FROM THE OFFICE OF PUBLIC AFFAIRS

The financial crisis that began in Asia more than a year ago has thrust all of us developed countries, developing countries and international financial institutions onto new and difficult terrain. The immediate challenge is to work together to repair troubled financial systems, address the profound human consequences resulting from the financial disturbances, and restore financial stability and growth. Over the longer term, the challenge must be to tackle the basic policy and governance inadequacies that lie at the root of today's problems. Each of us nations and institutions must step up these challenges.

Our efforts must be centered on improving preventive measures to reduce the scope and impact of problems, and better measures to confront problems when they occur. We must make greater public and corporate transparency and accountability a global reality. We must aggressively tackle the disease of corruption. And we must intensify efforts to strengthen the international financial architecture.

The world is still grappling with the financial instability of the past year. But it is not too soon -- indeed it is past time -- to move more boldly ahead with those steps that we know are integral to a durable solution.

ELEMENTS OF AN EFFECTIVE RESPONSE

IFIs Role In Crisis Countries: The Bretton Woods Institutions (BWIs) and the regional development banks have played a critical role in the international response to the current crisis and should remain central to a solution. The IFIs have devoted enormous resources, both financial and human, to help the economies in Asia and throughout the world recover from the crisis. The IFIs cannot help countries that are not committed to helping themselves. But where policy makers are committed, IFI involvement is central to an effective international response. Of course, adequate funding for the IMF and the multilateral development banks is critical to this effort, and I will continue to press the U.S. Congress to take action.

There are several immediate actions in which the IMF and World Bank must be engaged:

• convincing countries in crisis to stay engaged in the global economy misguided exchange and capital controls are not the answer for dealing with the effects of this crisis. While the loss of confidence and resulting flight of capital from many emerging market economies has carried with it a heavy cost, measures that would effectively prevent the return of this capital will only postpone recovery and the restoration of economic growth. Indeed, countries that use these measures to allow for the adoption of unsound policies or to insulate companies and banks from competition will in the end pay a heavy price in lost economic growth.

• accelerating the pace of comprehensive corporate and financial restructuring in countries where there is a systemic problem notably in Asia where the severe indebtedness of both the financial and corporate system is a serious barrier to recovery and where addressing the overhang of domestic debt is essential. Progress has been made and frameworks for dealing with these issues have gradually been put in place, however we remain concerned that necessary restructuring is proceeding too slowly to restore economic growth quickly given the systemic nature of the problem and the sheer magnitude of corporate and bank insolvency.

• providing increased social safety nets in the countries in crisis to help the least advantaged citizens in those countries who are experiencing hardship. The World Bank and ADB are well positioned to provide adequate government spending in the areas of health and education -- two of the most crucial areas in which the MDBs should focus their resources. In addition, employment generation plans, support to SMEs, and support in the development of unemployment insurance and pension plans, is needed.

• continuing discussion on new instruments for emergency assistance while adhering to prudential norms of the Bank's financial structure. Led by the World Bank, the multilateral development banks have played a vital role in providing exceptional assistance to support priority reforms in countries in crisis. Looking ahead, it is essential for the institutions to have the capacity to engage substantially and quickly as circumstances require. Current discussions have been helpful in identifying ways to strengthen the Bank's risk-bearing capacity, and creative thinking such as the Bank's proposals for an Emergency Structural Adjustment Loan (ESAL) are appreciated. Additional steps such as aggressive use of the Bank's guarantee instrument; measures to strengthen net income and reserves, including increased charges and elimination of commitment and interest waivers; and, making use of additional leverage that may be available in the balance sheet should also be considered.

• reinforcing good governance and transparency in both public and private sectors -- including, but not limited to the financial sector. Key elements of good governance and transparency should include, at a minimum, international generally accepted accounting principles, budget transparency, independent audit function, anti-corruption mechanisms and public participation. The IFIs are well positioned to lead on these crucial issues, and we look to them to exercise that leadership forcefully.

IFI RESOURCES

Bank-Fund Cooperation: Financial sectors are highly complex. Hence, a key challenge for the Bank and Fund is to improve their coordination and effectiveness on financial sector issues to avoid the problems that have arisen, and to manage overlaps in their respective roles. At present, the main concrete proposal put forth by both organizations is the creation of the Financial Sector Liaison Committee, which we support. However, the creation of a Committee is not enough. Substantial change including cultural -- is required of both institutions. It is past time to put aside institutional rivalries unbefitting public institutions with the same shareholders. We look to the Management of both institutions to deliver this change and to do so quickly.

Both the Bank and the Fund need to provide their respective Boards with papers detailing the changes in staffing, budgets, reporting structure, and operational procedures that they are proposing to adopt to enhance collaboration on financial sector issues and in response to financial sector crises. We also believe that information should be fully shared between the Bank and the Fund and would like both institutions to take the steps necessary to make this a reality. The Bank must develop a more effective internal decision-making structure that allows it to quickly coordinate its responses with those of the Fund. For its part, the Fund needs to actively engage the core Bank competencies that it clearly lacks. An action plan to coordinate effectively with the regional multilateral development banks is also necessary.

Implementation of the HIPC Initiative: Considerable progress has been made under the HIPC initiative to reduce further the debt burdens of heavily indebted poor countries in support of sustainable development, economic reform and growth; seven countries have demonstrated a sustained commitment to policy reform and have received firm commitments for HIPC relief. Two of these countries have reached the completion point, including most recently Bolivia.

Bolivia's strong record of economic reform since 1985 qualified it for final relief totaling $760 million in nominal debt service only one year after being declared eligible for HIPC debt relief. This culminates a process of economic reform and debt relief beginning in 1990 with a 33 percent reduction of eligible debt by the Paris Club that was followed by successively deeper debt reduction. The debt relief to be provided not only will lighten the debt burden but will enable Bolivia to intensify social reforms by allowing an increase in social sector spending, particularly for the most vulnerable.

For the future, we welcome the decision to extend the initial two-year period to allow more countries to meet the entry requirement that they be pursuing a program of adjustment and reform. We want to see as many countries as possible qualify for HIPC debt relief but note that the pace of implementation depends on the speed of individual country reform efforts.

In addition, we believe all creditors should follow the example of the World Bank and Paris Club in providing interim relief as a reward for reforms to date, rather than delaying all debt relief to the completion point. We urge all IFIs to develop mechanisms to provide interim relief that will ease cash-flow burdens.

When the full amount of debt relief to be provided under the HIPC debt initiative is included, we estimate that the total debt relief provided to the poorest countries since the late 1980s by all creditors will equal $75-80 billion. This is in addition to the grant assistance that has been provided and it represents a remarkable contribution to the development needs of these countries.

Post-Conflict: We welcome the preliminary ideas from the World Bank and International Monetary Fund on providing additional and more timely assistance to post-conflict countries, particularly the innovative thinking by the World Bank. We call on the international community to build on these ideas and develop a comprehensive strategy to assist financially burdened countries emerging from crisis, and to share appropriately in the financial burden of providing this assistance. A post-conflict strategy should not primarily be a debt strategy, but a strategy aimed at restoring stability and laying the groundwork for sustainable economic growth. Every effort must be made to provide a significant positive net flow of donor resources to post-conflict countries that are performing, particularly during the earliest stages of reconstruction. As first suggested in Birmingham, the Bank's strong role in coordinating a broad framework for post- conflict assistance is important. Also important is linkage of such assistance to an IMF program.

DEVELOPMENT EFFECTIVENESS

The past year's developments further highlight the need for substantial improvements in MDB operations for which we have been pressing for some time, including in the IDA-12 replenishment negotiation now underway.

Governance: There is a clear donor community consensus that Bank lending should be more closely linked to performance, with increased weight given to the transparency and accountability of borrower governance, and the quality and costs of the decisions they make. Specific indicators for governance should include: efforts to meet the IMF's code of conduct for fiscal transparency, independent audits of security-related expenditures provided to civilian authorities, demonstration of sound fiscal choices which prioritize social over non-productive expenditures, public participation in budget and rule-making processes, support for free association of workers and their rights and actions taken to prevent exploitative child labor.

Joint MDB and IMF preparation of comprehensive Public Expenditure Reviews (PER) would be enormously useful in many cases. PERs, combined with candid assessments of procurement and financial management capabilities, should be routinely incorporated into IFI Country Assistance Strategies (CAS). Technical assistance funds should be used to help countries pursue good governance and anti-corruption initiatives, especially in areas of creating anti-corruption authorities, strengthening audit functions, improving budget planning and transparency, assisting countries to meet data reporting standards (SDDS, e.g.) and bolstering public participation mechanisms. Finally, we encourage the MDBs to create lending programs which more effectively establish the elements of an attractive investment climate in developing countries, particularly in Africa, and to provide more effective support for regionally based initiatives.

The IFIs themselves must be held to similar standards. We expect openness and full accountability to be the rule in IFI operations; participation by civil society should be the norm in the CAS process, project and program planning and policy design; and, public access to documents should be broadened to the maximum extent, including project completion reports, OED studies of internal Bank processes and Inspection Panel reports with the accompanying Management action plans, all of which are currently withheld. Letting countries determine the release of Bank strategy documents related to them is no longer acceptable.

The Inspection Panel, a significant means to enforce accountability, should be strengthened to play a more forceful role in assuring compliance with Bank Group policies and processes and Panel reports and action plans should be made available to the public. We expect the Framework Paper of the Board's Working Group to enhance not dilute -- the role of the Panel. The Inspection Panel should be expanded to cover IFC and MIGA operations. We have discussed this issue for long enough -- now is the time to make effective Inspection Panels a reality.

In the end, IFI tolerance of corruption and poor governance in borrower countries and inadequate internal IFI controls undermines integrity of and public trust in IFIs in general. I am encouraged by the comments made by President Wolfensohn in his Note to the Development Committee. But there remains a stark disconnect between statements of intent and operational reality. For example, decentralization of procurement, disbursement and audit functions is fundamentally inconsistent with a strong internal control environment.

Finally, we need to dry-up the supply side of corruption. The U.S. will make every effort to meet the year-end target date for ratification of the OECD Anti-Bribery Convention; I urge others to do likewise.

Strategic Compact: Under the Strategic Compact, the Bank committed to refocus its development agenda and revamp its institutional capacities. The current economic instability in emerging markets, however, is requiring the Bank to respond more rapidly than it initially envisioned. We are pleased that the Bank is developing new instruments, strengthening its capacity to assist countries in financial crisis and responding to governments' requests for help in formulating anti-corruption strategies. These efforts need to be reinforced with a redesigned human resource policy and improved collaboration with other international financial institutions to allow the Bank to concentrate on areas where it is more 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 period.

Selectivity and Donor Coordination: Against a background of limited development resources, IFIs and other donors need to focus their efforts in areas of respective comparative advantage. This requires thorough knowledge of what all donors are doing in each country in order to identify where the Bank will intervene (based on comparative advantage), where it will follow others and where it will not intervene. In this regard, we are encouraged by the Bank's new Partnership Initiative, elements of which we are beginning to see in CASs, and encourage it to become routine. Similarly, IFIs must take seriously calls from donors and recommendations contained in the MDB Task Force Report to find efficiency gains both for themselves and for their borrowers. For us, this means: finalizing on-going work on a set of best-practice uniform MDB procurement rules and common evaluation methodologies; preparing joint CASs, and PERs, in the majority of cases; and, conducting joint project supervision missions. Specifically, under IDA-12 and AfDF-8 negotiations, it means agreeing to a clear division of labor between the two institutions on operations in Africa.

Labor: We are encouraged by strengthened efforts at the World Bank and at the other IFIs to advance respect for core labor standards, including rights to associate, organize and bargain collectively, the prohibition on forced labor and exploitative child labor, and the principle of non-discrimination. The first steps towards establishment of a screening process at the World Bank and other IFIs is commendable. However, the World Bank, the IMF and the other IFI have more work to do so that basic worker rights are systematically taken into consideration as part of the policies and programs of the institutions. This important work is consistent with the mission of these institutions and has the potential to help solidify the long term goals of economic growth and stability.

Environment and Sustainable Development: Since the last Development Committee meeting in April, harmonization of public disclosure, social, and environmental standards at the World Bank Group has moved further toward completion. Issues remain to be resolved on a few policies, such as involuntary resettlement, information disclosure and the inspection panel. In recent years the Bank itself has made substantial progress in these important areas and we are concerned that IFC and MIGA continue to lag behind the Bank. We would appreciate President Wolfensohn's involvement on this issue to ensure full policy harmonization to the highest standard. We will take progress on the issues of environmental and social policy harmonization across the Bank Group and expansion of the Inspection Panel to cover IFC and MIGA into consideration in replenishing IDA-12 and endorsing the MIGA capital increase.

Equally, we would like to see the Bank address the Global Environment Facility (GEF) Council Replenishment Policy Statement and the New Delhi Statement of GEF's 171 participating countries through mainstreaming environmental activities and values throughout its country programs, and redoubling its efforts to help countries identify and implement "win-win" development options that both clean up the environment and support economic growth. In particular, the Bank needs to expand support for renewable energy and energy efficiency and also make sure that energy sector reforms create a level playing field for private sector developers of clean energy.

CONCLUSION

We are living through a period of unprecedented challenges in the global economy. The global economy and global financial markets have evolved and, now, international financial institutions such as the IMF and World Bank, must evolve to meet the new demands of the global economy. All of us must work together to meet these challenges: countries in crisis must sustain sound reform programs geared to growth and engagement in the world economy; the major industrialized nations must maintain strong domestic growth and cooperate to spur global growth; and, international financial institutions must apply the lessons learned from the crisis and adapt to pursue best-practice models for supervising financial systems. And above all, we must strive for the global economy to work to the benefit of ordinary citizens.