelosi, let me conclude by reiterating that our strong support for the international financial institutions -- as well as the United Nations, I would like to note strongly promotes America's economic well being and national security interests. This Committee is central to providing that support, and we look forward to continuing our good working relationship as we deal with this budget request.