FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, members of this Committee, it is a pleasure to appear before you today to discuss funding for the International Monetary Fund in the context of U.S. leadership in the global economy and the situation in Asia. I would also like to bring you up to date on the international response to the crisis and our efforts to modernize the architecture of the international financial markets to better prevent financial crises, or better manage them should they occur.

Mr. Chairman, as you well know, we live in a new era of the global economy and global financial markets. Twenty years ago, the vast majority of our businesses were predominantly domestic. Now many are global entities. Developing countries have gone from having little impact on our economic well being to absorbing over 40 percent of our exports. Our leadership in international financial institutions such as the IMF has played a key role in these developments that have contributed so much the economic well being of our workers, farmers, and businesses.

But with the opportunities have come risks. Strong and effective U.S. leadership on the issues of the global economy is essential if we are to make the most of these opportunities, and effective manage the risks; and whether or not we provide that leadership will profoundly affect our national economic and security interests in the years ahead.

The need to exercise U.S. leadership in the global economy to protect and promote our interests has been brought home by the recent situation in Asia. We have critical economic and national security interests in Asia. Thirty percent of U.S. exports go to Asia, supporting millions of U.S. jobs, and we now 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. 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 and services in world markets, the growth of our economy and, ultimately, the well-being of American workers. Moreover, if the problem were to spread to developing countries around the globe, the potential impact to our economy could be severe. By doing everything sensible to help these Asian countries get back on track, we support our exports to the region and help strengthen their currencies, which helps the competitiveness of our goods in world markets and we reduce the risk that financial instability will spread to other developing countries.

In addition, the United States also has critical national security interests in seeing a restoration of financial stability in the region. We have 100,000 troops based in Asia, 37,000 on the Korean peninsula alone. As the members of this committee know well, financial stability and prosperity promotes social stability and peace -- both in Asia and throughout the globe.

The United States has exercised very strong leadership throughout this situation to help resolve the Asian crises. In Thailand, we saw the signs of problems early on and we moved with the IMF to put into place a reform program which the Thai government is currently implementing. In Korea, the situation deteriorated very rapidly and by Christmas the Korean banking sector was on the verge of systematic default. Treasury and the Fed worked together over a very few days to catalyze the participation of banks on three continents to refinance short term loans in order to give Korea breathing room to address its economic problems. In Indonesia, just this week President Clinton has sent former Vice-President Mondale as a personal representative to encourage Indonesia to make the critical reforms necessary to succeed. More broadly, we also have been part of an important international effort to encourage countries outside of the region to put policies in place to limit their vulnerability to crises.

Through all of this, the United States has strongly supported the IMF, as the central institution in the effort to resolve the financial crises in Asia. The IMF programs have been focused predominantly on structural reforms, to address the specific causes of the crisis in each nation. These reforms include reshaping the relationships between banks, the government, and commercial entities; financial sector regulations; trade liberalization; and appropriate monetary and fiscal policies. These are not austerity programs, though they do involve macro-economic policy regimes necessary to regain financial market confidence.

The IMF is the right institution to be at the center of this effort for three important reasons. First, it has the expertise to shape effective reform programs. Second, it has the leverage to require a country to accept conditions that no assisting nation could require on its own. Finally, it internationalizes the burden. Moreover, our contributions to the IMF have not cost the taxpayer one dime in fifty years. When the IMF draws on our commitments, we receive an interest bearing offsetting claim on the IMF of equal value. There are no budget outlays under CBO scoring and no increase in the deficit, or reduction in resources for other spending priorities.

Today we ask you to support two critical requests: an increase in our IMF quota subscription, and U.S. participation in 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.

We need this money as quickly as possible, because right now the IMF does not have sufficient funds to deal with a truly major crisis and it is in our economic interest to have that vulnerability exist for as little time as possible. As a result of the recent situation in Asia, the IMF's normal financial resources are approaching a historically low level. At the moment, the IMF has about $45 billion in uncommitted resources, but only $10-15 billion is available because an amount we estimate at $30-35 billion must be held in reserve to accommodate withdrawals by members. In addition, the IMF has access to roughly $23 billion in the General Arrangements to Borrow, for a total of $33 to $38 billion of total lending capacity. To give you a sense of how inadequate that amount could be, in the last six months alone the IMF's commitment in these Asia programs amounted to some $35 billion. The IMF might not have the capacity to respond effectively if that crisis were to deepen, spread to developing countries throughout the globe, or a new crisis were to develop in the near term. Even if the $3.5 billion for the NAB alone is approved, we still remain exposed with the IMF not having sufficient resources to deal with a truly major crisis. The U.S. contribution totaling $18 billion will leverage a total amount of about $90 billion in usable resources. If we don't act, neither the quota nor the NAB will come into effect. However, once we act the rest of the world will act very quickly. At the last IMF replenishment, in 1992, all of the other countries acted within six days of action by the U.S. Congress.

The probability of a serious reversal in the Asia situation and contagion to developing countries around the world, or of a new crisis in the short term, may be small. But, these occurrences are possible and the consequences could be immense. We cannot afford to take the risk that such events could start to unfold and the IMF not have the capacity to try to cope effectively. Again, the full IMF funding is needed now, to protect our interests. Moreover, failure to support fully the IMF now could shake confidence in American leadership in the global economy just at a time when confidence and American leadership are so important in re-establishing stability in Asia.

Some have suggested that we should not advance new monies to the IMF unless it agrees to attach certain conditions to its reform programs. We agree with the importance of many of their objectives. And I believe we can work out constructive measures responsive to them, but there are practical limitations on what can be done.

Mr. Chairman, even as we work to secure this funding and to solve the immediate problems in Asia, we are working to strengthen the architecture for the international financial system. While the global economy and the global financial markets have grown very rapidly and become very sophisticated in recent years, the institutions for preventing and dealing with these crisis has changed far less. We need to make that architecture as modern as the markets. At Treasury, we have been working with the Federal Reserve Board on these enormously complex issues. And we are working to develop international consensus. But, these are deeply complicated problems and major steps forward will take time.

One criticism that has arisen with respect to the international response to the situation is that providing financial assistance to these countries shields investors from the consequences of bad decisions. This, the so-called moral hazard issue, concerns us as well. We do not believe that international efforts to resolve financial crises should protect investors or creditors from the consequences of their actions and as you know numerous banks, investors and creditors have taken or will take huge losses in Asia. However, a byproduct of the international assistance effort may be that some creditors will be shielded from the full consequences of their actions. Addressing this issue is a high priority for us as we work to strengthen the international architecture, but is also extremely complicated.

Mr. Chairman, before I conclude, let me say a few words about the status of the situation in Asia. As a result of U.S. leadership and prompt action by the IMF and other international organizations, the spread of instability to other developing nations was limited after an initial burst. In the countries where instability has occurred, there is a long way to go and a great deal to do before we can feel secure that the period of instability is over and these countries are back on a path of solid growth. The countries in the region have great underlying strengths, such as high savings rates, a strong work ethic, and a commitment to education and that combined with strong reform programs, should provide the basis for a successful resolution over time. Thailand and Korea are on a constructive path of reform -- though there are great challenges ahead -- and that is the best path for Indonesia as well. In the meantime, it is critical that we have an IMF with the capacity to respond further -- or in other developing countries -- if necessary.

Mr. Chairman, as I said earlier, we live in an era of global financial markets and a global economy which presents both opportunities and risks for American workers, farmers and businessmen. Within that context, and to come again to the point of this hearing, we cannot afford to take the risk -- however small the probability -- that a major crisis develops while the IMF is without the capacity to respond, and so we should provide the full $18 billion IMF funding requested now.