FROM THE OFFICE OF PUBLIC AFFAIRS

Since the fall meeting of the Development Committee, we have all been focused on one of the most difficult and complex financial challenges in the post-war period. At this juncture, some of the countries most deeply affected appear to be on the path toward stabilization. But no one anticipates a rapid recovery in growth, and it is clearly no time for complacency.

It is also clear that these countries can, through their own efforts, avoid the long period of stagnation that Latin America suffered as a consequence of the debt crisis of the 1980s. The same Asian countries that have experienced instability in recent months have great underlying strengths. They have high savings rates and most have solid support for education and strong work ethics. With a sustained commitment to necessary reforms, they are well-positioned to re-establish strong economic growth and sound currencies. And the International Monetary Fund, the World Bank, the Asian Development Bank and the donor community have demonstrated a willingness to go to exceptional length in support of stability and reform.

Implications of the Recent Instability in Asia

I would like to turn to what the international community can and should be doing to build stronger national economies and a more sound global economy. In our view, the appropriate program rests on four elements:

• strong domestic actions to restore stability through macroeconomic policy adjustment and structural reforms;
• temporary and conditional financial support by the international community to provide a bridge to recovery;
• supportive policies in other individual nations to help restore market confidence;
• a stronger international financial system that fosters policies to reduce the risk of financial instability and to prevent further crises.

Strong Domestic Actions: Clearly, the key to restoring stability is national policies that address the specific causes of a country's crisis. Major areas include measures to strengthen the domestic financial system; to open protected sectors to both foreign and domestic competition; to reduce distortions in the international flow of resources; and to implement appropriate monetary and fiscal policies.

More than ever, the local and international business communities are looking for transparent and accountable governance, or what we call good governance. They want banking systems that are founded on transparency and sound regulation and supervision. They want markets that are open to competition and subject to appropriate corporate regulations, and monetary and fiscal policies based on stable and transparent rules. All countries have policy options to make real progress in each area. For instance in the fiscal area, we would argue in support of the IMF's code for fiscal conduct and for publicly vetted budgets. A transparent budget process is more likely to result in sound spending decisions with more for physical and social investment, such as primary heath and education, and less for subsidies for the affluent or unnecessary military expenditures. This sends an enormously powerful signal to markets and encourages development effectiveness.

Temporary and Conditional International Assistance: The International Financial Institutions must play a major role in supporting countries in crisis. In Asia, they have shown that they can react quickly to support countries that are committed to taking needed reforms. They have played a vital role in helping countries devise and implement these reforms and have taken on structural issues, such as banking and corporate governance, which extend beyond the traditional focus on monetary and fiscal policy and balance of payments adjustments. The IFIs are concentrating on structural issues because they are among the underlying causes for the crisis and must be addressed to restore investor confidence. By providing temporary assistance, the IFIs have given these economies the breathing room to undertake these vital reforms. Effective coordination among the IFIs, including the IMF, World Bank and the ADB, has been key to the success of recent efforts. But we also believe that IFI cooperation and coordination can be further improved through better information exchange, joint missions and activities linked to comparative advantage and a clearer definition of the division of labor across institutions. We believe a partnership of equals with each institution concentrating on its respective areas of strength and reinforcing the actions of the other is essential.

Supportive Actions by the U.S. and Other Individual Countries: In an era of interconnected markets, individual nations have a part to play in supporting a rapid return to growth and the continued expansion of trade. Several countries, including the United States, have indicated a willingness to provide additional temporary assistance in some situations if a country is continuing with reforms and unexpected developments call for supplemental resources. Like other countries, we are seeking legislative approval for U.S. participation in the IMF quota increase and in the IMF's New Arrangement to Borrow to provide needed resources for the global financial system. The U.S. and others are extending help through short-term export insurance to support the import financing needs of countries in crisis.

Long-Term Strengthening of the International Financial System: Recent events in Asia have highlighted the importance of strengthened safeguards in the global financial system -- an area of concern for us for several years. We encourage others to join with us to build upon the extensive work undertaken since the Halifax Summit to promote financial stability in global markets and to strengthen financial systems in emerging economies. At President Clinton's initiative, the United States has convened a meeting this week of finance ministers to continue these efforts and start developing a consensus on policies to deal with new challenges to the international financial system. Issues of concern include measures to make global markets function more efficiently through increased transparency and disclosure; steps to strengthen national financial systems and supervision; better surveillance and an improved IFI response to financial crises; and appropriate burden-sharing by the private sector in resolution of crises. Our shared objective should be agreement on measures to head off or minimize the impact of future systemic financial difficulties.

MDB Resources

World Bank Income Dynamics: Net income is a critical issue. We all have a shared responsibility to safeguard the Bank's financial soundness and maintain the Bank's high standard of financial integrity in international capital markets. This is fundamental to our ability to finance effectively the evolving development challenges of our borrowing members. We, therefore, need to move quickly and collaboratively to address the Bank's increasingly complex financial framework, including the prospective long-run decline in net income, changing reserve requirements, and the vital importance of maintaining net income support for priority development needs.

We need to look much more carefully both at how the Bank earns income and how it spends it, and we will have to be alert to identifying the opportunities -- as well as the difficult choices and trade-offs -- available for reducing costs and increasing revenues.

On the cost side, we seek a more efficient Bank, producing better results on the ground and at lower cost. We applaud Jim Wolfensohn's initiative to establish the Cost Effectiveness Review, which identified a broad range of savings opportunities to help meet the essential budgetary benchmarks of the Strategic Compact, implementation of which will require aggressive and systematic attention. We urge the Bank and its members to seek every opportunity for further savings beyond those which have already been identified.

There must be more selective use of Bank resources with greater concentration on those activities which the Bank does best and reduced attention on those activities which the Bank's development partners or the private sector can carry out more effectively. We note President Wolfensohn's efforts to seek a better prioritization of the Bank's activities in its borrowing countries. A rigorous and systematic examination of operational priorities, grounded firmly in the commitment to selectivity, will produce clear opportunities for further budgetary savings.

On the revenue side, we all should be concerned that the spread the Bank currently charges on its loans does not cover its administrative costs, and that IBRD loan charges are significantly lower than those of the regional development banks. As a result, the Bank is relying on its equity for its income. We believe strongly that IBRD charges should cover administrative costs at a minimum. This is reasonable. The development framework of IBRD loans brings substantial benefits to borrowers which are not available from most alternative funding.

There are a number of potential sources of additional revenue. While we are prepared to consider seriously other ideas, I believe we should focus on: (1) eliminating the interest waiver on existing loans, and (2) the use of a flexible pricing structure on new loans. I understand borrower reluctance to increase charges. However, as the prime beneficiaries of a financially sound institution, borrowers have a vested interest in strengthening the capacity of the Bank to maintain its financial standing and ability to lend.

Implementation of the HIPC Initiative: In September 1996, we agreed on a momentous initiative to support sustainable development and growth and assure manageable debt burdens for heavily indebted poor countries. During the past year and a half, considerable effort has gone into developing concrete mechanisms to implement this initiative by all creditors. We are pleased that key International Financial Institutions have now agreed to participate. Moreover, eight countries have demonstrated a sustained commitment to policy reform. Six of these have received firm commitments for HIPC relief, and we expect similar decisions soon for the other two.

In recognition of its strong reform effort, Uganda was the first country to receive final HIPC debt relief this month totaling about $650 million in nominal debt service relief. This is the last step of a process of economic reforms and debt relief that began in 1992 with a Toronto terms reduction (50%) in the Paris Club and was followed by successively deeper debt reductions that will allow Uganda to exit from the debt rescheduling process. We believe that Uganda sets a fine example for implementation of the HIPC debt initiative. HIPC action will free up resources that can be used to address poverty and poor social conditions, areas that have received increased emphasis under recent reform programs. New financing for Uganda is expected to remain highly concessional.

Credible early relief under this initiative should be a common objective of all creditors to help buttress the debtor countries' reform efforts. Although the World Bank has agreed to provide interim relief using IDA grants, based on the degree of debt burden, we remain concerned that the IMF and other IFIs have not agreed on specific mechanisms to provide interim relief. We urge them to define specific measures for early relief as soon as possible.

MIGA Capital Increase: We welcome the progress that has been made since the last meeting of the Development Committee to strengthen MIGA's finances and its development effectiveness. We also welcome the approval of a $150 million transfer of net income from the World Bank to MIGA, which we voted for, and which was approved by the World Bank Governors on April 6.

There have been good discussions in the MIGA Board on some of the core policy issues necessary for a financially strengthened MIGA to better promote sustainable economic development through private sector investment. Particular progress has been made in incorporating core labor standards in MIGA's operations and adopting stronger environment policies. We look forward to final agreements on these key issues. We urge that concrete progress be made in bringing MIGA and IFC social and environmental standards up to those of the World Bank itself. We are also seeking an improvement in MIGA's information disclosure policies. We are concerned that the effort to create an Inspection Panel at the IFC is considerably behind schedule, which in turn is preventing MIGA from moving forward with the creation of its own Inspection Panel.

My government is reviewing very carefully the recommendation for a $850 million General Capital Increase for MIGA recently approved by the MIGA Board. Thanks to the solid support we have received from MIGA Management and from other MIGA members in seeking a stronger, more effective MIGA, we hope to be in a position to support this capital increase in the Council of Governors, and submit a formal authorization request to our Congress. The U.S. will not be able to agree to a capital increase for MIGA until our concerns have been resolved. Much will depend on further discussions with our fellow MIGA members on the issues I have mentioned.

Development Effectiveness and Improved IFI Cooperation

Implementing the MDB Task Force Report: The MDB Task Force report commissioned by this body several years ago, spoke directly to some of the key issues we are grappling with today in the context of recent events in Asia. In particular, that report gave special emphasis to the importance of coordination among the Multilateral Development Banks. We welcomed the recommendations of the MDB Task Force Report two years ago, and are pleased that the Presidents of the Multilateral Development Banks (MDBs) are meeting semi-annually to discuss key policy issues and that staff also meets periodically. We look forward to a further strengthening of these efforts to improve MDB coordination.

To avoid duplication of effort and to make more effective use of MDB resources and expertise, we need better MDB coordination on country assistance strategies, public expenditure reviews, sector-specific policies, and assessment of country performances. To improve the quality and integrity of MDB lending as well as to set clear guidelines for private sector partners, we would like the banks to develop uniform procurement rules and documents of the highest standard, a common policy to mainstream anticorruption into decisions on assistance, and specific and monitorable performance indicators to evaluate the success of MDB policies and programs. I urge MDB Presidents to develop a process that will intensify current efforts and lead to specific results, including an announcement of a concrete set of accomplishments within the year.

Strategic Compact: Over the past year, the Bank has been proceeding rapidly with implementation of the ambitious agenda of the Strategic Compact. It is improving project quality and devising and enhancing performance indicators to evaluate the effectiveness of its work. It is decentralizing and reducing internal decision making layers. It is intensifying its focus on poverty alleviation through programs for health, education and microfinance and sharpening its ability to respond to financial crises in the wake of developments in Asia. We look forward to full implementation of the Bank's new human resources policy, cost-cutting measures and improved internal procedures. We applaud the effort being undertaken to focus the Bank's activities on areas where it can be most efficient and effective. All of these efforts will support the Bank's commitment to return its budget to pre-Compact levels in real terms at the end of the three-year Compact.

We urge the Bank to use the Strategic Compact to sharpen performance criteria for lending, to improve its own internal governance, and to strengthen its impact on labor, environment and microenterprise issues.

Performance Criteria and Selectivity: Recent Bank research shows that international foreign assistance leads to increased economic growth only in countries with good policy performance while aid in the wrong policy environment can actually be harmful. In addition, the research indicates that institutional capacity and good governance are indispensable to transforming assistance into sustainable economic growth. These are powerful findings, and strongly reinforce our long-held view that the Bank needs to extend assistance selectivity and to identify correctly the criteria for good performance.

Bank Governance: The principles of accountability, participation and transparency also need to be observed more systematically in the Bank's internal process. We are pleased that the Bank is using participatory approaches to ensure that its projects and programs benefit the poor in borrower communities, and urge that this approach be used across the board in the development of its country assistance strategies. A key factor in obtaining the support of affected groups for the Bank's strategy and programs would be publication of the assistance. Disclosure of Bank strategies and policies and the publication of Bank evaluation documents will encourage accountability and improve development effectiveness.

Labor: Over the past six months the Bank has made commendable efforts to advance core labor standards, including rights to associate, organize and bargain collectively, the prohibition of forced or exploitative child labor, and the principle of non-discrimination. We are pleased that President Wolfensohn has played a leadership role in this area and has met with Asian labor leaders to gain their perspective on recent events. In addition, the Bank recently decided to prohibit use of forced and exploitative child labor in MIGA-guaranteed operations. This is an important step forward and one we hope to see adopted throughout the World Bank Group and the MDB system. The debate on these issues has been constructive and healthy and has aired the full spectrum of views. For all of us, progress on the ground will be a continuing effort.

Our bottom line is that improving respect for core labor standards is fully consistent with -- indeed central to -- the mission of the International Financial Institutions. Greater respect for worker rights complements efforts to achieve and maintain long-term economic growth and stability. Conversely, denying core labor standards has a negative impact on the most important productive resource in developing countries -- labor. We call upon the World Bank and the IMF to continue efforts to advance respect for worker rights, including convening a joint conference on worker rights issues. In addition, we urge the World Bank to build on the work begun through its Child Labor paper and work with the ILO on a strategy that will advance a Bank screening mechanism process.

Environment: We are pleased that the donor community has agreed to replenish the Global Environment Facility and to adopt reforms to mainstream the GEF's objectives into the regular operations of the World Bank. But more work needs to be done. Environmental protection should not be a luxury available only to the rich.

As President Wolfensohn has noted, we need a uniform set of environmental standards that apply across the Bank, MIGA and IFC. In addition, implementation of policy commitments should be strengthened, and environmental considerations should be mainstreamed into the work of the Bank Group so that a broad array of projects are tailored to benefit the environment rather than solely to mitigate environmental harm. Public participation in the development of Bank projects and policy should become routine. Related to this, we are concerned by efforts to weaken the Bank's Inspection Panel, which we already believe is not functioning as rigorously as intended. We believe this issue warrants closer attention by Bank members. It is vitally important to reach agreement on an effective inspection process for the entire Bank Group. We intend to pursue this issue further in the IDA-12 negotiations.

Microenterprise Development: We are pleased that the Strategic Compact singled out microenterprise development as an area in need of greater focus by the World Bank. We commend the efforts that have been made thus far to increase the Bank's financial and policy involvement in this area, and urge that the goal of mainstreaming microenterprise into the overall work of the Bank be accelerated.

Conclusion

Since we met in Hong Kong in September, the shared challenges facing the international community and the International Financial Institutions have intensified, particularly in East Asia. These difficulties have reaffirmed the importance of broad-based economic reforms to lock in economic gains and of close coordination among countries in crisis, the International Financial Institutions and other countries that can lend a hand. As we go forward, our job is to take stock of what has worked, what has not and what needs to be improved, and then alter our policies accordingly -- as nations and as participants in the International Financial Institutions, and more broadly, in the international financial community. These lessons came at a price, particularly to the people of East Asia. We owe it to them and to ourselves to use these lessons to take actions that forestall or mitigate future crises.