Mr. Chairman, Representative Waters, Members of this Committee, I am pleased to have this opportunity to testify today on the Administration's FY 2000 budget request for Treasury's international programs, with particular reference to the requests pertaining to the Multilateral Development Banks and official debt reduction for the poorest countries.

Last year, the leadership of this committee was vital in approving the increases in our quota to the International Monetary Fund and our participation in the New Arrangements to Borrow. Your continued leadership is critical again this year to ensure that the international community remains in a position to respond effectively to financial crises such as those of the past two years and contain their effects on the United States and the global economy as a whole.

The financial crises and their costly implications for the countries most affected, and the rest of the international financial system, have understandably seized the headlines in recent months. But we must remember that the crises are not and must not be the only focus of the international financial community at this time.

Looking around the world, there are still very important development needs to be addressed especially in countries that have not so far managed to join the group of emerging market economies to any significant degree. It is these development needs and the best means of addressing of them which are the focus of my testimony today. But first, let me say a few words about the background for the Administration's requests in this area.

I. Introduction: The United States Approach

The United States' engagement with the global economy is increasingly important to our economic and national well-being. And the developing world's importance to the global economy is destined to grow considerably in the future.

More than 90 percent of the world's consumers live outside of the United States. All of the growth in the world's population over the next 25 years -- and the lion's share of its growth in productivity -- will take place in the developing world. That gives us an immense and growing stake in developing countries putting in place policies that will promote market- based, democratic, and self-sufficient growth.

We know that countries shape their own destiny. Neither the United States, nor the international community as a whole, can be more committed to growth and market reform than the countries themselves. Where supported by sound policies, official foreign assistance can be an important catalyst for market-led development: but our goal must always be to support, and not to supplant private finance.

In a few moments, I will discuss the very important role that debt reduction can play in this context. But our requests for the MDBs should be seen as growing out of the same basic philosophy. To put it bluntly: our requests for these institutions are not about charity or foreign aid. They are about the way these institutions serve core United States economic and security interests.

In the past year alone:

• The MDBs have mobilized more than $25 billion in response to the financial crises in Asia that is now working to help these countries restore economic stability and market- led growth.
  

• They have spearheaded an unprecedented international response to natural disasters in Central America and Colombia. The World Bank and the InterAmerican Development Bank have provided $212 million to support relief and reconstruction in the wake of Hurricane Mitch, and a further $600 million to others in the region suffering the impact of El Nino.
  

• And they have played, and will continue to play, an integral part in helping to deal with the immediate and longer-term consequences of recent crisis in the Balkans. World Bank lending to the Balkan frontline states was $338 million in 1998. Looking forward, it will soon approve a $30 million fast disbursing IDA operation to Albania, and a $40 million emergency IDA credit to Macedonia.

Support for MDBs delivers maximum United States leverage over development outcomes at minimum cost to the taxpayer. A few years ago, the United States' participation in these institutions cost us approximately $1.9 billion a year. Today, after negotiating a more than one-third reduction, our annual obligations to the entire MDB system are around $1.2 billion. Under the Bush Administration, the United States' annual commitment to the World Bank's International Development Association alone was $1.25 billion.

Our contribution is levered two ways: first, because every dollar we contribute unlocks many more from other countries; and second, because it makes possible the release of resources worth many times the institutions' paid-in capital in the form of project and program loans.

All told, our $1.4 billion contribution buys enormous influence over some $57.1 billion in MDB lending. Put it another way, each $1 we contribute directly leverages an additional $40 for economic development that will critically serve United States interests in the future.

While the absolute size of our contribution has declined in recent years, we have successfully maintained the United States' formal and informal leverage within these institutions. And let me add that Congress has played an important part in this, by helping to make possible major progress toward reducing United States arrears.

Back in 1996, the Administration and Congress worked together to chart a course for clearing all of our arrears to the MDBs. Thanks to the support that has been provided by Congress, we are now well in sight of that goal and United States leadership in these institutions is as strong as ever. In FY1997, when the 3-year arrears clearance plan was initiated, United States arrears to the MDBs stood at $862 million. At the end of this year (and if Congress approves the FY2000 appropriation in full), arrears will be around $140 million.

Our requests this year will continue this critical work as well as advancing core United States economic and strategic interests, including several priorities of particular concern to many in Congress. We greatly value the constructive and bipartisan dialogue we have had with Members on the full range of U.S. policy priorities. And we intend to maintain and deepen that dialogue, including through the regular reporting we have been providing on our negotiating objectives and key institutional operational issues such as on environment, transparency, and integration of core labor standards.

However, before turning to the details of our proposals let me highlight one critical issue that risks casting a shadow over this year's requests: the proposals presently before Congress to rescind appropriated United States callable capital. If enacted, the rescission of U.S. callable capital could be perceived as a major reduction in United States' support for these institutions, and could lead to a serious market reassessment of the likely United States response to a call on MDB capital should one ever occur.

Such a reassessment could increase borrowing costs for the MDBs, costs which then be passed on to the developing countries it is their mandate to help. At a time of such uncertainty in global financial markets, and the emerging market economies in particular, this would be a peculiarly unfortunate message to send, and is a step that I very much hope Congress will resist.

. Authorization Requests for MDBs

Last year was one of significant U.S. achievements in the MDBs. Negotiations were completed to replenish the resources of the African Development Bank (AfDB), the African Development Fund (AfDF), the International Development Association (IDA), and the Multilateral Investment Guarantee Agency (MIGA). And we are near completion of negotiations for a replenishment of the Inter-American Investment Corporation (IIC).

While the institutional details of these negotiations some of which I will be highlighting in a moment will vary, it is fair to say that the outcomes will advance three crucial United States' priorities:

• mproved focus on basic economic and social priorities that are central to long-term growth, including education and basic social services.
  

• Modernization and renewal of international financial institutions to make them more transparent, accountable and responsive.
  

• An increased emphasis on the private sector as the key to growth in the developing world in the years ahead.

With this by way of backdrop let us just offer some highlights of our specific MDB authorization requests for FY 2000 and the concrete benefits they will afford for these institutions' clients and for the United States.

A Twelfth Replenishment

Continuing our record of more effectively targeting IDA's resources, we have successfully pressed in this replenishment for:

• Such greater emphasis on direct human resource investments for poverty reduction particularly education investments -- within IDA.
  

• "Graduation" of China from IDA, with no new lending after June '99; and the earmarking of up to 50 percent of this replenishment of $21 billion for loans in Sub-Saharan Africa.
  

• New, specific linkages between new lending and governance indicators, anti-corruption measures, and portfolio performance; and a major increase in IDA transparency, notably in the breakthrough agreement to publish Country Assistance Strategies from June of this year.

In all this, we have husbanded well our resources. The new United States commitment has been held to the level of the previous one at around $800 million per year for 3 years. When combined with other donors' funding and "re-flows" from old loans, this means that every dollar of United States resources that is committed to IDA will leverage another $8 from other sources.

African Bank and Fund Requests

In recent years, the African Development Bank has faced real problems of governance, accountability, and appropriate performance of its institutions that have raised real concerns among its creditors and clients and across the development community. In these negotiations, we see the successful culmination of a major United States effort to restructure and restore the credibility and effectiveness of the institution -- and put it firmly back on track.

The results are:

• A program of reform and renewal at the AfDB that is almost certainly the most ambitious in the history of any International Financial Institution. The result will be finally to position the AfDB to make an enduring contribution to reducing poverty in Africa at an especially critical time in the region's history.
  

• A capital increase of $680.8 million, calling for United States payments of just over $5 million per year for 8 years, that will restore key financial ratios at the same time as achieving a major revision in voting rules will protect our interests in -- and influence over -- over the institution for the future.
  

• A replenishment of the AfDF calling for annual United States contributions of $100 million for 3 years, in return for which we obtained a full slate of IDA-12 type commitments: including the clear linkage of lending decisions to past performance; making good governance, or its absence, an explicit criterion in lending; and making poverty reduction a priority focus of programs, especially in rural areas.

Capital increases for MIGA and the IIC

Our other MDB authorization requests, which cover capital increases for MIGA and the soon to be agreed capital increase for the IIC, are for institutions that are both explicitly engaged in attracting private capital to for investments in developing countries. These will:

• Dramatically increase MIGA's capacity to help catalyze private capital flows to would- be emerging economies through the provision of political risk insurance to private investors. This, in return for annual United States contributions of $25 million for five years.
  

• Help the IIC to expand its extremely successful work providing loans and equity investments to small and medium-sized enterprises in under-served and under- developed Latin markets. The annual United States contribution would be $25 million for 5 years and would be levered many times over by the contributions of other shareholders.

III. Highlights of Debt Account Requests

Our policy with respect to debt reduction for the poorest economies starts from two basic propositions.

The first is that the single most important element in achieving growth and poverty reduction is attracting private capital. That, in turn means, developing policies and institutions for transparent, participatory and decentralized governance. Individuals and companies both inside and outside a country must feel secure that their persons and property will be respected, disputes will be fairly adjudicated, and that an economy will be well managed before they will provide the private savings and investment that is necessary to ensure long term growth. They must also have the basic confidence that debts undertaken will be repaid on time and in full.

On the other hand, we have learned that an excessive overhang of debt, for countries as for companies, can stifle growth and investment to such an extent that an economy will never be able to grow out from under it. In that case, discharging or reducing that burden of debt that will never be repaid stands to benefit debtor and creditor alike.

The proper balance between these two considerations lies in a policy that rewards good policies just as it reduces the burden of bad debts. It is this approach that has informed United States support for successive programs of targeted official debt reduction for the most indebted economies in recent years, including the most recent HIPC initiative, which we are hoping to strengthen and expand with this year's requests.

We recognize that unilateral U.S. debt action in the poorest Sub-Saharan African countries will achieve little, simply because we hold a relatively small proportion of the total debt. If we act on our own, our actions could result only in enhanced repayments to other creditors rather than relief to debtors. A coordinated and concerted action among virtually all creditors is needed to ensure that benefits flow to debtors.

We also recognize that there are difficult budgetary trade-offs involved. As we all know, in the budget process, once budgetary caps and Subcommittee spending allocations are set, increases in one program must be achieved either by reduction or by less growth in other programs. There is thus a tension between funding debt relief and funding other foreign assistance grant or lending programs. Targeted effectively, however, we believe that targeted debt reduction for the poorest, most severely indebted reforming economies can be money well spent.

All of these considerations come together in President Clinton's call for a major new international effort on debt-related programs at the March 16 United States-African Ministerial.

At that time, the President asked the international community to take actions which could result in forgiving $70 billion. The goal would be "to ensure that no country committed to fundamental reform is left with a debt burden that keeps it from meeting its people's basic human needs and spurring growth. We should provide extraordinary relief for countries making extraordinary efforts to build working economies."

As part of this effort, the United States is now pressing, in consultation with Congress and within the framework of our balanced budget, for substantial changes in the Heavily Indebted Poor Countries (HIPC) initiative, which currently faces an estimated funding shortfall of around $1.7 billion.

These changes would include:

• First, a new focus on early relief by international financial institutions, which now reduce debt only at the end of the HIPC program;
  

• Second, the complete forgiveness of all bilateral concessional loans to the poorest countries;
  

• Third, deeper and broader reduction of bilateral debts, raising the amount to 90%;
  

• Fourth, to avoid recurring debt problems, donor countries should commit to provide at least 90% of new development assistance on a grant basis to countries eligible for debt reduction;
  

• Fifth, new approaches to help countries emerging from conflicts that have not had the chance to establish reform records, and need immediate relief and concessional finance; and,
  

• And sixth, an adequately funded program for relieving debt owed to official institutions, which in the case of a number of countries may be predominantly owed to the IMF.

The thrust of the President's program is simple and compelling: "the more debtor nations take responsibility for pursuing sound economic policies, the more creditor nations must be willing to provide debt relief." As I have said, such a program cannot be the work of the United States alone. But we can and must do our part. In this context, the FY2000 request contains a number of new debt-related initiatives:

• A first ever authorization request for a United States contribution to the World Bank HIPC Trust Fund of $50 million;
  

• The first year of implementation of the debt for rainforest legislation which passed Congress last year of $50 million;
  

• The second year of implementation of debt reduction under the Africa Initiative, and the regular debt reduction activities of the Paris Club, including the Naples and HIPC programs; and,
  

• Two further authorization requests which would permit us to support IMF gold sales and the use of resources in the IMF SCA2 reserve account for the continuation of IMF concessional lending and HIPC debt reduction activities for the poorest countries.

In total, these requests amount to $120 million in budget authority: an extremely modest amount relative to the scale of the resources that these actions will mobilize. For example, the $50 million contribution to the World Bank HIPC Trust (in addition to authorization not requiring budget authority for our consent to mobilization of some of the IMF's gold and SCA2, of which our share is $300 million), will unlock some $12 billion of debt to the international institutions.

Let me say a little about this request relating to IMF gold sales, which has been the focus of some attention inside and outside of Congress.

Mr. Chairman, we want to ensure that the IMF is able to continue its support for the world's poorest countries, especially those burdened by unsustainable debt. For these purposes, we believe it is reasonable for the IMF to use income from the investment of profits on the sale of a small portion of its gold reserves. The principal amount of the profits on such a sale would remain part of the IMF's resources.

In the event Congress authorizes a decision to go forward with this approach, the IMF would take steps aimed at ensuring that any gold sales be conducted in a manner that limits any adverse impact on gold holders, producers, and the gold market. However, we believe that, at worst, such effects will be extremely modest.

• Gold sales on the scale currently under consideration would be dwarfed by the amounts of gold that will typically come on to the market in a given year. The London gold market alone has a daily turnover of the order of 850-1,200 tons. Against this the sale of 150-300 tons, over the space of quite a number of years, would be small fry indeed.
  

• Experience of gold sales by the IMF in the 1970s that were many times as large as any contemplated here provide further grounds for believing the impact would be extremely modest: 150-300 tons represents only about 6-12 percent of total gold mine production in 1998, and only around 4-7 percent of total global demand for gold.
  

• Further, market movements on the modest scale we would anticipate can be expected to have already been significantly discounted by market participants. This would further reduce the potential for the sale to have lasting market effects.

We think that mobilizing a modest amount of the IMF's gold in this way is a sensible and prudent approach. Other gold-producing countries support this view. This approach to funding IMF support for heavily indebted poor countries is far preferable to an even greater reliance on bilateral contributions from IMF members. Such contributions have fallen far short of needs in recent years, and, in our view, it would be unrealistic to count on such contributions to finance adequately the IMF's participation in this area. 

IV. Concluding Remarks

Mr. Chairman, in the past few years the Administration and Congress working together -- have achieved major reform and change at the MDBs, change that has directly served United States interests and those of their clients. Every one of these institutions is today more focused on basic development priorities and market-oriented reforms, more transparent and accountable, and more responsive to critical concerns such as the sustainability of development and good governance. Our requests for FY2000 reflect our desire to continue this progress in the years to come. I look forward to working with this Committee and with others in Congress as we work to achieve this. Thank you. I would now welcome any questions that you might have.