[Senate Hearing 106-657]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 106-657
 
      THE MELTZER COMMISSION: THE FUTURE OF THE IMF AND WORLD BANK

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 23, 2000

                               __________

       Printed for the use of the Committee on Foreign Relations





 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate




                    U.S. GOVERNMENT PRINTING OFFICE
66-721 CC                   WASHINGTON : 2000





                     COMMITTEE ON FOREIGN RELATIONS

                 JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana            JOSEPH R. BIDEN, Jr., Delaware
CHUCK HAGEL, Nebraska                PAUL S. SARBANES, Maryland
GORDON H. SMITH, Oregon              CHRISTOPHER J. DODD, Connecticut
ROD GRAMS, Minnesota                 JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas                RUSSELL D. FEINGOLD, Wisconsin
CRAIG THOMAS, Wyoming                PAUL D. WELLSTONE, Minnesota
JOHN ASHCROFT, Missouri              BARBARA BOXER, California
BILL FRIST, Tennessee                ROBERT G. TORRICELLI, New Jersey
LINCOLN D. CHAFEE, Rhode Island
                   Stephen E. Biegun, Staff Director
                 Edwin K. Hall, Minority Staff Director

                                  (ii)






                            C O N T E N T S

                              ----------                              
                                                                   Page

Bergsten, Dr. C. Fred, member, International Financial 
  Institution Advisory Commission; director, Institute for 
  International Economics, Washington, DC; prepared statement....    47
Calomiris, Dr. Charles W., member, International Financial 
  Institution Advisory Commission; Paul M. Montrone Professor of 
  Finance and Economics, Columbia University's Graduate School of 
  Business; and visiting scholar, American Enterprise Institute, 
  Washington, DC.................................................    12
    Prepared statement...........................................    17
Levinson, Dr. Jerome I., member, International Financial 
  Institution Advisory Commission; professor, Washington College 
  of Law, American University, Washington, DC....................    26
    Prepared statement...........................................    29
Meltzer, Dr. Allan H., chairman, International Financial 
  Institution Advisory Commission; professor of Political 
  Economy, Carnegie Mellon University; and visiting scholar, 
  American Enterprise Institute, Washington, DC..................     3
    Prepared statement...........................................     7

                                 (iii)




      THE MELTZER COMMISSION: THE FUTURE OF THE IMF AND WORLD BANK

                              ----------                              


                         TUESDAY, MAY 23, 2000

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met at 3:05 p.m., in room SD-419, Dirksen 
Senate Office Building, Hon. Chuck Hagel, presiding.
    Present: Senators Hagel, Chafee, and Wellstone.
    Senator Hagel. Good afternoon. This afternoon, the Foreign 
Relations Committee will continue to exercise its oversight 
authority over U.S. participation in various international 
financial institutions. We will hear from three members of the 
International Financial Institution Advisory Commission, which 
recently issued majority and minority reports on what kinds of 
reforms should be made in these international financial 
institutions.
    In October 1998, Congress voted an $18 billion 
replenishment for the International Monetary Fund. The money 
was predicated on reforms of the IMF that included, among other 
provisions, improved fund transparency and market-based lending 
rates for borrowing nations. Congress also decided to 
commission a thorough review of the world's international 
financial institutions.
    The International Financial Institution Advisory Commission 
was tasked with studying seven international financial 
institutions: the International Monetary Fund, the World Bank, 
the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the World Trade 
Organization, and the Bank for International Settlements.
    The Commission was chaired by our first witness, Professor 
Allan Meltzer. He is the Allan H. Meltzer Professor of 
Political Economy at Carnegie Mellon University and is a 
visiting scholar at the American Enterprise Institute. From 
1988 to 1989, Dr. Meltzer served as an acting member of the 
President's Council of Economic Advisers. He was also a member 
of the President's Economic Policy Advisory Board and has 
advised and consulted for central banks, governments, and 
international financial institutions. Welcome, Doctor.
    Dr. Meltzer. Thank you.
    Senator Hagel. Our second witness is Professor Charles 
Calomiris. Dr. Calomiris is a Professor of Finance and 
Economics at the Columbia University Graduate School of 
Business, and also teaches at Columbia University School of 
International and Public Affairs. He co-directs the Project on 
Financial Deregulation at the American Enterprise Institute and 
is a research associate of the National Bureau of Economic 
Research. Doctor, we welcome you as well.
    Dr. Calomiris. Thank you.
    Senator Hagel. Our third witness is Professor Jerome 
Levinson. Dr. Levinson is one of the authors \1\ of the three-
person minority report that disagreed with the major 
recommendations contained in the majority report. Dr. Levinson 
is presently the Distinguished Lawyer in Residence at American 
University's Washington College of Law, where he has been for 
the last 5 years. Professor Levinson has a long, distinguished 
public service career. He served as chief counsel to Senator 
Church's subcommittee on the Senate Foreign Relations Committee 
and was general counsel to the Inter-American Development Bank. 
Sir, welcome to you as well.
---------------------------------------------------------------------------

    \1\ Dr. C. Fred Bergsten, a co-author of the minority report, was 
scheduled to testify but was unable to attend due to personal reasons. 
His prepared statement, which includes the full dissenting statement, 
begins on page 47.
---------------------------------------------------------------------------
    Dr. Levinson. Thank you.
    Senator Hagel. As policymakers and in concert with our 
fellow members of these organizations that were included in the 
study, it is Congress' responsibility to translate the 
Commission's thoughtful recommendations into appropriate 
policies and procedures.
    There were certain basic reforms that received consensus 
support on the Commission. These included a sharp distinction 
between lending programs of the IMF and World Bank, greater 
transparency in the programs of the international financial 
institutions, the need for stronger banking systems in 
developing countries, and support for debt relief for highly 
indebted poor countries [HIPC]. These are the kinds of reforms 
that have broad support both in the Congress and in the 
administration.
    However, the Commission was sharply split on several more 
controversial recommendations. The Commission's majority report 
also called for changes in the most basic structure and 
programs of the IMF and the World Bank. These included turning 
all IMF loans into extremely short-term loans with maturities 
of no longer than 240 days. It called for permitting the IMF to 
lend only to countries that prequalified, no matter what kind 
of financial crisis the world was facing. Finally, it called 
for getting the World Bank out of the lending business and 
transforming it into a grant-making institution.
    The committee looks forward to a discussion of these 
recommendations and gaining a better understanding of what 
reforms are achievable, what are relevant and could gain 
consensus support within the United States and among our G-7 
country allies.
    Before turning to our panel, I want to again thank each of 
you for taking your time, for your service to this country, and 
especially for the time that you all devoted in this study. We 
on this committee, as you know, have primary jurisdiction over 
most of these issues and we work in conjunction with the Senate 
Banking Committee and other tangential, sequential jurisdiction 
committees, but it is the primary responsibility for this 
committee to understand better what these recommendations are 
and how we might, in fact, benefit in actually implementing 
what you have done and what you are suggesting and take the 
time required, working with Treasury and other important parts 
of our Government, to in fact weave into the IMF these kinds of 
important and relevant recommendations based on the relevant 
challenges of our time.
    I have said, when we have had oversight committee hearings 
before, that international financial institutions should be, in 
fact, relevant to the challenges of our day, and what has 
occurred in this amazing world of ours over the last 50 years, 
since the days of Bretton Woods and the institution of IMF and 
the World Bank, have brought us to a point where we have come 
to ask people who have spent lifetimes in your business how 
best we can use these institutions and how best we can apply 
the infrastructure, the resources to these new challenges of 
this new dynamic world.
    So, that in essence is something that I think this 
committee is primarily interested in hearing from you. Most of 
us on this committee and our staffs have had an opportunity to 
get through those recommendations. I would hope that the effort 
that your Commission made will not end up like so many efforts 
of so many commissions around here: We have two or three more 
hearings and then we never hear from it again. I think it is 
more important than that, and I would hope that you could dwell 
and focus on that practical aspect of what you have come 
forward with and how it could be incorporated and woven into 
this realistic pursuit of helping nations.
    So, again, thank you all, and Dr. Meltzer, I would ask you 
to begin.

  STATEMENT OF DR. ALLAN H. MELTZER, CHAIRMAN, INTERNATIONAL 
    FINANCIAL INSTITUTION ADVISORY COMMISSION; PROFESSOR OF 
  POLITICAL ECONOMY, CARNEGIE MELLON UNIVERSITY; AND VISITING 
     SCHOLAR, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Meltzer. Thank you very much. Of course, the last part 
of your remarks, Senator, are dear to our hearts. Having done 
this work, we certainly hope that it will have some impact on 
the way in which these organizations function, not just because 
we did the work, but because we believe so many of these 
recommendations are in the interest of the United States, as 
well as the broader interest of the United States in its role 
in the global community.
    It is a privilege to testify before this distinguished 
committee on the report of the International Financial 
Institution Advisory Commission. Although the Commission was 
charged with making recommendations on seven different 
institutions, I will confine my remarks to two, the IMF and the 
World Bank, although I will be glad to answer questions about 
the others.
    The Commission's report became available almost 3 months 
ago. It has been discussed and appraised extensively in the 
press both here and abroad, by the U.S. Treasury Department, 
foreign governments, and central banks, in public discussion 
and in the Congress. I believe this is the fifth hearing that 
Congress has held on the report, a recognition not only of the 
importance of the issues but the widespread recognition that 
reforms are needed.
    I have followed discussion of the Commission's report 
closely. While there are many counter-currents, I believe it is 
fair to say that there is a very broad agreement that the IMF 
and the World Bank should be reformed and that the Commission's 
report is a proper starting point for such reform. The same 
bipartisan approach that was present within the Commission now 
characterizes many discussions of our conclusions.
    The two most important problems that the Commission faced 
were, one, how to make the world economy more stable, less 
subject to the frequent, deep, and widespread economic crises 
that the world economy experienced in the 1980's and 1990's, 
and two, how to make more effective development aid to 
impoverished people while improving their opportunities and 
living standards. A subsidiary but important issue was reform 
of the institutions to make them more transparent, more 
accountable, and more efficient.
    I will spend most of my time on the IMF. The main questions 
about the IMF are: Why have crises become more frequent and 
deeper, affecting many more countries in the last 20 years? 
What could a restructured IMF do to make crises less frequent, 
less severe, and less widespread? Before answering these 
questions, I will comment on why these questions are important 
to Americans and why the Congress, the administration, and the 
public have a major stake in the answers.
    Many commentators talk about the IMF's successful 
performance. The Latin American debt crisis took most of a 
decade to resolve. Asia recovered much faster. Does the IMF 
deserve full credit for the speedy recovery in Asia?
    I submit that the answer is no. The United States played a 
major role. We became, once again, the importer of first resort 
in a crisis. U.S. imports of goods soared; our exports fell in 
1998 and grew very slowly in 1999. The U.S. current account 
deficit rose from about $150 billion in 1997 to a current 
annual rate of $400 billion. That $250 billion swing is a key 
way we helped to strengthen the world economy.
    I have distributed a chart,\2\ that is in my paper, which 
shows what happened to the current account deficit. It looks as 
though someone tied a rock to the bottom of the line with a 
heavy weight and pulled it down. The chart shows what happened 
to net exports of goods and services. Unwinding this swing will 
be a major challenge to the U.S. and other economies in the 
next few years.
---------------------------------------------------------------------------
    \2\ The chart referred to is in Dr. Meltzer's prepared statement on 
page 9.
---------------------------------------------------------------------------
    Let me leave no doubt. I believe that running the 
extraordinary trade deficit and allowing the dollar to 
appreciate against other currencies was the proper policy under 
the circumstances we faced then. Preventing or restricting 
imports would have been counter to both our narrow interest and 
our broader interest in general prosperity.
    For some Americans, this policy was costly, however. 
Farmers are an example. Sugar and soybeans, wheat, and other 
commodities are priced worldwide in dollars. When Brazil 
devalued against the dollar, Brazilian soybeans and sugar 
became cheap temporarily compared to the U.S. produced sugar 
and soybeans. Canadian, Australian and other growers of wheat 
gained a temporary advantage over U.S. farmers growing wheat 
when their currencies depreciated against the dollar. The same 
is true for industrial producers. Appreciation of the dollar 
permits U.S. manufacturers to buy components or assemblies more 
cheaply from foreign suppliers, reducing their cost, but it 
also reduces sales by domestic manufacturers of these same 
inputs. U.S. exporters face tougher competition when selling 
abroad, while foreign producers increase their share of the 
U.S. market.
    To reduce the U.S. role as importer of first resort in a 
crisis, we must change the role of the IMF. It must go from 
managing crises to preventing them or, since complete 
prevention is unlikely, making them less virulent, less 
widespread, less harmful, and less frequent.
    The commission addressed this problem by proposing an 
incentive-based system that encourages and rewards countries 
with good behavior. It began by identifying three major causes 
of deep and prolonged crises. They are, one, the collapse of 
the exchange rate, requiring substantial devaluation; second, 
collapse of the financial system, requiring large loans to 
shore up the remnants; and three, the long-term delay, often 
months, before the IMF and the desperate country agree on the 
many conditions that the country must accept to get assistance. 
Since the agreed conditions are often not met in practice, 
replacing the long negotiation with preconditions is an 
improvement.
    The commission proposed four preconditions, reforms that 
countries must complete to qualify for immediate assistance in 
crises. The four preconditions require countries to strengthen 
their financial systems, improve their fiscal or budget 
policies, and provide timely information about their 
outstanding sovereign debt. Countries would have 5 years to 
phase in the conditions. Countries that met the preconditions 
would be less subject to crises.
    I must admit that I am disappointed and disheartened by the 
Treasury's initial response. On the positive side, they have 
agreed that the preconditions are desirable. But they have 
spoken repeatedly about how only a small number of countries 
would adopt the conditions. They fail to notice that 50 
countries, nearly a third of the IMF's membership and many of 
its larger members, already meet or accept one of the 
politically most difficult conditions, requiring full access of 
foreign financial institutions to the country's markets.
    Equally disturbing, the Treasury's position would keep the 
U.S. as importer of first resort. It fails to protect the U.S. 
economy from the temporary losses to U.S.-based producers from 
the flood of imports and the loss of exports during the 
adjustment to exchange rate changes. This neglect or oversight 
is particularly surprising because in the last 2 years the 
Congress has given substantial assistance to affected groups, 
such as farmers and most recently sugar producers. This 
assistance compensates for some of the losses these groups 
sustained during this most recent crisis.
    Further, the Treasury fails to recognize the improved 
incentives that countries and lenders would face under the 
proposed reforms. Once the preconditions have been phased in, 
the IMF would list the countries that met the conditions and 
those that did not. Countries meeting the conditions would have 
much greater opportunities to borrow in the capital markets 
and, because they would be less risky, they would borrow on 
more favorable terms. Countries that failed to meet the 
preconditions would receive less capital and would have to pay 
higher rates of return to compensate for their higher risk. In 
this way, markets would work to encourage reform.
    All countries would not meet the standards. Let me suggest 
some examples of countries that are unlikely to do so. Ecuador 
and Pakistan have not been able to maintain a stable 
government. They have not had sufficient political stability to 
enact reforms like the preconditions. Some governments are 
venal and corrupt. It is unfortunate but true. They promise the 
IMF that they will make changes, but they are either unwilling 
or unable to do so. Ukraine and Russia are examples, but they 
are not alone.
    Under the Commission's proposals, the IMF would not bail 
out countries like Ecuador, Pakistan, Russia, and Ukraine until 
they put in place reforms that strengthen their financial and 
fiscal systems. The acceptance and implementation of reform, 
not the promise of reform, works to increase economic stability 
and reduce crises. After the 5-year phase-in has passed, 
lenders to highly risky countries should expect to take the 
losses their positions imposed on them. That is why they 
received high returns. There is no problem of bailing them in. 
They are bailed in. The question is should they be bailed out? 
The answer of the Commission is no. They took the risk. They 
should be allowed to suffer the consequences. In a crisis, 
however, the IMF would lend, as needed, to countries affected 
by the crisis, but it would not generally lend to the crisis 
country if it has not met the preconditions. In a system-wide 
crisis, the Commission proposes to suspend the rules, lending 
as needed to stem the crisis.
    Under Secretary Geithner, testifying before the Senate 
Banking Committee, said that the last process, permitting the 
IMF to waive the rules, would mean that the Commission's 
proposals might not differ from current practice. This 
statement is remarkable for two reasons. First, it fails to 
recognize that the U.S., the IMF, and the G-7 cannot force 
countries to reform. Reforms may be imposed, but they do not 
last unless the country chooses to maintain them and works to 
do so. Second, it fails to recognize that many countries would 
choose reform so as to attract foreign lenders and investors. 
Foreign lenders are the principal suppliers of capital. A 
country that fails to reform, and knowledge that the lender 
truly bears the risk of loss, would reduce a country's access 
to capital. Very little capital flows to sub-Saharan Africa. 
Very little, if any, went to Peru prior to the reforms 
instituted by the first Fujimori government. Lenders make 
mistakes, but they do not fail to recognize risk or fail to 
charge a premium for bearing it.
    We, the United States, have a major interest in global 
stability. We must insist on reform of the international 
financial system. I note quickly that the Commission made other 
recommendations for changes at the IMF. It should improve the 
quantity, quality, and timeliness of information about member 
countries. It should improve transparency about its own 
operations. An ordinary person should be able to read the 
amount of loans it has outstanding, how much it has available 
in usable currencies to lend, and how much it costs to operate 
the institution. Further, the Commission agreed unanimously 
that the IMF should stop long-term lending and close the 
Poverty Reduction and Growth Facility, as you mentioned 
earlier.
    I have reviewed the draft of S. 2382, the Technical 
Assistance, Trade Promotion, and Anti-Corruption Act of 2000. I 
find few of the needed reforms. S. 2382 would do little to 
reduce the risk of financial and economic crises or the role of 
the United States as importer of first resort in a crisis, or 
the cost of crises to American farmers, manufacturers, and 
workers.
    Let me turn to the World Bank. Long-term loans for emerging 
market economies should be the responsibility of the 
development banks. The Commission shares the World Bank's view 
that its mission and the mission of other development banks 
should be reduction of poverty in developing countries.
    The Commission report asks four major reforms of these 
banks because they are ineffective and greatly overstaffed. 
Many of the professionals are dedicated to their tasks. The 
problem is to change the incentives under which they operate to 
improve their performance. In his testimony before the 
Commission, President Wolfensohn agreed on the need for 
improved performance.
    The Commission proposed three main tasks for the 
development banks: one, to supply global public goods such as 
elimination of tropical diseases or improvements in tropical 
agriculture; two, promote economic and social development using 
an incentive-based system that subsidizes institutional reform 
and gives incentives for implementing and maintaining reforms--
and I want to emphasize maintaining reforms--and three, use 
grants instead of loans to improve the quality of life in the 
poorest countries by inoculating children, providing sanitary 
sewers, bringing potable water to the villages, and in other 
ways.
    The Commission proposed that the grants would be paid 
directly to service providers, on evidence of completion 
furnished by independent auditors. Grants would bypass corrupt 
governments; auditing results would improve performance. This 
is a much more effective mechanism for reform than is proposed 
in S. 2382.
    The Commission believes that a very important first step 
toward reform of the bank would be an independent audit of the 
bank's performance. The bank provides almost no information 
about the success or failure of its projects after final 
disbursement of its loans. S. 2382 calls for a financial audit. 
This is a good first step, but it is not enough. Although the 
Commission did not propose an independent performance audit of 
the development bank's operations, I urge the Congress to 
require such an audit as a condition for additional U.S. 
assistance.
    Finally, the Commission agreed unanimously that the present 
HIPC debts be written off completely in all countries that 
adopt and implement effective development programs.
    Thank you.
    [The prepared statement of Dr. Meltzer follows:]

               Prepared Statement of Dr. Allan H. Meltzer

    It is a privilege to testify before this distinguished committee on 
the report of the International Financial Institution Advisory 
Commission. Although the Commission was charged with making 
recommendations on seven different institutions, I will confine my 
remarks to two--the IMF and the World Bank.
    The Commission's report became available almost three months ago. 
It has been discussed and appraised extensively in the press both here 
and abroad, by the U.S. Treasury Department, foreign governments and 
central banks, in public discussion, and in the Congress. I believe 
this is the fifth hearing that Congress has held on the report, a 
recognition not only of the importance of the issues but the widespread 
recognition that reforms are needed.
    The IMF and the Bank are now more than fifty years old. They have 
evolved and changed in response to events, without any systematic 
thinking about what they do well, what needs to be done, what should be 
left to private sector institutions, and what governments or 
multinational institutions can and should do.
    I have followed discussion of the Commission's report closely. 
While there are many counter-currents, I believe it is fair to say that 
there is very broad agreement that the IMF and the Bank should be 
reformed and that the Commission's report is a proper starting point 
for such reform. The same bipartisan approach that was present within 
the Commission now characterizes many discussions of our conclusions.
    The two most important problems that the Commission faced were: (1) 
how to make the world economy more stable, less subject to the 
frequent, deep and widespread economic crises that the world economy 
experienced in the 1980s and 1990s, and (2) how to make more effective 
the development of aid to impoverished people while improving their 
opportunities and living standards. A subsidiary but important issue 
was reform of the institutions to make them more transparent, more 
accountable, and more efficient.
                                  imf
    I will spend most of my time on the IMF. The main questions about 
the IMF are: why have crises become more frequent and deeper, affecting 
many more countries in the last twenty years? What could a restructured 
IMF do to make crises less frequent, less severe, and less widespread? 
Before answering these questions, I will comment on why these questions 
are important to Americans and why the Congress, the administration, 
and the public have a major stake in the answers.
    Many commentators talk about the IMF's successful performance. The 
Latin American debt crisis took most of a decade to resolve. Asia 
recovered much faster. Does the IMF deserve full credit for the speedy 
recovery in Asia?
    I submit that the answer is no. The United States played a major 
role. We became, once again, the importer of first resort in a crisis. 
U.S. imports of goods soared; our exports fell in 1998 and grew very 
slowly in 1999. The U.S. current account deficit rose from about $150 
billion in 1997 to a current annual rate of $400 billion. That $250 
billion swing is a main way we helped to strengthen the world economy. 
The chart that I distributed [see following page] shows what happened 
to net exports of goods and services. Unwinding this swing will be a 
major challenge to the U.S. and other economies in the next few years.
    The U.S. economy expanded rapidly during these years. Imports were 
cheap relative to the cost of domestic production, so, as a nation, we 
could help the world economy to recover while enjoying rapid growth 
with low inflation. Our rapidly growing economy, our innovative 
enterprises and rising worker productivity encouraged foreign 
investment in our plants, equipment, bonds and shares. The stock market 
soared, attracting foreign capital and bringing home as investment the 
extra dollars we spent for goods and services abroad. The capital 
inflow appreciated the dollar compared to other currencies. 
Devaluations and currency depreciation by many crisis countries, and 
others, also appreciated the dollar.
    Let me leave no doubt. I believe that running the extraordinary 
trade deficit and allowing the dollar to appreciate against other 
currencies was the proper policy under the circumstances. Preventing or 
restricting imports would have been counter to both our narrow interest 
and our broader interest in general prosperity.


    For some Americans, this policy was costly, however. Farmers are an 
example. Sugar and soybeans, wheat, and other commodities are priced 
worldwide in dollars. When Brazil devalued against the dollar, 
Brazilian soybeans and sugar became cheap compared to U.S. produced 
sugar and soybeans. Canadian, Australian and other growers gained a 
temporary advantage over U.S. farmers when their currencies depreciated 
against the dollar. The same is true for industrial producers. 
Appreciation of the dollar permits U.S. manufacturers to buy components 
or assemblies more cheaply from foreign suppliers, reducing cost, but 
also reduces sales by domestic manufacturers of these inputs. U.S. 
exporters face tougher competition when selling abroad, while foreign 
producers increase their share of the U.S. market.
    To reduce the U.S. role as importer of first resort in a crisis, we 
must change the role of the IMF. It must go from managing crises to 
preventing them, or since complete prevention is unlikely, making them 
less virulent, less widespread, less harmful and less frequent.
    The Commission addressed this problem by proposing an incentive-
based system that encourages and rewards countries with good behavior. 
It began by identifying three major causes of deep and prolonged 
crises. They are (1) collapse of the exchange rate, requiring 
substantial devaluation, (2) collapse of the financial system, 
requiring large loans to shore up the remnants, and (3) the long-time, 
often months, before the IMF and the desperate country agree on 
conditions that the country must accept to get assistance. Since the 
agreed conditions are often not met in practice, replacing the long 
negotiation with pre-conditions is an improvement.
    The Commission proposed four pre-conditions, reforms that countries 
must complete to qualify for immediate assistance in crises. The four 
pre-conditions require countries to strengthen their financial systems, 
improve their fiscal or budget policies, and provide timely information 
about their outstanding sovereign debt. Countries would have five years 
to phase-in the conditions. Countries that met the pre-conditions would 
be less subject to crises.
    I must admit that I am disappointed and disheartened by the 
Treasury's initial response. On the positive side, they have agreed 
that the conditions are desirable. But, they have spoken repeatedly 
about how only a small number of countries would adopt the conditions. 
They fail to notice that 50 countries, nearly 1/3 of the IMF's 
membership and many of its larger members, already meet or accept one 
of the politically most difficult conditions, requiring full access of 
foreign financial institutions to the country's markets.
    Equally disturbing, the Treasury's position would keep the U.S. as 
importer-of-first-resort. It fails to protect the U.S. economy from the 
temporary losses to U.S. based producers from the flood of imports and 
the loss of exports during the adjustment to exchange rate changes. 
This neglect or oversight is particularly surprising because, in the 
last two years, the Congress has given substantial assistance to 
affected groups, such as farmers and most recently sugar producers. 
This assistance compensates for some of the losses these groups 
sustained.
    Further, the Treasury fails to recognize the improved incentives 
that countries and lenders would face under the proposed reforms. Once 
the preconditions have been phased-in, the IMF would list the countries 
that met the conditions and those that did not. Countries meeting the 
conditions would have much greater opportunities to borrow in the 
capital markets and, because they would be less risky, they would 
borrow on more favorable terms. Countries that failed to meet the pre-
conditions would receive less capital and would have to pay higher 
rates of return to compensate for their higher risk. In this way, 
markets would work to encourage reform.
    All countries would not meet the standards. Let me suggest some 
examples of countries that are unlikely to do so. Ecuador and Pakistan 
have not been able to maintain a stable government. They have not had 
sufficient political stability to enact reforms like the pre-
conditions. Some governments are venal and corrupt. They promise the 
IMF that they will make changes, but they are either unwilling or 
unable to do so. The Ukraine and Russia are examples, but they are not 
alone.
    Under the Commission's proposals, the IMF would not bail out 
countries like Ecuador, Pakistan, Russia and Ukraine until they put in 
place reforms that strengthened their financial and fiscal systems. The 
acceptance and implementation of reform, not the promise of reform, 
works to increase economic stability and reduce crises. After the five-
year phase-in has passed, lenders to highly risky countries should 
expect to take the losses their positions imposed on them. In a crisis, 
the IMF would lend, as needed, to countries affected by the crises, but 
it would not generally lend to the crisis country if it has not met the 
preconditions. In a system-wide crisis, the Commission proposes to 
suspend the rules, lending as needed to stem the crisis.
    Under Secretary Geithner, testifying before the Senate Banking 
Committee, said that the last process--permitting the IMF to waive the 
rules--would mean that the Commission's proposals might not differ from 
current practice. This statement is remarkable for two reasons. First, 
it fails to recognize that the U.S., the IMF, and the G-7 cannot force 
countries to reform. Reforms may be imposed, but they do not last 
unless the country chooses to maintain them and works to do so. Second, 
it fails to see that many countries would choose reform so as to 
attract foreign lenders and investors. Foreign lenders are the 
principal suppliers of capital. A country that fails to reform, and 
knowledge that the lender truly bears the risk of loss, would reduce a 
country's access to capital. Very little capital flows to sub-Saharan 
Africa. Very little, if any, went to Peru prior to the reforms 
instituted by the first Fujimon government. Lenders make mistakes, but 
they do not fail to recognize risk or fail to charge a premium for 
bearing it.
    We, the United States, have a major interest in global stability. 
We must insist on reform of the International Financial System. I note 
quickly that the Commission made other recommendations for changes at 
the IMF. It should improve the quantity, quality, and timeliness of 
information about member countries. It should improve transparency 
about its own operations. An ordinary person should be able to read the 
amount of loans it has outstanding, how much it has available in usable 
currencies to lend, and how much it costs to operate the institution. 
Further, the Commission agreed unanimously that the IMF should stop 
long-term lending and close the Poverty Reduction and Growth Facility.
    I have reviewed the draft of S. 2382, the Technical Assistance, 
Trade Promotion, and Anti-Corruption Act of 2000, I find few of the 
needed reforms. S. 2382 would do little to reduce the risk of financial 
and economic crises or the role of the United States as importer of 
first resort in a crisis, or the cost of crises to American farmers, 
manufacturers, and workers.
                             the world bank
    Long-term loans for emerging market economies should be the 
responsibility of the development banks. The Commission shares the 
World Bank's view that its mission, and the mission of other 
development banks, should be reduction in poverty in developing 
countries.
    The Commission report asks for major reform of these banks because 
they are ineffective and greatly overstaffed. Many of the professionals 
are dedicated to their tasks. The problem is to change the incentives 
under which they operate to improve their performance. In his testimony 
before the Commission, President Wolfensohn agreed on the need for 
improved performance.
    The Commission proposed three main tasks for the development banks: 
(1) to supply global goods--such as--elimination of tropical diseases, 
or improvements in tropical agriculture; (2) promote economic and 
social development using an incentive-based system that subsidizes 
institutional reform and gives incentives for maintaining reforms; and 
(3) use grants instead of loans to improve the quality of life in the 
poorest countries by inoculating children, providing sanitary sewers, 
bringing potable water to the villages, and in other ways.
    The Commission proposed that the grants would be paid directly to 
contractors, on evidence of completion furnished by independent 
auditors. Grants would bypass corrupt governments; auditing results 
would improve performance. This is a much more effective mechanism for 
reform than is proposed in S. 2382.
    The Commission believes that a very important, first step toward 
reform of the Bank would be an independent audit of the Bank's 
performance. The Bank provides almost no information about the success 
or failure of its projects after final disbursement of its loans. S. 
2382 calls for a financial audit. This is a good first step, but it is 
not enough. Although the Commission did not propose an independent 
performance audit of the development banks' operations, I urge the 
Congress to require such an audit as a condition for additional U.S. 
assistance.
    Finally, the Commission agreed unanimously that the present HIPC 
debts be written off completely in all countries that adopt and 
implement effective development programs.

    Senator Hagel. Dr. Meltzer, thank you very much.
    Dr. Calomiris, thank you.

 STATEMENT OF DR. CHARLES W. CALOMIRIS, MEMBER, INTERNATIONAL 
  FINANCIAL INSTITUTION ADVISORY COMMISSION; PAUL M. MONTRONE 
   PROFESSOR OF FINANCE AND ECONOMICS, COLUMBIA UNIVERSITY'S 
  GRADUATE SCHOOL OF BUSINESS; AND VISITING SCHOLAR, AMERICAN 
              ENTERPRISE INSTITUTE, WASHINGTON, DC

    Dr. Calomiris. Thank you, Mr. Chairman. It is an honor and 
a pleasure to be here today to discuss the recommendations of 
the Meltzer Commission. I would like to summarize my written 
statement and ask that it be included in the record as well.
    Senator Hagel. It will be included.
    Dr. Calomiris. Since our report was published, it has 
become clear to me that two separate debates are being waged 
over the new so-called financial architecture--a narrow, 
visible debate over the technical aspects of specific proposals 
for designing mechanisms to achieve well-defined economic 
objectives, on the one hand, and on the other hand, a broader, 
less visible debate over whether the IMF, the World Bank, and 
other development banks should have narrowly defined economic 
objectives or alternatively should be used as tools of ad hoc 
diplomacy. Until we settle that second broader political 
debate, we cannot seriously even begin constructive dialog over 
how best to achieve economic objectives. Although open 
opposition to the Meltzer report generally focuses on its 
details, and much of that is sincere, behind closed doors many 
critics are candid about their primary reason for objecting to 
our proposals: ``Forget economics; it's the foreign policy, 
stupid.'' For proposed reforms to succeed, they must face the 
challenges posed not only by economic logic, but by the 
political economy of foreign policy.
    The Commission's recommendations make sense as economics; 
that is, they were derived from evidence in a sensible way. 
Just as important, the principles on which they are based are 
valid ethically and politically, specifically, most 
importantly, our premise that the World Bank and the IMF should 
not and cannot continue to serve the ad hoc political purposes 
of broad foreign policy.
    The Meltzer report begins with a well-defined set of 
economic objectives and political principles and suggests 
mechanisms that would accomplish those objectives within the 
confines of those principles. The economic objectives include: 
one, improving global capital market liquidity, two, 
alleviating poverty in the poorest countries; three, promoting 
effective institutional reforms in the legal and financial 
systems of developing countries which will spur development; 
and four, providing effective public goods, for example, 
through programs to deal with global problems of public health, 
particularly malaria and AIDS, and environmental risks in 
developing countries; and fifth, collecting and disseminating 
valuable economic data in a uniform and timely manner. The 
Commission viewed liquidity provision during crises, 
macroeconomic services, and data collection and dissemination 
to be appropriate missions of the IMF and saw poverty 
alleviation, the promotion of reform long term, the provision 
of global public goods, microeconomic data collection and 
dissemination, and related advisory services as the central 
missions of the development banks.
    We also identified six principles that any credible reform 
strategy should satisfy and which underlie our proposals: one, 
respecting member countries' sovereignty; two, clearly 
separating tasks across institutions; three, setting credible 
boundaries on goals and discretionary actions by those 
institutions; four, judging policies not by their stated 
objectives alone but by their effectiveness; five, ensuring 
accountability of management through clear disclosure, 
accounting, internal governance rules, and independent 
evaluation of performance; and six, sharing the financial 
burden of aid through these institutions fairly among 
benefactor countries.
    We began by evaluating the performance of the IMF, the 
World Bank, and the other development banks against the 
touchstone of these goals and principles and found these 
institutions quite deficient. They often failed to achieve 
their goals, even by their own internal measures.
    Why is the IMF so ineffective? For one thing, the IMF's 
crisis lending mechanism is not designed to fulfill the role of 
providing effective liquidity assistance. Liquidity crises 
happen quickly. There is not time to enter into protracted 
negotiations or to demonstrate that one is an innocent victim 
of external shocks, as the IMF's stillborn contingent credit 
facility would mandate. If the IMF is to focus on liquidity 
assistance, and if the liquidity assistance is to be effective, 
there is no viable alternative to having countries prequalify 
for lines of credit. The current IMF formula of taking weeks or 
months to negotiate terms and conditions for liquidity 
assistance and then offering that assistance in stages over a 
long period of time simply is a non-starter if the goal is to 
mitigate or prevent liquidity crises.
    IMF and development bank lending, which entails substantial 
subsidies to borrowing countries, does, however, manage to 
transfer resources to debtor countries during severe economic 
crises through the implied interest rate subsidies. But those 
transfers do not seem to improve securities markets in those 
countries or spur growth on average; rather, they are put to 
use for less laudable goals apparently, most notoriously, for 
shady transactions in Russia or the Ukraine. But it is the 
legitimate uses of IMF and development bank emergency loan 
subsidies that are even more troubling in my view, especially 
their use in facilitating the bailouts of insolvent domestic 
banks and firms and international lenders, which ultimately are 
financed mainly by taxes on domestic residents.
    Consider the current IMF program being established with 
Ecuador. Ecuador has been suffering a deepening fiscal crisis 
for several years. As yet, there is no consensus for reform in 
Ecuador, and there is no reason to believe that reforms will be 
produced by a few hundreds of millions of IMF dollars. Why in 
the world is the IMF sending money to Ecuador? Some observers 
claim that IMF aid to Ecuador is best understood as a means of 
sending political payola to the Ecuadoran Government at a time 
when the United States wishes to ensure continuing use of its 
military bases there monitoring drug traffic. Will that sort of 
IMF policy be likely to produce the needed long-run reforms in 
fiscal and bank regulatory policy? Has the IMF not learned 
anything from the failure of its lending to Russia in 1997 and 
1998?
    Argentina, perhaps more than any other country, has 
depended on IMF conditional lending over the past several years 
to maintain its access to international markets. It is now 
widely perceived as possibly on the verge of a public finance 
meltdown, which many commentators blame, in part, on the IMF 
and the U.S. Treasury. IMF support, in retrospect, was 
counterproductive because it put the cart of cash ahead of the 
horse of reform. Now Argentina is faced with a growing and 
possibly an unsustainable debt service burden. Furthermore, at 
the IMF's behest, Argentina substantially raised its tax rates 
last year, choking off its nascent recovery. Instead, Argentina 
should have cut government expenditures. The notion that tax 
hikes are an effective substitute for expenditure cuts as a 
means of successful fiscal reform appears to be an article of 
faith at the IMF but, unfortunately, one that is simply at odds 
with the evidence. The chronology of policy failure in 
Argentina is aptly summarized in a recent financial markets 
newsletter that I would like to quote. ``Between 1996 and 1999, 
the IMF and IDB all but led the marketing effort for Argentina 
bonds. The two institutions voiced strong endorsements each 
time that there was a confidence crisis in Argentina. The IDB 
went so far as to dispatch its most senior economist to New 
York last summer to recommend that U.S. portfolio managers buy 
Argentine bonds. At the same time, the Street,'' meaning Wall 
Street, ``came to realize that the U.S. Treasury was the real 
force behind the IMF and IDB support for Argentina. It was 
never clear why there was such unwavering support. The 
motivation could have been geo-political. Argentina was a 
staunch supporter of U.S. political policies around the world 
and across the region. Argentina was also the poster-child of 
the so-called Washington Consensus. Therefore, the U.S. needed 
Argentina to succeed. At the beginning of the year, when the 
Machinea team traveled to Washington to seek a revised Standby 
Facility, the team met first with the U.S. Treasury before 
meeting with the IMF and the World Bank. These actions sent 
clear signals to the market that the country had an implicit 
guarantee from Washington. Otherwise, it would have been 
irrational for any creditor to lend so much money to such a 
leveraged country with such little flexibility.''
    Again, this is a newsletter from what I regard as the best 
Latin American bond market news daily.
    How Argentina will extricate itself from its current debt 
trap is unclear. What is clear, however, is that the U.S. 
Treasury/IMF-sponsored debt inflows and tax hikes over the past 
several years have put Argentina into this risky position. More 
market discipline, less U.S. Treasury/IMF assistance and less 
debt at an earlier date would have encouraged the needed 
reforms of government expenditures and labor market 
regulations.
    The World Bank's record and the records of the regional 
development banks in sponsoring successful programs are also 
poor. The World Bank's internal evaluations of performance, 
which are made shortly after the last disbursement of its 
funds, identify more than half of its projects as failing to 
achieve ``satisfactory, sustainable'' results.
    The multilaterals do not follow the principle of separation 
either. The IMF's mission warrants short-term lending, yet the 
IMF typically makes long-term loans. Seventy-three IMF member 
countries have borrowed from the IMF in more than 90 percent of 
the years in which they have been members of the IMF. The 
development banks participate, on the other hand, in short-term 
emergency lending, despite the fact that this is not consistent 
with their long-term focus on development, and even though 
their managements sometimes privately complain about having to 
do so.
    There is little disclosure of relevant information about 
accounting or decisionmaking within this institutions, too. In 
the case of the IMF, its own staff admits that its accounting 
system is an exercise in obfuscation. Quote. This is by an IMF 
staff member. ``The cumulative weight of the Fund's jerry-built 
structure of financial provisions has meant that almost nobody 
outside, and, indeed, few inside, the Fund understand how the 
organization works, because relatively simple economic 
relations are buried under increasingly opaque layers of 
language. To cite one example, the Fund must be the only 
financial organization in the world for which the balance sheet 
contains no information whatsoever on the magnitudes of its 
outstanding credits or its liquid liabilities. More seriously, 
the Fund's outdated financial structure has been a handicap in 
its financial operations.''
    The Meltzer Commission's recommendations for reform follow 
directly from the perceived gap between actual performance of 
these institutions and the combination of bona fide objectives 
and principles that I summarized at the beginning. With respect 
to the IMF, the Commission unanimously voted to end long-term 
lending. The 8 to 3 majority went further, recommending that 
the IMF focus on maintaining liquidity for emerging economies. 
By providing lines of credit to countries in general, those 
that meet minimal, pre-established standards, and by lending to 
them as a senior creditor at a penalty rate, the IMF could 
prevent avoidable liquidity crises without sponsoring 
counterproductive bailouts of banks at taxpayers' expense.
    With respect to the development banks, for poverty 
alleviation, we recommended relying on grants to service 
providers with independent verification of performance, rather 
than making subsidized loans earmarked to governments, as a 
mechanism more likely to deliver results.
    With respect to promoting institutional reform, the 
Commission proposed making loans through the development banks 
to governments at highly subsidized rates, but only after they 
had passed laws establishing reforms. The maturity of those 
loans could be extended, and thus the subsidies implicit in 
them increased, conditional on the continuation of reforms, 
that is, only if independent verification indicates that 
promised reforms are continuing on track.
    The Commission also voted unanimously that the IMF and the 
development banks should write off all claims against the 
highly indebted poor countries, once those countries have 
established credible development programs.
    Treasury Secretary Summers testified before the House 
Banking Committee, while reserving the right to change his mind 
based on further reading of the report, and faulted the 
Commission on several specifics. In my formal comments, I 
review each of the Secretary's concerns and explain why I 
believe they are misplaced. Let me just touch on a few.
    With respect to our proposals for reforming the IMF, Mr. 
Summers expressed several concerns. He claims that ``few if any 
of the countries that have suffered financial crises in recent 
years would have qualified for emergency IMF support.'' He goes 
on to recognize that the Commission recommended waiving 
prequalification standards in cases where global capital market 
stability was threatened, and that therefore, the Commission 
did not, in fact, recommend ruling out support to any country. 
Still the Secretary questioned, in light of our recommendation 
that prequalification could be waived, ``how the rest of the 
report's proposals in this area are to be interpreted and 
applied.'' He questioned whether many countries would qualify 
for IMF support and whether lending even to prequalified 
countries might create moral hazard problems in comparison to 
the current practice of attaching conditionality, ex post.
    These criticisms are misplaced. We envision a phase-in 
period of 5 years for the new prequalification standards, and 
we think most emerging market countries would prequalify. Most 
or all of the crisis countries in Latin America and Asia would 
face strong incentives to meet our proposed standards, 
particularly since failing to do so would likely reduce their 
access to and raise their costs of private market financing. If 
our proposed standards had been imposed, say, in 1990, the 
severe crises suffered by these countries, which largely 
reflected weaknesses in their banking systems and in the 
incentives of those weak banks to take on enormous exchange 
risks, may have been averted and certainly would have been far 
less severe.
    Furthermore, it is hard to see how our proposed IMF lending 
arrangements would worsen moral hazard. Moral hazard depends on 
the expectation of receiving a subsidy. Under current IMF 
arrangements, countries borrow large amounts at highly 
subsidized rates. Under our proposals, there is no subsidy and 
therefore virtually no possibility of moral hazard.
    Mr. Summers also criticizes our recommendations for 
reforming the development banks. He objects first to limiting 
emergency lending to the IMF; second, to our proposal to target 
country level assistance to the poorest countries only; and 
third, to the use of grants rather than loans for poverty 
alleviation.
    Our proposal to limit emergency lending to the IMF follows 
directly from the principle that separating the functions of 
the various multilaterals promotes greater effectiveness and 
accountability. Nevertheless, the Commission report envisions 
loans or grants from development banks to poor countries that 
have experienced crisis-induced trauma. We recommend, however, 
that any assistance be channeled through appropriate long-term 
programs.
    The Secretary also misunderstands the effect of our 
proposals on poor people who reside in developing countries 
with access to private capital markets or with per capita 
annual average incomes higher than $4,000. He states, ``the 
report would rule out MDB support for the majority of the 
world's poorest people.'' That is not true.
    Similarly, the Secretary's statement that ``the report's 
recommendations would drastically undercut the global role of 
the World Bank by limiting it to the `knowledge' business'' 
indicates a serious misunderstanding of our recommendations. We 
envision a substantial continuing role for the World Bank in 
providing financial assistance.
    Senator Hagel. Dr. Calomiris, could I ask you to sum up 
your statement in the next minute because we want to leave time 
for questions and we have Dr. Levinson yet. So, I would 
appreciate that very much.
    Dr. Calomiris. I will try to move quickly.
    Senator Hagel. You have 1 minute.
    Dr. Calomiris. Rather than go through the rest of those 
specifics, let me talk about the second broader debate that I 
mentioned, the political debate.
    Should the IMF or the World Bank not be hemmed in by too 
many requirements designed to make them effective as economic 
mechanisms because doing so prevents them from acting in a 
broad ad hoc foreign policy role? In my statement, I provide 
five reasons why I think it is desirable that the IMF and World 
Bank focus on economic objectives rather than pursue that broad 
role. Rather than list those for you, I will just mention one 
example right now.
    I learned from a knowledgeable insider that the 
negotiations between the IMF and Pakistan right now are being 
held up by the U.S. insistence that Pakistan sign a nuclear 
nonproliferation treaty. Now, this is a laudable objective, but 
is the IMF the right tool for accomplishing that objective for 
the reasons I state in my opinion? I believe it is not.
    In the interest of time, I will stop there and thank you 
for your attention.
    [The prepared statement of Dr. Calomiris follows:]

             Prepared Statement of Dr. Charles W. Calomiris

         when will economics guide imf and world bank reforms?
    The Meltzer Commission Report (a blueprint for reforming the IMF, 
the World Bank, and other multilateral development banks released in 
March, and signed by a bipartisan majority of 8 to 3) has generated its 
share of criticism from opponents in the Commission minority, the 
Administration, the labor unions, and the Congress.\1\
---------------------------------------------------------------------------
    \1\ The Commission members who signed the Report include Allan 
Meltzer (Chairman),
Tom Campbell, Edwin Feulner, Lee Hoskins, Richard Huber, Manuel 
Johnson, Jeffrey Sachs, and the author of this article. Fred Bergsten, 
Jerome Levinson, and Esteban Torres did not sign the Report. Mr. Huber, 
despite signing the Report, dissented on some points. The Report, Com-
mission hearings, and background papers for the Commission (know 
formally as the International Financial Institution Advisory 
Commission) are available at the website
http://phantom-x.gsia.cmu.edu/IFIAC.
---------------------------------------------------------------------------
    Since our Report was published, it has become clear to me that two 
separate debates are being waged over the new ``financial 
architecture''--a narrow (visible) debate over the technical aspects of 
specific proposals for designing mechanisms to achieve well-defined 
economic objectives, and a broader (less visible) debate over whether 
the IMF, the World Bank, and the other development banks should have 
narrowly defined economic objectives or alternatively, be used as tools 
of ad hoc diplomacy. Until we settle that second, broader political 
debate, we cannot seriously even begin the constructive dialogue over 
how best to achieve economic objectives. That dialogue is important; 
our proposals are a starting point for rebuilding these institutions, 
not the final word. But those who oppose the basic premises of the 
Meltzer Report don't want to get to that constructive phase. They want 
the reformers to just go away. Although open opposition to the Meltzer 
Report generally focuses on its details, behind closed doors critics 
are candid about their primary reason for objecting to our proposals: 
``Forget economics; it's the foreign policy, stupid.'' For proposed 
reforms to succeed, then, they must face the challenges posed not only 
by economic logic, but by the political economy of foreign policy.
    In this article, I summarize the recommendations of the Commission 
and respond to criticisms of our recommendations, both from the 
standpoint of their economic logic and their political economy. I argue 
not only that the Commission's recommendations make sense as economics, 
but defend the principles on which they are based, specifically, the 
premise that the World Bank and the IMF should not and cannot continue 
to serve the ad hoc political purposes of broad foreign policy.
First Principles
    The Meltzer Report begins with a well-defined set of economic 
objectives and political principles, and suggests mechanisms that would 
accomplish those objectives within the confines of those principles. 
The economic objectives we envision for the multilateral financial 
institutions include: (1) improving global capital market liquidity, 
(2) alieviating poverty in the poorest countries, (3) promoting 
effective institutional reforms in the legal and financial systems of 
developing countries that spur development, (4) providing effective 
global public goods, e.g., through programs to deal with global 
problems of public health (particularly, malaria and AIDS), and 
environmental risks in developing countries, and (5) collecting and 
disseminating valuable economic data in a uniform and timely manner. 
The Commission viewed liquidity provision during crises, macroeconomic 
advisory services, and data collection and dissemination to be 
appropriate missions of the IMF, and saw poverty alleviation, the 
promotion of reform, the provision of global public goods, 
microeconomic data collection and dissemination, and related advisory 
services as the central missions of the development banks.
    We identified six principles that any credible reform strategy 
should satisfy, and which underlie our proposals: (1) respecting member 
countries' sovereignty (that is, the desire to minimize the 
intrusiveness of membership requirements or conditions for receiving 
assistance), (2) clearly separating tasks across institutions (to avoid 
waste and counterproductive overlap, and to enhance accountability), 
(3) setting credible boundaries on goals and discretionary actions (to 
prevent undesirable mission creep and to promote accountability), (4) 
judging policies not by their stated objectives but by their 
effectiveness (i.e. ensuring that the mechanisms chosen to channel 
assistance are likely to succeed and to avoid waste), (5) ensuring 
accountability of management through clear disclosure, accounting, 
internal governance rules, and independent evaluation of performance, 
and (6) sharing the financial burden of aid fairly among benefactor 
countries.
The Record of IMF and Development Banks Performance
    We began by evaluating the performance of the IMF, the World Bank, 
and the other development banks against the touchstone of these goals 
and principles and found these institutions quite deficient. They often 
failed to achieve their goals, even by their own internal measures. 
Studies of the extent to which the IMF succeeds in enforcing its 
lending conditions show a poor track record. Sebastian Edwards found 
that most of the time IMF lending conditions are not met.\2\ And all 
three comprehensive studies of the average effects of IMF programs, 
which include the IMF staffs own study, failed to find evidence of a 
positive effect on economic activity or domestic securities prices from 
having received IMF assistance.\3\
---------------------------------------------------------------------------
    \2\ ``The International Monetary Fund and the Developing Countries: 
A Critical Evaluation,'' Carnegie-Rochester Series on Public Policy, 
31, 1989, pp. 7-68.
    \3\ R.A. Brealey and E. Kaplanis, ``The Impact of IMF Assistance on 
Asset Values,'' Working Paper, Bank of England, September 1999, N. Ul 
Haque and M.S. Khan, ``Do IMF Supported Programs Work? A Survey of 
Cross Country Empirical Evidence,'' IMF Working Paper, November 1999, 
M.D. Bordo and A.J. Schwartz, ``Measuring Real Economic Effects of 
Bailouts: Historical Perspectives on How Countries in Financial 
Distress Have Fared With and Without Bailouts,'' Working Paper, Rutgers 
University, November 1999.
---------------------------------------------------------------------------
    Why is the IMF so ineffective? For one thing, the IMF's crisis 
lending mechanism is not designed to fulfill the role of providing 
effective liquidity assistance. Liquidity crises happen quickly. There 
isn't time to enter into protracted negotiations, or to demonstrate 
that one is an innocent victim of external shocks (as the IMF's 
stillborn contingent credit facility mandates). If the IMF is to focus 
on liquidity assistance, and if liquidity assistance is to be 
effective, there is no viable alternative to having countries pre-
qualify for lines of credit. The testimony before our Commission of the 
IMF's acting managing director, Mr. Fischer, recognized the 
desirability of prequalification for providing liquidity assistance.\4\ 
The current IMF formula of taking weeks or months to negotiate terms 
and conditions for liquidity assistance, and then offering that 
assistance in stages over a long period of time, simply is a non-
starter if the goal is to mitigate or prevent liquidity crises.
---------------------------------------------------------------------------
    \4\ See the testimony of Stanley Fischer before the Commission on 
February 2, 2000.
---------------------------------------------------------------------------
    IMF and development bank lending--which entails substantial 
subsidies to borrowing countries--does, however, manage to transfer 
resources to debtor countries during severe economic crises. But those 
transfers do not seem to improve securities markets or spur growth; 
rather, they are put to use for less laudable goals--most notoriously, 
for shady transactions in Russia or the Ukraine. But it's the 
``legitimate'' uses of IMF and development bank emergency loan 
subsidies that are even more troubling, especially their use in 
facilitating the bailouts of insolvent domestic banks and firms and 
international lenders, which ultimately are financed mainly by taxes on 
domestic residents.
    In the cases of Mexico, Korea, Indonesia, and Thailand, those tax 
bills ranged from 20% to 55% of annual GDP, and averaged more than 30% 
of GDP. Not only do these bailouts transfer enormous wealth from 
average citizens to rich cronies, they undermine market discipline (by 
softening the penalties for unwise investing) and encourage reckless 
lending domestically and internationally. They also strengthen the hold 
that domestic cronies continue to exert on their countries' political 
systems.
    Consider the current IMF program being established with Ecuador. 
Ecuador has been suffering a deepening fiscal crisis for several years 
caused by the combination of an unresolved internal political struggle, 
adverse economic shocks to its terms of trade, and a poorly regulated 
banking system (which encouraged enormous risk taking at taxpayers 
expense, and which has imposed a bailout cost of 40% of annual GDP on 
taxpayers). As yet, there is no consensus for reform in Ecuador, and 
there is no reason to believe that reforms will be produced by a few 
hundreds of millions of IMF dollars. Why in the world is the IMF 
sending money to Ecuador? Some observers claim that IMF aid to Ecuador 
is best understood as a means of sending political payola to the 
Ecuadoran government at a time when the United States wishes to ensure 
continuing use of its military bases there monitoring drug traffic. 
Will that sort of IMF policy be likely to produce the needed long-run 
reforms in fiscal and bank regulatory policy? Hasn't the IMF learned 
anything from the failure of its lending to Russia in 1997-1998?
    Argentina, perhaps more than any other country, has depended on IMF 
conditional lending over the past several years to maintain its access 
to international markets. It is now widely perceived as possibly on the 
verge of a public finance meltdown, which many commentators blame, in 
part, on the IMF and U.S. Treasury. IMF support, in retrospect, was 
counterproductive because it put the cart of cash ahead of the horse of 
reform. Now Argentina is faced with a growing, and possibly an 
unsustainable, debt service burden. Furthermore, at the IMF's behest, 
Argentina substantially raised its tax rates last year, choking off its 
nascent recovery. Instead, Argentina should have cut government 
expenditures. The notion that tax hikes are an effective substitute for 
expenditure cuts as a means of successful fiscal reform is an article 
of faith at the IMF, but unfortunately, one that is at odds with the 
evidence. The chronology of policy failure in Argentina is aptly 
summarized in a recent financial markets newsletter:

          Between 1996 and 1999, the IMF and IDB all but led the 
        marketing effort for Argentina bonds. The two institutions 
        voiced strong endorsements each time that there was a 
        confidence crisis in Argentina. The IDB went so far as to 
        dispatch its most senior economist to New York last summer to 
        recommend that U.S. portfolio managers buy Argentine bonds. At 
        the same time, the Street came to realize that the U.S. 
        Treasury was the real force behind the IMF and IDB support for 
        Argentina. It was never clear why there was such unwavering 
        support. The motivation could have been geo-political. 
        Argentina was a staunch supporter of U.S. political policies 
        around the world and across the region. Argentina was also the 
        poster-child of the so-called Washington Consensus. . . . 
        Therefore, the U.S. needed Argentina to succeed. At the 
        beginning of the year, when the Machinea team traveled to 
        Washington to seek a revised Standby Facility, the team met 
        first with the U.S. Treasury before meeting with the IMF and 
        the World Bank. These actions sent clear signals to the market 
        that the country had an implicit guarantee from Washington. 
        Otherwise, it would have been irrational for any creditor to 
        lend so much money to such a leveraged country with such little 
        flexibility.\5\
---------------------------------------------------------------------------
    \5\ BCP's Molano Latin American Daily, May 15, 2000.

    How Argentina will extricate itself from its current debt trap is 
unclear. What is clear, however, is that the U.S. Treasury/IMF-
sponsored debt inflows and tax hikes of the past several years put 
Argentina into this risky position. More market discipline, less U.S. 
Treasury/IMF ``assistance,'' and less debt, at an earlier date would 
have encouraged the needed reforms of government expenditures and labor 
market regulations.
    The World Bank's record, and the records of the regional 
development banks, in sponsoring successful programs are also poor. The 
World Bank's internal evaluations of performance (which are made 
shortly after the last disbursement of funds) identify more than half 
of its projects as failing to achieve ``satisfactory, sustainable'' 
results. The World Bank earmarks subsidized loans to member countries, 
but does little to ensure that the funds are used for the stated 
purposes. And the allocation of funds is primarily to countries with 
easy access to private capital markets. Over the past decade, the World 
Bank has lent 70% of its funds to 11 countries. These countries are not 
among the poorest or those lacking access to markets. Indeed, for those 
countries, development bank loans average less than two percent of 
total capital inflows during that period.
    The Commission found that development banks were ineffective as 
promoters of reform. As shown in the work of David Dollar and others at 
the World Bank, programs that subsidize institution building only work 
in countries that already have a commitment to reform.\6\ Reform-minded 
governments offer windows of opportunity for change, and under those 
circumstances constructive reforms can be hastened and broadened by 
appropriate external assistance, which can benefit not only the 
recipient but other countries as well (including the United States). 
But to be effective, subsidies have to reward bona fide efforts, not 
just lip service. There is a need to improve dramatically the way 
reform subsidization is delivered to ensure that it is channeled 
effectively where it can have the greatest positive impact.
---------------------------------------------------------------------------
    \6\ Assessing Aid. Oxford University Press for the World Bank, 
1998.
---------------------------------------------------------------------------
    The Meltzer Commission also found that the development banks are 
devoting far too little to alleviating global problems in the areas of 
public health, particularly the endemic problems of AIDS and malaria, 
which are important stumbling blocks to economic development in many of 
the poorest countries.
    None of the international financial institutions clearly defines 
and limits its spheres of activity. The IMF's mission warrants short-
term lending, yet the IMF typically makes long-term loans. Sixty-nine 
countries have borrowed from the IMF for a total of more than 20 years, 
and 24 of those countries have borrowed for more than 30 years. 
Seventy-three countries have borrowed from the IMF in more than 90% of 
the years they have been members of the IMF.\7\ The development banks 
participate in short-term emergency lending, despite the fact that this 
is not consistent with their long-term focus on development, and even 
though their managements sometimes privately complain about having to 
do so.
---------------------------------------------------------------------------
    \7\ Ian Vasquez, ``The International Monetary Fund: Challenges and 
Contradictions,'' Cato Institute, 1999.
---------------------------------------------------------------------------
    There is little disclosure of relevant information about accounting 
or decision making. In the case of the IMF, its own staff admits that 
its accounting system is an exercise in obfuscation:

          The cumulative weight of the Fund's jerry-built structure of 
        financial provisions has meant that almost nobody outside, and, 
        indeed, few inside, the Fund understand how the organization 
        works, because relatively simple economic relations are buried 
        under increasingly opaque layers of language. To cite one 
        example, the Fund must be the only financial organization in 
        the world for which the balance sheet . . . contains no 
        information whatever on the magnitudes of its outstanding 
        credits or its liquid liabilities. More seriously, the Fund's 
        outdated financial structure has been a handicap in its 
        financial operations.\8\
---------------------------------------------------------------------------
    \8\ Jacques Polak, ``Streamlining the Financial Structure of the 
International Monetary Fund'' (Princeton: Essays in International 
Finance 216, September 1999), p. 2.

    With regard to the principle of respecting sovereignty, critics of 
all political persuasions seem to agree that the international 
institutions should reduce their intrusiveness. Labor union officials 
complain that conditions for assistance requiring labor market 
``flexibility'' undermine the position of trade unions. Martin 
Feldstein has faulted the IMF for undermining debtor countries 
sovereignty through excessive micromanagement of the conditions 
attached to subsidized loans.\9\ George Schultz and others complain 
that the sovereignty and constitutional frameworks of creditor members 
are also undermined, since loan subsidies often serve as an end-around 
the legislative oversight that should accompany foreign aid.
---------------------------------------------------------------------------
    \9\ ``Refocusing the IMF,'' Foreign Affairs, March/April 1998, pp. 
20-33.
---------------------------------------------------------------------------
Proposals for Reform
    The Meltzer Commission's recommendations for reform follow directly 
from the perceived gap between actual performance of these institutions 
and the combination of bona fide objectives and principles that we 
viewed as non-controversial. With respect to the IMF, the Commission 
unanimously voted to end long-term lending. The 8-3 majority went 
further, recommending that the IMF focus on maintaining liquidity for 
emerging economies. By providing lines of credit to countries that meet 
minimal pre-established standards, and lending to them as a senior 
creditor at a penalty rate, the IMF could prevent avoidable liquidity 
crises without sponsoring counterproductive bailouts of banks at 
taxpayers' expense.The terms under which the IMF would lend are crucial 
to our reform proposal. Under current practice the IMF lends at a 
markup over its cost of funds. That is not a penalty rate--for many 
countries it implies a substantial subsidy. Our proposed penalty rate 
removes that subsidy. Countries facing a bona fide liquidity crisis 
(including those with past fiscal problems that have decided to improve 
their fiscal discipline) would benefit by borrowing short-term at a 
penalty rate, since such borrowing would allow them to avoid 
unnecessary collapse. But countries seeking financial assistance for 
bailouts would get no benefit from senior IMF lending at a penalty 
rate. Countries facing both a liquidity crisis and a banking crisis 
would still likely access IMF lending, but doing so would discourage 
fiscally costly bailouts of banks. Borrowing on senior terms from the 
IMF at a penalty rate would not channel subsidies to a country that 
chose to expand its public deficit by bailing out its banks; indeed, it 
would hamper that country's ability to raise and retain private funds. 
Thus IMF complicity in bailouts would be avoided.
    The proposed pre-qualification requirements for IMF lending are 
few. They include meeting IMF fiscal standards and prudential banking 
standards (that is, requiring that banks maintain adequate capital and 
liquid reserves). IMF discretion would be relied upon in setting and 
enforcing pre-qualification standards. Those standards reduce the 
likelihood that borrowing countries would access IMF lending to sponsor 
bailouts at their taxpayers' expense. We also recommend requiring that 
countries with access to IMF credit be required to permit free entry 
into their financial systems by foreign financial institutions. That 
requirement would go a long way toward ensuring competitive, stable 
banking in emerging markets, and in so doing would substantially reduce 
the likelihood and magnitude of bank bailouts. More than 50 countries 
already have agreed to this WTO provision. Over the five years that we 
envision for the transition to this new pre-qualification system 
virtually all emerging market countries would be able to meet these 
standards.
    Our pre-qualification requirements are designed to avoid, rather 
than increase, intrusion by the IMF into the sovereignty of borrowing 
countries. IMF conditionality now is ex post, customized 
micromanagement (which is necessarily very intrusive). We suggest, 
instead, making IMF liquidity assistance available based on clearly 
specified rules which are the same for all countries. The requirement 
that countries allow free entry into financial services is not designed 
to force countries into greater free trade, per se, but to protect 
borrowing countries' citizens from bearing the costs of IMF-sponsored 
bailouts. The IMF's complicity in the bank bailouts in Mexico, Asia, 
and elsewhere--which the pre-qualification standards and penalty rate 
would avoid--has been a far more important invasion of sovereignty than 
our pre-qualification standards would be.
    What would happen if the stability of the global financial system 
were at stake because a large developing country in need of liquidity 
assistance had not pre-qualified? The report recognizes that the pre-
qualification requirement could be waived in such a circumstance, but 
the lending limits, the IMF's senior status, the short maturity, and 
the penalty rate would still apply.
    With respect to the development banks, for poverty alleviation, we 
recommended relying on grants to service providers with independent 
verification of performance, rather than loans earmarked to 
governments, as a mechanism more likely to deliver results. Development 
banks would share the burden of financing projects with recipient 
governments. For the poorest countries, the development banks would pay 
nearly all cost, but for those with higher per capita income the share 
of development bank support could be much lower. Grants would be paid 
to service providers, not governments, and those providers would 
compete for projects in open auctions. No grants would be paid out by 
development banks unless independent auditors had verified that the 
providers had actually achieved the stated objectives.
    With respect to promoting institutional reform, the Commission 
proposed making loans to govermnents at highly subsidized rates, but 
only after they had passed laws establishing reforms. The maturity of 
those loans would be extended (and thus the subsidies increased) 
conditional on the continuation of reforms--that is, only if 
independent verification indicates that promised reforms are continuing 
on track. For example, if a country passed a bankruptcy reform law, it 
would be eligible for a subsidized loan in support of implementing that 
new law (which can be a protracted and difficult process). Continuing 
progress after the law was passed (as indicated, for example, by an 
independent international group that rates the performance of 
countries' bankruptcy systems) would be a prerequisite to extending the 
duration of the loan.
    We recommend focusing country-level poverty assistance and reform 
subsidies on the poorest countries, where it is needed most (a distinct 
departure from current practice). And we suggest devolving much of the 
authority over country-specific programs that combat poverty or support 
institutional reforms to regional development banks, leaving the World 
Bank to pursue neglected global public goods provision, for example, in 
the areas of health and the environment.
    Are the existing resources of the international financial 
institutions adequate to meet these objectives? Yes and no. If the IMF 
refocused its efforts on emergency liquidity assistance, offered at a 
penalty rate, it could provide substantial benefits at little cost. So 
the IMF's capital is more than adequate. The resources currently 
available to the development banks could provide substantially greater 
and more effective assistance if the Commission's recommendations were 
adopted. However, the Meltzer Commission recommended substantial new 
appropriations for these institutions, if they can be reformed to 
improve their effectiveness.
    The Commission also voted unanimously that the IMF and the 
development banks should write off all claims against the highly 
indebted poor countries (HIPCs) once those countries have established 
credible development programs. The financial distress of the HIPCs is 
as much an indictment of multilateral lenders (and the governments that 
control them) as it is of the leaders in the borrowing countries who 
often wasted those funds or used them for personal gain, leaving their 
impoverished citizens with an enormous debt burden. If the multilateral 
lenders can reform their policies so as not to produce these debt 
burdens again in the future, and if the HIPCs can establish the basic 
foundations for growth, there is little point to continuing to punish 
the citizens in these countries for the mistakes of the policy makers 
of the past. However, without substantial reforms of the international 
financial institutions, debt relief will accomplish little in the long 
run; without reform, debt forgiveness would be a prelude to rebuilding 
the mountain of unpayable debt that now faces HIPC countries.
Reactions To the Report
    The editorial pages of the New York Times, the Wall Street Journal, 
and the Financial Times have been favorably disposed to some or all of 
our recommendations, which has helped us to get a fair hearing. Some G-
7 officials outside the United States (notably officials in Germany, 
the U.K., Canada, and the ECB) have expressed strong support for the 
thrust of our recommendations on IMF reform. The IMF, the U.S. 
Treasury, and the World Bank have each agreed with some of our 
criticisms and recommendations, and some of the reforms they are 
currently implementing move slightly in the directions we suggest (or 
at least appear to do so). Specifically, the IMF claims that it will 
improve its contingent credit line facility to attract more countries 
to sign on to it, and the Treasury Secretary has called for a scaling 
down of long-term IMF lending (although neither the IMF nor the 
Treasury has accepted the need to focus the IMF primarily or 
exclusively on liquidity assistance, as opposed to emergency aid 
broadly defined). While the World Bank has rejected our grant-based 
approach for providing assistance, and our call for HIPC debt 
forgiveness, in at least one recent case they seem to have accepted the 
essence of our argument for grant-based support. In late April, when 
considering the funding of the ``Economic Recovery Project'' to 
Burundi, the Bank's management conceded that:

          Donors are concerned that any budget support, without 
        appropriate controls, might be misused for military purposes. . 
        . . It is for this reason that this ERC differs from normal 
        Bank quick disbursing operations. Foreign exchange will be 
        provided to the private sector, its distribution and value 
        determined through auction.

    Despite these small, encouraging signs, and the enthusiastic 
support the Report has gotten from some Members of Congress and some 
policy makers outside the United States, the thrust of the reaction to 
the Report from the Treasury Department, the World Bank, the IMF, and 
some other Members of Congress has been negative. Richard Gephardt 
referred to the Report as ``isolationist.'' Pete Stark (who admitted 
publicly that he had not read the Report) nevertheless characterized 
our proposals as ``laughable.'' Treasury Secretary Lawrence Summers, 
testifying before the House Banking Committee (while reserving the 
right to change his mind based on further reading of the Report) 
faulted the Commission on several specifics. Given the influence that 
Mr. Summers' views may exert on the reform movement, it is worth 
addressing his criticisms in detail.\10\
---------------------------------------------------------------------------
    \10\ All references to statements by Secretary Summers are from his 
testimony before the House Banking Committee on March 23, 2000.
---------------------------------------------------------------------------
    At the hearings, Mr. Summers expressed concern that forgiving too 
much of the HIPC debt might hurt the HIPC countries themselves by 
making it harder for them to access capital markets in the future. It 
is important to stress that our report only spoke to the question of 
forgiving the debts owed to the multilaterals. In my view, it would not 
be necessary or constructive for the HIPC countries to default on, or 
seek forgiveness of, their private sector debt. So long as debt 
forgiveness is confined to the debts of the multilaterals, and the 
debts held by individual sovereign creditors, I see no reason why the 
HIPC countries would be penalized by the private capital markets. 
Furthermore, the historical literature on debt default indicates that 
``warranted'' sovereign debt write downs (those which are practically 
unavoidable because of the high cost of debt service relative to 
available income) are not penalized very much by future creditors. 
Because the HIPC countries clearly fall into the category of warranted 
debt forgiveness, I think the Secretary's concerns about the costs they 
would bear from debt forgiveness are misplaced.
    With respect to our proposals for reforming the IMF, Mr. Summers 
expressed several concerns. He claims that ``few if any of the 
countries that have suffered financial crises in recent years . . . 
would have qualified for emergency IMF support.'' He goes on to 
recognize that the Commission recommended waiving prequalification 
standards in cases where global capital market stability was 
threatened, and that therefore, the Commission did not, in fact, 
recommend ruling out support to any country. Still the Secretary 
questioned, in light of our recommendation that prequalification could 
be waived, ``how the rest of the Report's proposals in this area are to 
be interpreted and applied.'' He questioned whether many countries 
would prequalify for IMF support, and whether lending even to 
prequalified countries would create moral hazard problems (in 
comparison to the current practice of attaching ``conditionality'').
    The Secretary's concerns again are misplaced. First, we envision a 
phase-in period of five years for the new prequalification standards, 
and we think most emerging market countries would prequalify. Most or 
all of the crisis countries in Latin America and Asia would face strong 
incentives to meet our proposed standards, particularly since failing 
to do so would likely reduce their access to, and raise their costs of, 
private finance. If our proposed standards had been imposed, say, in 
1990, the severe crises suffered by these countries (which largely 
reflected weaknesses in their banking systems and the incentives of 
those weak banks to take on enormous exchange rate risks) may have been 
averted, and certainly would have been far less severe.
    Furthermore, it is hard to see how our proposed IMF lending 
arrangements would worsen moral hazard. Moral hazard depends on the 
expectation of receiving a subsidy. Under current IMF arrangements, 
countries borrow large amounts at highly subsidized rates. The 
conditionality imposed on these countries (particularly in the area of 
financial sector reform) is not enforced and not effective, owing in 
part to the short disbursement time period of emergency lending and the 
long time period required for meaningful reform. Under our proposals, 
there is no subsidy, and therefore, virtually no moral hazard. 
Prequalifying countries would be able to borrow a limited amount on a 
short-term basis in the form of senior debt at a penalty rate; those 
that receive emergency assistance without having prequalified must 
borrow at a super-penalty rate, which provides further assurance that 
no subsidies would flow to those borrowers.
    Another concern expressed by Mr. Summers is that the Commission's 
report presumes ``that crises emerge almost exclusively from flaws in 
the financial sector.'' This is a significant misunderstanding of our 
report. According to our proposals, the role of the IMF would be to 
protect against liquidity problems in the markets for foreign exchange 
and sovereign debt that come from problems other than banking sector 
fragility. The point of the prequalification standards is to prevent 
the IMF from being misused as a mechanism for facilitating financial 
sector bailouts. Its main function lies elsewhere--specifically in 
providing protection against market illiquidity, either due to 
information problems that result in the temporary collapse of markets, 
or problems of self-fulfilling speculative attacks.
    The Secretary criticizes our proposals for failing to provide IMF 
support to deal with ``balance of payments problems.'' I am not sure 
what the Secretary means by a ``balance of payments problem.'' Our 
proposals for IMF lending are designed to counter balance of payments 
outflows resulting from bona fide liquidity crises. Our proposals would 
not channel counter-cyclical subsidies to countries that suffer balance 
of payments outflows, per se. In our view it would be inappropriate to 
charge the IMF with the broad mandate of providing global counter-
cyclical fiscal subsidies to its members.
    Mr. Summers also criticizes our recommendations for reforming the 
development banks. He objects (1) to limiting emergency lending to the 
IMF, (2) to our proposal to target country-level assistance to the 
poorest countries, and (3) to the use of grants rather than loans for 
poverty alleviation.
    Our proposal to limit emergency lending to the IMF follows directly 
from the principle that separating the functions of the various 
multilaterals promotes greater effectiveness and accountability. Under 
our proposals the IMF would have the capacity to deal with all bona 
fide liquidity problems that would arise. There is no need for the 
other multilaterals to assist it in providing short-term assistance.
    Nevertheless, the Commission Report envisions loans or grants from 
development banks to poor countries that have experienced crisis-
induced trauma. We recommend that any assistance to alleviate poverty 
or to spur reforms should be channeled through appropriate long-term 
programs, and that in the case of reform programs, these should be 
designed to ensure that the flow of aid is credibly linked to the 
implementation of reforms undertaken by recipients.
    The Secretary also misunderstands the effect of our proposals on 
poor people who reside in developing countries with access to private 
capital markets or with per capita annual average incomes higher than 
$4,000. He states that ``the Report would rule out MDB support for the 
majority of the world's poorest people.'' That is not true. While we 
recommend that the MDBs focus their country-level poverty alleviation 
funding on the very poorest countries that lack access to private 
capital markets, we would have the World Bank expand its support to the 
poor throughout the world through two channels: financial assistance 
for supplying global public goods, particularly in the areas of public 
health and the environment, and technical assistance to all developing 
countries. Similarly, the Secretary's statement that ``the Report's 
recommendations would drastically undercut the global role of the World 
Bank by limiting it to the `knowledge' business'' indicates a serious 
misunderstanding of our recommendations. We envision a substantial 
continuing role for the World Bank in providing financial assistance.
    Finally, Mr. Summers' statement that ``the shift to grant-based 
funding would drastically reduce the total amount of official resources 
that can be brought to bear in these economies'' confuses the dollar 
amount of lending that the development banks currently provide with the 
dollar amount of assistance implicit in that lending (the amount of 
interest subsidy). So long as the development banks retain their 
capital (as we recommend), under our proposals they will be able to 
channel more assistance using grants than using loan subsidies, and 
crowd in a greater flow of credit, to the world's poorest countries 
than they do today. That is so even before taking into account our 
recommended increases in funding for the development banks. Current 
World Bank loans transfer money to borrowing countries in advance and 
require borrowing countries to guarantee repayment. Grant funding frees 
up additional resources by allowing countries to use their limited 
potential to guarantee repayment to support private market borrowing to 
finance their share of project costs. Also, unlike grant subsidies, the 
amount of subsidy transferred through a loan is limited by the fact 
that loans can't bear an interest rate less than zero. Taking these 
advantages of grant-based assistance into account, Adam Lerrick of the 
Commission staff estimated that a grant-based program would support a 
volume of development projects for poverty alleviation and 
institutional reform 80% larger than that of the current loan-based 
programs.
    I do not mean to suggest that there is no room for disagreement on 
the details of our recommendations. Indeed, it would be remarkable if 
that were so. Rather, in reviewing and responding to these arguments I 
hope to show that the reorganization of these institutions and the new 
policy mechanisms we suggest for them (e.g. IMF liquidity lending with 
prequalification, grant-based poverty alleviation, credible 
subsidization of long-run reforms, and HIPC debt relief) are quite 
reasonable and practical economic mechanisms.
``Forget Economics: It's the Foreign Policy, Stupid!''
    Dealing with these detailed concerns, however, is the easy part of 
responding to critics' objections, and the less important part. Most 
critics of our proposals, including the Secretary, have a deeper 
problem with our Report. They do not agree with our goals and 
principles. Specifically, many critics do not share the goal of 
narrowing the latitude of the IMF and the World Bank. To some, the IMF 
and the development banks should be used as cost-effective vehicles for 
``leveraging'' U.S. foreign policy. From that perspective, any limits 
on the ``flexibility'' of these institutions are undesirable, as is 
transparency in accounting, open voting, independent evaluation of 
performance, and other procedural reforms we suggest, since they only 
get in the way of flexibility. Indeed, to those who view the 
multilaterals this way, their principal advantage is the absence of 
accountability. Aid can be delivered, and the embarrassing deals that 
lie behind it are not easily traced. Time-consuming parliamentary 
appropriation debates and justification for the use of taxpayer funds 
can be avoided. This point of view is not often voiced openly, but it 
is nevertheless a crucial element in the current debate over reform.
    Consider, for example, the recent negotiations between Pakistan and 
the IMF. A knowledgeable insider informs me that the United States 
government has told Pakistan that its access to IMF subsidized lending 
depends on its willingness to sign a nuclear nonproliferation treaty. 
According to this person, unless Pakistan agrees, the U.S. will block 
its IMF program. In this case, the U.S. foreign policy objective seems 
laudable, but is the IMF the right tool for achieving it?
    The view that the multilaterals should serve the broadly and 
flexibly defined goals of U.S. foreign policy is wrong for at least 
five reasons. First, the flexibility necessary to permit the 
multilaterals to serve as broad foreign policy devices undermines their 
effectiveness as economic mechanisms. When the objectives of poverty 
reduction and institutional reform take a back seat to ad hoc foreign 
policy it is no surprise that aid mainly flows to the richest and most 
powerful of the emerging market countries, or that the IMF and the 
development banks maintain so poor a track record, even by the 
standards of their own internal evaluations. In my view, there is no 
more important goal for American foreign policy than promoting stable 
economic development around the world. We should design multilateral 
institutions that are able to meet that challenge. Saddling those 
institutions with broader political mandates that weaken their ability 
to achieve bona fide economic objectives is counterproductive, even 
from the perspective of foreign policy.
    Second, the use of multilaterals to pursue broad foreign policy 
objectives forces the management of these institutions to depart from 
clear rules and procedures in order to accommodate ad hoc political 
motivations. This undermines their integrity as economic institutions, 
makes it hard to establish norms for the conduct of management and 
mechanisms to ensure their accountability, and leads to erosion of 
popular support for funding the important economic goals on which they 
should be focused. It is ironic that some of the public officials who 
complain loudest about the reluctance of Congress to fund international 
organizations have done more than their share to produce the cynicism 
about these organizations that makes them so unpopular. The Meltzer 
Commission recommends substantial increases in the budgets of effective 
development banks. But the popular support necessary to raise new 
appropriations will not be forthcoming until these institutions regain 
their credibility.
    Third, the subversion of the process of Congressional deliberation 
over foreign aid appropriations is no small cost to bear, even in the 
interest of pursuing desirable foreign policy objectives. It is beneath 
us as a democracy to sanction such behavior. If Congress wishes to 
delegate power over a limited amount of resources to a multilateral 
``political emergency fund'' financed by the G-7 countries, then let it 
do so openly, establish the appropriate governance and oversight to 
accompany that delegation of authority, and keep the management and 
funding of that entity separate from the other multilateral 
institutions. I am not recommending that such a fund be established, 
but rather suggesting that if it were, it should be created by, and be 
made accountable to, the governments and taxpayers who authorize and 
finance its activities.
    Fourth, it is worth considering the adverse impact that loans from 
multilateral lenders with non-economic objectives can have on emerging 
market countries. The debt burdens that plague the HIPCs today are 
primarily the result of inter-governmental or multilateral loans that 
were politically motivated, not private or public lending made to 
finance credible investments.
    Finally, it may not even be feasible for the United States to 
continue to use multilateral financial institutions as an extension of 
U.S. foreign policy. Progress in the global economy will make that 
approach to those institutions increasingly anachronistic. A decade 
from now the global economy will be much more polycentric. Europe and 
Japan are likely to enjoy a golden era of productivity growth over the 
next decade, as well as substantial improvements in the sophistication 
of their financial systems and increases in their living standards. 
Many emerging market countries outside of Europe--including Korea, 
Argentina, Brazil, and Mexico--will soon become full-fledged industrial 
nations, as well. Multilateral agencies focused on bona fide economic 
objectives, with a more decentralized administrative structure--one 
that relies more on regional development banks in Asia and Latin 
America, financed by new benefactor countries as well as the G-7--will 
fit the global economy of the future better than the current structure, 
which is rooted in and subservient to the broad goals of U.S., or G-7, 
foreign policy. And a World Bank that can focus cooperative efforts 
among a growing number of benefactor countries to address global public 
health and environmental problems will be increasingly valuable for the 
same reason.
    Sooner or later, global economic progress will mandate the kinds of 
reforms our Commission is recommending, and a number of senior members 
of Congress are considering. It is worth remembering that the 
independence of the Federal Reserve System from the Treasury 
Department--a precursor of sorts to the economic rationalization of IMF 
and World Bank policies advocated by the Meltzer Commission--that was 
achieved in 1951 resulted from a shift in economic power that made it 
impossible for the Treasury to continue to use monetary policy as a 
political and economic tool.
    In 1935, then Treasury Secretary Morgenthau gloated that ``the way 
the Federal Reserve Board is set up now they can suggest but have very 
little power to enforce their will . . . [The Treasury's] power has 
been the Stabilization Fund plus the many other funds that I have at my 
disposal and this power has kept the open market committee in line and 
afraid of me.'' Morgenthau felt no threat from the centralization of 
power at the Board of Governors in 1935 and the new structure of the 
Federal Open Market Committee because ``I prophesy that . . . with the 
seven members of the Federal Reserve Board and the five governors of 
the Federal Reserve Banks forming an open market committee, that one 
group will be fighting the other . . . and that therefore if the 
financial situation should go sour the chances are that the public will 
blame them rather than the Treasury.'' \11\ The prospect of retaining 
power while escaping responsibility always appeals to government 
officials.
    Why was Secretary Morgenthau able to control monetary policy in the 
1930s, and why did that control lapse in the 1950s? In essence, 
Secretary Morgenthau had more funds at his disposal (with which to 
expand the money supply) than the Fed had on its balance sheet (with 
which to contract the money supply), so the Fed was simply too small to 
control the supply of money. By 1951, however, the size of the Fed had 
grown relative to the Treasury's resources, and its independence, 
codified in the Treasury Fed Accord of 1951, was a forgone conclusion.
    The growing strength of other industrial and emerging economies 
will increase the independence of the World Bank and the IMF from U.S. 
Treasury control in the next decade or two. In the post-World War II 
era the U.S. economy reigned supreme. Being an ``internationalist'' 
meant understanding the central importance of the strategic political 
struggle between the United States and the Soviet Union, and the need 
to make economic policy subservient to that struggle. But as the 
polycentric post-Cold War global polity and economy take hold, it will 
become increasingly apparent that the United States neither should, nor 
can, use the World Bank and the IMF as a tool of leveraged, ``stealth'' 
foreign policy.
    The Meltzer Commission Report has provided a credible starting 
point for reforming the multilateral financial institutions, and has 
persuasively argued that it is high time to begin that process. Before 
reform can begin, before these institutions can operate as effective 
economic mechanisms, they must narrow their focus, regain credibility 
as organizations, and recapture the trust of the taxpayers that finance 
their operations. And before any of that can happen, the developed 
countries, and especially the United States, must resolve the often 
unspoken controversy over whether these organizations should act as 
foreign policy slush funds or as bona fide economic institutions. That 
is the first step toward real reform.

--------------
    \11\ John Morton Blum, From the Morgenthau Diaries: Years of 
Crisis, 1928-1938 (New York: Houghton Mifflin, 1959), p. 352.

    Senator Hagel. Doctor, thank you.
    Dr. Levinson.

    STATEMENT OF DR. JEROME LEVINSON, MEMBER, INTERNATIONAL 
     FINANCIAL INSTITUTION ADVISORY COMMISSION; PROFESSOR, 
 WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSITY, WASHINGTON, DC

    Dr. Levinson. Mr. Chairman, I had to substitute for Fred 
Bergsten yesterday afternoon. I have submitted a brief 
statement. I am not going to read it. I am just going to make a 
few points in the interest of your getting to the questions, 
which I think the members want to reach with respect to this.
    Let me just say this. First, the majority report--there 
should be no illusions about it--basically eviscerates both the 
IMF and the World Bank. Let us not have any illusions about 
that. The IMF is converted into an international bank 
supervisory agency. Once a country is prequalified, its access 
to the resources is considered to be automatic. Essentially 
what you need at the IMF then is a high level clerk, two 
disbursing officers, and three lawyers to draw up the 
documentation.
    They say that in a systemic crisis you suspend the rules, 
as if it is self-evident what a systemic crisis is. I want to 
remind you of the Tesebono crisis in Mexico in 1994 and 1995. 
You will recall that there was no agreement between the U.S. 
and the western European authorities as to whether the crisis 
was systemic. There was a substantial disagreement. So, it is 
not self-evident when a crisis is systemic. That is the first 
point.
    The second point, with respect to the World Bank, the World 
Bank becomes converted into a super development bank for Africa 
because all financing terminates with respect to the member 
countries of Latin America and Asia. So, it becomes a super 
development bank for Africa until the African Development Bank 
can take over, and it then becomes what they call a provider of 
public goods, solving the malaria and public health problems of 
Africa. Why one believes that the World Bank is going to be 
more effective at this than the World Health Organization is a 
mystery to me. Why the World Bank is going to be a more 
effective coordinator of aid for NGO's than that United Nations 
development program, without financing that the World Bank 
provides, again is a mystery.
    Now, I will not go into the details--I will be happy to 
address those issues in the question period--of the scheme that 
they propose for World Bank financing, the idea of grants, et 
cetera. But the criteria that they have set up means 
essentially that, for example, in Latin America, the only 
countries that would be eligible for borrowing from the IDB 
would be the Central American countries, less Costa Rica, and 
Bolivia, Paraguay, and Guyana. The Inter-American Development 
Bank does not survive as a regional development institution 
under that criteria. The point is to push the more advanced 
developing countries into exclusive reliance upon the private 
financial markets.
    That brings us to the nub of the difference. Is there a 
legitimate role for development finance? We have had experience 
with the private financial markets for 25 years and we know how 
volatile they can be. We have seen the debt crisis of the 
1980's. We have seen the Mexican Tesebono crisis. We have seen 
the East Asian short-term lending. We have seen the Russian 
crisis. We have seen the Brazilian crisis. So, the idea that 
you want to push the countries into exclusive reliance upon 
these volatile financial markets certainly should give one 
pause in light of the history.
    Now, there is a legitimate issue which I think they raise 
and I think is at the heart of the dilemma. I think there is a 
compelling case for development finance in terms of the 
volatility of the markets. For instance, if you have the IDB 
with a self-sustaining lending program now of $9 billion--by 
self-sustaining, I mean they do not need any further capital 
increases. They loan $9 billion a year. The World Bank provides 
approximately $7 billion. So, that is $16 billion per annum for 
the Latin American countries, and that is complemented by 
another $16 billion in counterpart funds by the countries. You 
have a base investment in the human capital of the region, if 
the resources are properly used, of approximately $32 billion 
per annum. That gives you at least a secure baseline for 
investment. Whatever else occurs in terms of access to the 
markets, the countries know that they are going to be able to 
finance those key investments through long-term, assured 
capital lending from the international community through these 
institutions.
    The basic difference between us, the minority and the 
majority, was that the majority said that only countries that 
are prequalified have access to IMF resources and there are no 
conditions that attach. We in the minority said that does not 
make any sense. You want the IMF to address with the country 
the underlying conditions that led to the crisis in the first 
place and to assure that those conditions are being addressed.
    As I said, with respect to the World Bank and the 
development banks, we saw a continuing relevant complementary 
role for development finance as the private markets assume the 
primary financing role.
    Neither the majority nor the joint minority really 
addressed the equity issue, and that is the reason I wrote a 
separate, rather lengthy dissent because I think this is the 
heart of the problem in areas like Latin America. They are 
trying to achieve two things at once: high growth rates and at 
the same time address historic inequities.
    The basic problem we have with the World Bank and the IMF 
is that they are really pushing a neoclassical economic vision 
of the world; that is most evident in their labor market 
recommendations: in order to solve the unemployment problem 
that has accompanied the economic liberalization program, they 
want the countries and insist--in Argentina, for example--that 
the countries adopt labor market flexibility measures, which is 
a euphemism for measures which make it easier for firms to fire 
workers without substantial severance payments, to weaken the 
capacity of unions to negotiate, and to drive down urban 
unionized wages to make the country more competitive 
internationally.
    I really find it astonishing to listen to Professor 
Calomiris' testimony with respect to Argentina and labor market 
reforms. No one was more dedicated than the Menem government to 
implementing this IMF, World Bank, and our own Treasury agenda 
with respect to the labor markets. And they tried. And that led 
in September 1996 to a general strike which brought the country 
to a halt and which had broad support in the middle class. So, 
the question of labor market reform is more than just a 
technical economic issue. It goes to the basic social compact 
in the society, and that compact has evolved as a result of 
negotiation within the society.
    The present Argentine Government has accomplished something 
in reforming the labor market that the previous government was 
not able to, also accompanied by major labor unrest. Again, it 
is astonishing to listen to Professor Calomiris with respect to 
Argentina's fiscal problem that they now face. They tried to 
cut. They have cut substantially. They have continuing riots in 
every one of the outlying provinces because they do not have an 
economic base in those provinces. When you cut the government 
expenditures, you are now having social riots in the interior 
provinces of Argentina. These are not simply a question of 
technical issues. This goes to the question of how you allocate 
the costs and the burdens of reform within a society.
    Unfortunately, the approach of the IMF and the World Bank 
is to allocate that cost disproportionally to working people.
    I want to refer you to an extraordinary report in the New 
York Times by Nick Kristof and David Sanger discussing the East 
Asia crisis, where they describe how the push for 
liberalization of the financial markets was a contributing 
cause to the East Asian crisis, and the push came from the 
United States. They say, ``This is not to say that American 
officials are primarily to blame for the crisis. Responsibility 
can be assigned all around not only to Washington policymakers, 
but also to the officials and bankers in the emerging market 
countries who created the mess, the Western bankers and 
investors who blindly handed them money, the Western officials 
who hailed free capital flows and neglected to make them safer, 
the Western scholars and journalists who wrote paeans to 
emerging markets in the Asian century.''
    Absent from this rogues' gallery of culprits who are 
responsible are workers, workers in both Korea, the other East 
Asian countries, and the United States. As Professor Meltzer 
very rightly points out, they are the ones who pay the price 
disproportionally in the resolution of each of these crises. He 
refers to the United States as the importer of first resort, 
there is a social and political cost which underlies that 
importer of first resort function to which he refers to.
    At the heart of the issue between myself and the other 
members of the Commission was they were unwilling to address 
the question of growing income inequality both between 
countries and within countries, and I think that is at the 
heart of the development issue. The dilemma we have, for those 
of us who support a continued role for development financing, 
is that the economic philosophy which these institutions bring 
to bear really fosters growing income inequality in the 
interest of this neoclassical economic model which places 
market efficiency above all other considerations. In my 
opinion, this is not sustainable politically and socially and 
that is what we are going to find out in the next couple of 
years.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Levinson follows:]

              Prepared Statement of Dr. Jerome I. Levinson

     the international financial institutions and their discontents
    Two events have highlighted the discontent with the IMF and the 
World Bank: first, the issuance of a report by the majority of an 
International Advisory Commission on International Financial 
Institutions, and accompanying dissenting statements. Second, high 
profile protest demonstrations in Washington at the April meetings of 
both institutions. Coming from opposite ends of the American political 
spectrum, the two events converge in evidencing a widespread discontent 
with the operations and priorities of both institutions.
    Both the Commission and the protests, in my opinion, arise out of 
the evolution of the international trade, investment and finance system 
of the past two decades. That evolution has transformed domestic U.S. 
politics with respect to the international economy. The culminating 
event was the East Asian financial crisis in November 1997 and the 
request of the Administration for additional funding for the IMF to 
cope with the developing crisis.
    That crisis served as a catalyst for two strains of criticism of 
the IMF: the center-left of the Democratic Party in the Congress, 
particularly in the House, demanded, as the price of their support, 
that the legislation include provisions that instructed the U.S. 
Executive Director in the IMF to use the ``voice and vote'' of the 
United States to (i) advance core worker rights as a part of IMF 
programs and (ii) to ensure that IMF programs that included labor 
market flexibility measures as a condition of financing are compatible 
with core worker rights. That demand reflected a widespread feeling 
among Democrats, and their labor allies, that IMF programs are biased 
in favor of capital and corporate interests. If the IMF legislation was 
to obtain Congressional passage, the Administration, Wall Street and 
the Congressional leadership, had to accept a provision in the 
legislation along the above lines.
    For the first time, the legislation appropriating IMF funding 
included such a worker rights provision, but this approach did not 
question the existence of the IMF, or, its relevance. Nor did it impose 
conditions directly upon the IMF; rather, it respected the multilateral 
character of the institution by imposing the policy conditions upon the 
U.S. Executive Director (USED) in the IMF, and the U.S. Treasury 
Department, the principal agency responsible for U.S. policy relating 
to the IFIs. Understood in these terms, it represented a relatively 
conservative approach to policy reform in the IMF. It was a reformist 
rather than an abolitionist strategy.
    At the same time, the Asian financial crisis catalyzed sentiment, 
in conservative U.S. academic and Congressional circles, that the IMF 
no longer served a useful purpose; on the contrary, it contributed to 
successive crises by increasing ``moral hazard.'' The East Asia crisis, 
in this view, arose directly out of the 1994/95 bailout of Mexico: the 
resolution of the East Asia crisis should have been left to the private 
capital markets to sort out. This view received its most dramatic 
expression in a Wall Street Journal article by George Schultz, William 
Simon and Walter Wriston; Schultz and Simon, of course, had been 
Secretary of the Treasury in former Republican administrations and 
Wriston, was a former Chief Executive Officer of Citicorp. Because the 
article called into question the rationale for the very existence of an 
IMF, and because of the personal prestige of the authors, it caused 
something of a sensation.
    The legislation approving additional funding for the IMF provided 
for a Congressional Advisory Commission on International Financial 
Institutions (IFIs), which was to examine U.S. policy with respect to 
these institutions, including the question of whether they ought to 
continue to exist. For purposes of the Commission, the World Trade 
Organization (WTO) was included in the definition of IFIs, indicating, 
in my view, that the Congress wanted the question of international 
finance examined within a broader context: trade, investment and 
finance, considered as an integrated whole.
    The Advisory Commission consisted of eleven members, six appointed 
by the Republican Majority Leaders in the Senate and the House and five 
appointed by the Democratic Minority leaders in both Chambers. The 
Chairman (Professor Allan Meltzer of Carnegie-Mellon University) was 
drawn from among the majority members. I was one of the Democratic 
appointees. The various reports, a majority report (eight members), a 
joint dissent (three members), my own separate somewhat lengthy 
dissent, reflected the deep divisions within the Commission, and, in my 
opinion, within American society, concerning not only the institutions 
which are the subject of the Commission inquiry, but also the more 
general process in the international economy that we short-hand refer 
to as ``globalization.'' (One member signed both the majority report 
and the joint dissent).
    The Majority, consisting of the six Republican members and two 
Democratic appointees, Professor Jeffrey Sachs of Harvard University 
and Richard Huber, formerly Chief Executive Officer of the Aetna 
Corporation, recommended a highly constricted role for the IMF: only 
member countries of the IMF that are pre-qualified are eligible for IMF 
financing; that financing is at a penalty rate of interest for a 
maximum period of 120 days, with a one-time-only rollover for an 
additional 120 days. Initially, the Majority had a collateral 
requirement, an IMF preferential claim on tax revenues, specifically 
customs revenues, but in the final report this requirement was dropped.
    The pre-qualification requirements relate to financial ratios for 
financial sector institutions; in the final meeting of the Commission, 
one dissenting member, Fred Bergsten, severely criticized the absence 
of macroeconomic criteria. In response to this criticism, unspecified 
fiscal criteria were added. Program conditions attached to IMF 
financing are specifically barred. During a five-year transition 
period, non-qualifying countries would be enabled to borrow, but only 
at a super-penalty rate of interest.
    Initially, the majority members of the Commission voted to have the 
IMF discontinue Article IV consultations, but at the same time, they 
proposed the IMF be a disseminator of best practices. The illogic of 
discontinuing Article IV consultations, the means by which the IMF 
informs itself of best practices, but expecting the Fund to disseminate 
such practices among the member countries finally dissuaded the 
Majority from recommending discontinuing Article IV consultations. 
Longer term lending facilities would be terminated.
    The IMF, then, according to the Majority, has a highly restricted 
financing role as lender of last resort in a systemic crisis, or, when 
a country, through no fault of its own, finds itself in temporary dire 
financial straits, deprived of market access. It is a 19th century 
Bagehot conception of a central bank but without the money creation 
function; that conception assumed a single political entity in a 
country with basically solvent financial institutions operating within 
a market economy with relatively well developed financial markets. Any 
interruption of market access could be assumed to be an aberration and 
temporary in nature.
    Countries which have problems which are structural in character are 
assigned by the Majority to the World Bank (and regional development 
banks). However, under the Majority proposal, the World Bank would be 
divested of financing responsibility in any of the countries of Latin 
America or Asia. It becomes a super-development bank for Africa, at 
least until the African Development Bank has matured sufficiently to 
assume exclusive responsibility for financing development in the 
region. To the extent there is a development financing function at all 
for the other regions, that function is to be carried out by the 
regional development banks. But the criteria for eligibility for 
financing from these institutions is set at such a high bar, that, for 
example, in Latin America, the only countries that would be eligible 
are the Central American countries, less Costa Rica, and Bolivia, 
Paraguay and Guyana. It is a proposal, which, in effect, says that for 
the more developed countries in Latin American and Asia, development 
financing is now irrelevant; they should rely, for development 
purposes, exclusively upon the private financial markets.
    The World Bank becomes a source of ``public goods,'' addressing 
such issues as tropical disease, for example, malaria, and AIDS, which 
are not now being adequately addressed. It also becomes a coordinator 
of other aid givers. In my view, neither the World Bank or the regional 
development banks, politically, can survive this proposal.
    The joint dissent outlined a different conception: the IMF should 
continue to be a source of financing for countries which, for one 
reason or another, find themselves in balance of payments difficulties. 
The original conception of the Fund remains valid: it is desirable that 
countries in financial difficulty not resort to destructive policies 
that have the potential to set off a competitive cycle of policy 
choices that lead to harmful systemic problems. Such IMF financing 
should be accompanied by an agreement on program conditions that 
address the underlying causes that led to the balance of payments 
problem. That is a major difference with the Majority proposal: a 
continued role for programmatic content to accompany IMF financing.
    The joint dissent, however, shared the view with the Majority that 
the IMF should not be a front-line permanent poverty fighting agency. 
It must assess the social impact of a specific program, but structural 
reform not proximately linked to the balance-of-payments problem, 
should be left to the World Bank and regional development banks. This 
conception, then, assumed a continued development financing role for 
the development banks, even for the more advanced developing countries. 
The increasing importance of the private financial markets as the 
primary source of development finance for the future, in the context of 
volatile private financial markets, must be complemented by public 
development finance.
    Development financing provided an assured source of long-term 
finance for high value projects and programs, primarily related to 
human capital development but also for a limited number of high value 
physical infrastructure projects. That finance also, of course, has a 
policy content, that is not characteristic of private financing. In 
general terms, it is this conception that has been articulated by the 
Secretary of the Treasury, the Council on Foreign Relations and 
Institute for International Economics Task Force on International 
Finance, and a similar task force of the Overseas Development Council.
    Neither the Majority report or the Joint Dissent, however, 
recognized the other source of discontent with the Bretton Woods 
institutions: the perception that they are critical elements in the 
development of a profoundly inequitable two track international trade, 
investment and finance system, a rule based system for the protection 
of corporate property rights and no protection for core worker rights 
and the environment. It is that perception, in my view, that fueled the 
demonstrations in Seattle and Washington. It is what is fundamentally 
at issue in the current intense debate in this country over granting 
permanent normal trade status to China. It is the issue that I address 
in my separate dissenting statement.
    The issue arises most acutely in connection with the IMF/World Bank 
emphasis upon labor market flexibility measures, which is a code-word 
for measures that make it easier for companies to fire workers without 
significant severance payments, weaken the capacity of trade unions to 
negotiate on behalf of their members, and drive down urban union wages 
and benefits. Joseph Stiglitz, formerly Chief Economist of the World 
Bank, has noted, with respect to labor matters, it reflects an 
excessively economic view, through the even more narrow prism of 
neoclassical economics. This labor market intervention by the Bretton 
Woods institutions is contrasted with their indifference to the core 
worker rights of freedom of association and collective bargaining, 
where countries use the coercive power of the state to effectively deny 
workers these core worker rights, even where the country's own 
constitution and labor laws, at least, nominally, guarantee such 
rights.
    Indeed, the World Bank is of the view that it cannot support 
freedom of association and collective bargaining; these rights have 
been deemed by the Bank to be political in nature; economic studies, 
according to the Bank, are inconclusive as to whether freedom of 
association and collective bargaining make a positive contribution to 
economic development. In contrast, according to the World Bank, labor 
market flexibility measures clearly contribute to economic development, 
and therefore are an integral part of the conditionality requirements 
of both World Bank and IMF programs.
    Both institutions are, then, perceived as doing the dirty work for 
big capital, both domestic and foreign, to the disadvantage of workers, 
in both developed and developing countries. (Mr. Stanley Fischer, 
Acting Managing Director of the IMF, denies that IMF intervention is so 
one-sided, but that is the way it is perceived by trade unions, 
particularly in Latin America and Asia, and critics in the Congress).
    That neo-classical economic model, promoted by the World Bank and 
IMF, is not confined to the labor market, but represents a more general 
approach to development: public sector intervention is suspect or 
worse; privatization, in any and all circumstances, is preferred. 
Growing income inequality within countries is of lesser consequence 
than economic efficiency considerations. So long as that perception 
continues, and I believe it is a perception based upon the reality of 
the policy priorities of these institutions, there is no possibility, 
in my view, of assembling a broad-based consensus within this country 
for support of the these institutions. On the contrary, I anticipate 
that public, although not elite, support will continue to weaken.
    We run the risk of creating, in both the industrialized world and 
the borrowing member countries of the Bretton Woods institutions, an 
increasingly alienated and embittered working class, with incalculable 
social and political consequences. The apparent indifference of the 
Bretton Woods institutions to this tendency fuels the view that they 
are dominated by a one-dimensional, excessively technocratic economic 
ideology which is socially and politically tone-deaf.
    It is ironic that this neo-classical economic view now predominates 
in the Bretton Woods institutions: Lord Keynes and Harry Dexter White, 
the two men most responsible for the design of the Bretton Woods 
system, fought all of their professional lives against that same neo-
classical model; the institutions they designed to insulate the world 
economy against the limitations of that economic philosophy have now 
become the means to impose it upon the borrowing member countries of 
the two institutions.
    So there is a dilemma: there is a compelling case for development 
finance to complement the private financial markets, even with respect 
to the more advanced developing countries, but the Bretton Woods 
institutions, in promoting their neo-classical economic philosophy, 
have overreached: they are engaged in a project of remaking the 
economies of their borrowing member countries along lines that would 
never be accepted, politically, in their major non-borrowing member 
countries. In so doing, they are promoting an increasingly inequitable 
international economic system. They thus undermine support among groups 
in American society that should be their natural allies in what should 
be a noble enterprise: raising the standard of living for too many 
people that now cannot share in the global economy.

    Senator Hagel. Dr. Levinson, thank you, and to each of our 
three panelists, we are grateful you would spend some time here 
today.
    Dr. Meltzer. Mr. Chairman, may I correct one statement?
    Senator Hagel. Dr. Meltzer.
    Dr. Meltzer. Yes. If you look on page 88 of our report, 
there is the list of the countries. There are 11 countries in 
Latin America that would be eliminated from the list. What Mr. 
Levinson said is simply an overstatement of what would happen. 
There are only 11 countries in all of Central and South America 
and they are the richest countries or the countries which have 
access to financial markets.
    Senator Hagel. The record will reflect your comments, Dr. 
Meltzer.
    I think the committee has developed some appreciation over 
the fact that we do have, indeed, a minority and a majority 
report.
    Dr. Levinson. We have two minority reports.
    Senator Hagel. Two minority reports.
    I would like to begin the questioning this afternoon with 
you, Dr. Calomiris. You have heard what your colleague and 
friend has said about the majority report, and we could spend 
days, I suspect, taking apart Dr. Levinson's analysis. But I 
want to focus on a point that he made, and you can take this 
any way you want to take it. His comment, I believe the quote 
was, ``more than technical issues are involved here.'' First, 
do you believe that is true? And then would you amplify your 
answer? Should ``more than technical issues'' in fact be 
considered in determining the role of the IMF and other 
international institutions?
    Dr. Calomiris. I am going to ask for a little 
clarification. Do you mean, when you say more than technical 
issues----
    Senator Hagel. Well, Dr. Levinson laid out that we are 
dealing with real people's lives, social compacts as I think he 
referred to it. He seems to think the majority report defined 
the IMF, the World Bank, and the seven institutions that you 
studied in narrow, technical, economic terms only. Did you do 
it that way, or did you look at the reality of dealing with 
people's lives rather than a textbook framing of the issue?
    Dr. Calomiris. Let me respond. I think that we agree in our 
objectives. We disagree maybe about what the consequences of 
different policies would be to meet those objectives. Since we 
were talking about Argentina, let us use that as a case. I do 
not think the IMF or the World Bank should go to any country 
and tell them what their labor union laws should be, and I want 
to clarify that. I have said that in previous testimony. I do 
not think that is the proper role of those multilateral 
institutions and I do not think that it should be part of their 
conditionality for lending either. So, I think we agree on 
that.
    Let me explain in Argentina where we may disagree, or at 
least how I view it. What I was suggesting is that the U.S. 
Treasury, IMF, IDB, and World Bank involvement in Argentina had 
made the size of the debt over the last 3 years very large. The 
major mistake was that it kept postponing private market 
discipline. Basically the arithmetic has not been working in 
Argentina. It is that simple. The amount of debt service 
required is getting very large. There are $18 billion worth of 
Argentine debt that has to be either rolled over or new debt 
issued within the next year. The entire Argentine banking 
system only has a deposit base of $80 billion. So, that gives 
you a little bit of a sense of how big the shock is. I could go 
into the details.
    The point is now we have a big problem, and the problem is 
a lot bigger as a result of the fact that the private market 
discipline that would have occurred 3 years ago, where the 
creditors would have said, we do not see the progress, we do 
not see the reforms, the money is not coming in, was postponed. 
If Argentina had been forced to choose 3 years ago between what 
I would call a reform agenda--that is, expenditure cuts, labor 
market reforms--then they could keep their currency board and 
they could maintain their payments on their foreign debt 
indefinitely. On the other hand, they might have learned 3 
years ago that they did not desire or have the political will 
to maintain that policy stance.
    I am not judging which of those they should do. That is up 
to Argentina. My point is now they have the worst of both 
worlds because now they are sitting on a powder keg. When they 
have to make that choice over the next year, it is going to be 
a much bigger cost either way. So, my point is not to disagree 
with Mr. Levinson about what the choice in Argentina should be. 
We do disagree about it, but that is really not the point of 
our recommendations. I think the spirit of our Commission was 
to say that should be up to the country. Let us not make their 
choice set worse. Let us not aggravate the risks and that is 
the sense on which I think we disagree.
    Senator Hagel. Dr. Levinson, what is wrong with that?
    Dr. Levinson. I agree. I am delighted to hear that Dr. 
Calomiris agrees that it should be no part of the IMF, World 
Bank, or Treasury program to tell Argentina how it should 
resolve its labor market compact, which arose over the last 40 
years, as we well know, in part as a consequence of the 
reaction against the oppressive conditions of the Argentine--
what they called the des camisados, the ones who worked in meat 
packing.
    But it is really astonishing to listen to this because it 
is as if when--Professor Calomiris, who I really admire because 
of his expertise in the history of international financial 
markets, talks about 3 years ago in Argentina. In order to meet 
the expenditure cuts that they had agreed with the IMF, the 
targets, they started cutting education. There was a middle 
class, an upper class, and a working class revolt in Argentina. 
They had to back off of those expenditure cuts. We talk about 
the labor market reform that the IMF and World Bank has been 
pressing for the last 5 years. As I said, in 1996 it brought 
the country to a halt. This year it led to riots before the 
Congress.
    He is right when he says this has to be resolved by 
Argentina, but what he is not willing to acknowledge is that 
maybe the model that has been promoted for the last 10 years of 
radical labor market and liberalization of markets, without 
taking into account the employment consequences and the social 
consequences, is not sustainable in a place like Argentina.
    Senator Hagel. Thank you. My time is up for this one. But 
may I ask you for a quick response? You have something on your 
mind, I suspect. Then we will go to Senator Wellstone.
    Dr. Calomiris. I am trying to find a point of agreement. I 
have worked for the Argentine Government over the past 5 years. 
I would guess that Mr. Levinson has probably worked for them, 
giving advice, saying what we think is right. I think we can 
agree maybe that Argentina should decide for itself, get a lot 
of different advice, and that there is no reason that the IMF 
or the World Bank needs to tell them what to do. I do not see 
any disagreement.
    Dr. Meltzer. May I point out that that is why we tried to 
get rid of conditionality and impose preconditions, so that the 
IMF would not be in this position? I do not understand Mr. 
Levinson's position because he criticizes our report because we 
get rid of conditionality, and then he criticizes the 
conditions which they impose on the country. Now, perhaps he 
would like to impose different conditions on the country. Then 
other people would object to those. We got rid of those 
conditions for some of the reasons, and others, that he 
mentions.
    Senator Hagel. Well, thank you. I know we could continue 
this. It is an enlightening and didactic experience.
    Senator Wellstone will get up and pour water on my head and 
leave if I do not call on him. Senator Wellstone.
    Senator Wellstone. On my time, Dr. Levinson, why do you not 
respond to Dr. Meltzer.
    Dr. Levinson. The problem is that Professors Meltzer and 
Calomiris and the majority throw the baby out with the bath 
water. They are right in terms of focusing and calling our 
attention to the degree of intrusiveness of the conditionality. 
They are right about that.
    Senator Wellstone. And may I interrupt you for a moment? 
And the past history of that conditionality all too often, I 
gather, was imposing austerity measures, cutbacks, and 
basically trying to export countries exporting their way out of 
economic trouble. Would that be a summary?
    Dr. Levinson. Yes. That is the basic philosophy that you 
have.
    The difference is that I say--and Fred and myself agreed 
and the Treasury and the Council on Foreign Relations--that 
there is a legitimate role--if the international financial 
community is going to provide assistance, it is right to say, 
listen, you got into this mess, let us figure out a way 
together as to how you are going to avoid repeating it. So, you 
try and work out a program in which the conditions are most 
proximally related to the balance of payments crisis. But you 
do not try and remake the society. That is where I think the 
IMF and World Bank have overreached with the support of our own 
Government. So, it requires a degree of self-restraint.
    Professor Meltzer is right to point out that once you 
accept conditionality, it is very hard to draw that bright line 
where you step over into that degree of intrusiveness that is 
really national sovereignty. The criticism I have is that they 
have stepped over that line and, with our support, are trying 
to remake not only the economies, but these societies in 
accordance with their prefixed model. Now, they would deny 
that, and the difference between us is I think there is a 
legitimate role for conditions proximately related to the 
problem.
    Senator Wellstone. Let me ask you. Maybe this is a 
semantical problem here, but I am going to just read to you 
from your testimony that you submitted. You say: ``Neither the 
majority report or the joint dissent, however, recognized the 
other source of discontent with Bretton Woods institutions: the 
perception that they are critical elements in the development 
of a profoundly inequitable two track international trade, 
investment and finance system, a rule based system for the 
protection of corporate property rights and no protection for 
core worker rights and the environment.''
    Now, it seems to me their argument would be that if you are 
now going to talk about some core protection for the 
environment and labor rights--I know Joe Stiglitz has also 
talked about this--that you are now talking about 
conditionality.
    Now, let me ask you to sort of respond to that because I am 
trying to figure out exactly where you are at on this question.
    Dr. Levinson. The problem I have is that they are pushing 
labor market flexibility, which as I said is----
    Senator Wellstone. Right, which----
    Dr. Meltzer. And that means the IMF, not me.
    Dr. Levinson. No, I agree. Right, the IMF and World Bank.
    And when you raise the question, wait a minute, that is an 
intervention on one side, what about labor market abuses where 
a country uses the coercive power of the state to deny workers 
the right of freedom of association and collective bargaining, 
they say, well, we cannot support freedom of association and 
collective bargaining because the economic studies are 
inconclusive.
    I asked the World Bank for a statement on their policy. 
They said they were studying the matter, and then their studies 
concluded that they cannot support it. In the year 2000, the 
World Bank cannot bring itself to say freedom of association 
and collective bargaining are legitimate rights of workers. 
That is where I get off the boat.
    Dr. Calomiris. And if I can clarify my position and I think 
the majority's, it is simply we do not want the World Bank and 
the IMF setting conditions one way or the other on that point.
    Dr. Meltzer. That is right. We want them to be neutral and 
simply not to lean either to protect--we certainly do not want 
them to protect the lenders, who have put their money in at 
risk and received rewards for doing it. That really is a major 
point. Nor do we believe that they should be involved in 
trying--and it is hard to know how they could succeed--in 
changing the political structure of a country. They have 
politics in those countries too and those countries are going 
to do what the balance of political decision in the country is. 
That is not the job of Washington. It is not the job of the IMF 
or the job of the World Bank.
    Now, I would like to say one other thing, Senator 
Wellstone.
    Senator Wellstone. Yes.
    Dr. Meltzer. In fairness to the IMF, the fact that they 
come with austerity programs, they come in a crisis. There is 
going to be austerity because it is a crisis. No one is going 
to lend to them any more. There is going to be austerity 
because they have been borrowing more than they have been able 
to repay. So, there is going to be austerity.
    What we would like to do and what we would like to get 
concentration on is instead of dealing with crises as they 
occur, deal with the conditions that create crises before they 
occur, establish some preconditions that countries will meet so 
as to limit the crises.
    Senator Wellstone. This will be my final piece, Mr. 
Chairman, and Dr. Levinson can respond, but I would think, Dr. 
Meltzer, that you could argue that part of creating the 
conditions is the sort of building of community institutions in 
these countries.
    Dr. Meltzer. Absolutely.
    Senator Wellstone. And one of those institutions would have 
to do with the right of people to be able to organize and 
bargain collectively so that when people do so--you need people 
to consume in order to make the economy go. It can lead to a 
more stable class of people. And another might be sustainable 
environment. The commission tends to not call for more 
oversight or attention to environmental or social implications 
of structural adjustments. Is Dr. Levinson not trying to say 
that ought to be part of what is factored in here?
    This is a great panel. They all want to speak. This is what 
happens when you get these professors together.
    Dr. Levinson. There are some people, including my 
colleague, Fred Bergsten, who believed that the Commission 
should have simply ignored the World Trade Organization, which 
was defined as an international financial institution for 
purposes of this Commission. I do not believe that somebody put 
a mickey in the water system up here and that the WTO just 
slipped in while nobody was looking. There is a reason for that 
and I think it reflects the wisdom, if you will, of the 
Congress in terms of trying to see this problem as a whole, 
trade, finance, and investment.
    What you have is a system which is developing where 
everything is directed to assure the security of capital and of 
corporate property rights and nothing is done to assure 
minimum, basic core worker rights, either in the WTO system or 
with the IFI's.
    The Congress in the last IMF legislation accepted a 
provision with respect to core worker rights. We do not see it 
implemented in either the World Bank or the IMF. When I asked 
Wolfensohn, wait a minute, you are intervening in the labor 
market for purposes of labor market flexibility, you are 
intervening on the part of capital, what about the abuses, he 
said, look, I agree with you completely. He said, but if I take 
a measure to the board for labor market flexibility, I have no 
problem getting it through. If I raise the issue of labor 
market abuses in a country, I will not even get it on the 
agenda to be discussed.
    There is something fundamentally wrong with that imbalance, 
and that is what I am saying. There is an imbalance both in the 
WTO and when the World Bank tells us in the year 2000 that they 
cannot support freedom of association and collective bargaining 
because the economic studies are inclusive, but they are 
enthusiastic about labor market flexibility, that is not 
neutrality. That is an intervention on the part of one party, 
and we should not stand for it and our executive director 
should not stand for it.
    Dr. Meltzer. I realize the red light is on. May I just give 
a very brief answer to your question?
    Senator Wellstone. Yes.
    Dr. Meltzer. We separate crisis prevention, the role of the 
IMF, from structural reform. Questions like the environment are 
in our report and they are very prominent in our report as part 
of what we call world public goods, responsibility of the 
development banks. So, we do not ignore the issue. We just do 
not think it should be on the list of conditions that are part 
of the reform. We think that the major problem that you are 
going to face is that the United States has run a huge payments 
deficit in order to finance the reform in Asia, and we are 
going to have to adjust to that and that is going to be painful 
and that is going to be a problem. And we need to build a 
system which does not require the United States to be the 
importer of first resort in a crisis, and this system is not 
doing it. And that, from the standpoint of the United States, 
is the single most important problem you have to solve because 
the rest will not follow unless we do that, that is, unless we 
do something to see that these problems do not all end up 
solved by exports to the United States.
    Dr. Calomiris. Senator Wellstone, I want to prove that I 
listened to your question. You asked about environmental and 
labor standards. In the report actually there is a fair amount 
of writing about environmental questions and there is a view in 
the report that I think was--I cannot say that it was a 
unanimous view, but that is my sense--that there really is a 
legitimate role for particularly the World Bank to play in 
promoting good solutions to global environmental problems.
    What is the difference between environmental problems and 
labor standards? Why did we not talk about labor standards but 
we did talk about environment? The answer is very simple. Labor 
standards are something that each country should decide for 
itself, while environmental issues are intrinsically global. 
So, it makes sense, because of externalities across countries, 
for there to be some mechanism for helping countries to 
coordinate their approach to global environmental standards. At 
least that I think is the explanation.
    Senator Hagel. Doctor, thank you.
    Let me call now upon Senator Chafee.
    Senator Wellstone. I thought as a professor I get to get 
into this now. I had to listen to all that.
    Senator Hagel. No. We have to be out of here by midnight.
    Senator Wellstone. I have to leave now. Thank you very 
much.
    Senator Chafee. I have a quick question for Dr. Calomiris. 
You testified that the Commission voted unanimously to 
recommend that the IMF and the development banks write off all 
debts to highly indebted poor countries, and that the financial 
distress of the HIPC's is as much an indictment of the 
multilateral lenders as it is of the leaders in the borrowing 
countries who often wasted those funds or used them for 
personal gain. Despite these factors, the Commission voted 
unanimously that we should relieve them of their debt. Can you 
describe the debate on how the Commission came to that 
unanimous agreement, considering the scathing words in your 
testimony?
    Dr. Calomiris. Well, I will give my characterization of the 
discussion and then let the others, I suppose. I do not think 
that there was much of a hostile debate at all on this question 
within the Commission. I think that there was a consensus that 
it made sense to do HIPC debt forgiveness, largely because the 
people who had borrowed the money and the conditions under 
which the moneys had been borrowed really were very different 
from the current situations in those countries and the current 
people; that is, just as I say in the testimony, it is hard to 
fault the current citizens of those countries or even their 
current leaders for the bad judgment that went into those 
loans.
    I think the disagreement in the Commission, was over how to 
set up the right criteria for debt forgiveness. How far do you 
want to push? Some members of the Commission, at least my 
recollection is, Mr. Huber felt that we should add more 
conditions, more preconditions, before forgiving debt. I think 
he mentioned particularly maybe privatizing all state-owned 
enterprises as a condition for forgiveness. He had some other 
ideas. Others had different ideas.
    Because we could not come up with a clear list or a clear 
consensus on exactly what those conditions would be, I think we 
really just agreed on the principle that we saw no reason not 
to forgive the debt but that we did see a little bit of 
latitude for requiring some kind of bona fide development plan 
as a precondition. I think we were vague on this point because 
we did not reach full consensus on what that should be.
    Dr. Levinson. May I elaborate just for a moment on that? I 
proposed that we should forgive the debt--period--because the 
majority themselves said in the report that the debt is not 
repayable. So, if you have an unrepayable debt, how are you 
conditioning the repayment of a debt which they themselves say 
is unrepayable? It does not make any sense. It is illogical.
    Just let me finish please. So, what I suggested was, let us 
acknowledge that reality, which you yourselves have said. That 
the debt is unrepayable.
    Therefore, you say to these countries, look, we all 
acknowledge that a good deal of this debt was contracted in 
cold war conditions. We are going to wipe that out. Your access 
to future resources will depend upon how well you use the space 
that we have given you by forgiving that debt. But we agreed 
that this debt cannot be repaid, and what is more, it was 
contracted for reasons which led to very little positive impact 
in your countries. So, let us start with a clean slate. But 
we've got to tell you, if you screw up in the use of this 
margin that we have given you, we are going to be very tough in 
terms of access to future capital. That position was rejected.
    So, therefore, rather than vote against debt forgiveness, I 
went along with the majority in terms of saying it should be 
conditioned, but I do not see the logic of conditioning a debt 
which you say cannot be repaid upon A, B, C. You have already 
said it cannot be repaid. What are you conditioning the non-
repayment on?
    Dr. Calomiris. If I may very quickly. We are not very far 
apart but instead of saying the debt cannot be repaid, I would 
add the word cannot be fully repaid. These debts do have a 
current market value. So, that means if you forgive it 
completely, that is, you take all of the debt away, you do have 
a little bit of leeway potentially to add a few conditions. But 
I agree with the thrust of what Mr. Levinson is saying, and I 
just want to say my feeling was that this was not a hotly 
contested issue. It was more that we really did not know 
exactly how to do it, and I think maybe his view went a little 
farther than others were willing to go.
    Dr. Levinson. I think that is a fair statement.
    Senator Chafee. And you are optimistic that they are 
different people than those that committed the abuses?
    Dr. Meltzer. No, Senator Chafee, I do not believe that. I 
believe that they are certainly different people, but whether 
the institutions in those countries are sufficiently reformed 
is questionable.
    I want to challenge this kind of semi-agreement. First, it 
was true that Mr. Levinson was alone on the issue of debt 
forgiveness without conditions.
    Second, there is nothing illogical about saying, one, we 
are going to forgive the debts because they cannot be paid, but 
we want to make sure, by imposing conditions which we want put 
in place, that the next set of debts will not be in the same 
position as these debts at the end of 10 or 15 years. So, the 
conditions are there looking forward to saying, look, we want 
reforms in these countries. We want the reforms to be in place, 
and we are going to use the leverage of debt forgiveness to get 
those reforms to be put in place. That does not seem to me--
there is nothing illogical about that. It seems to me to be a 
sensible thing to do, to use the leverage we have to get the 
reforms we need.
    Dr. Calomiris. If I can just amplify what Professor Meltzer 
said. Conditions have two sides to them. Professor Levinson was 
talking about imposing very draconian conditions on the 
recipient, and his point was, well, if the recipient cannot 
repay it, you do not have a lot of leverage in imposing 
conditions.
    But there is another set of conditions and those are the 
conditions on the institutions going forward, and that is, I 
think, the more important set of conditions to be thinking 
about when you forgive the debt.
    Senator Hagel. Senator Chafee, thank you.
    Dr. Meltzer, has the IMF or World Bank responded to you in 
any way on your Commission's recommendations?
    Dr. Meltzer. Not formally, but I have had any number of 
meetings with officials of the institution both here and 
abroad. I have talked to them. I think that they accept a great 
many of the proposals that we have made. They like the idea of 
preconditions. Dr. Fisher, the Deputy Managing Director of the 
Fund, testified to that in an open hearing of the Commission. 
They liked the idea of having a lender of last resort function. 
They have gone very far toward the idea of having either hard, 
fixed or fluctuating exchange rates.
    Where do they differ with us? I do not want to speak for 
them, but let me say what my sense of where they come from is.
    One is they do not like the idea of giving up long-term 
lending, which we want to move out of the Fund and into the 
bank. They think that there is something to do there. I will 
let them speak to that. But anyway, that is one.
    The second is they would like to have conditions when there 
is a crisis in addition to the preconditions. Now, that is a 
strange issue. Let me say that I could see a compromise which 
said, yes, if those conditions are limited to the monetary, 
fiscal, and exchange rate policy of the country, that might be 
good.
    The problem is not to get back into two boxes which we want 
to escape from. One is the box which says we spend a lot of 
time negotiating those conditions and then things get worse 
during that period, as in Mexico, as in Korea. The second is 
that if we say, look, if you do not meet the preconditions, we 
will negotiate with you anyway and put on other conditions 
which you may or may not meet. Then we are right back into the 
present system, which is a system which generates crises and 
does not prevent them.
    Those are, I think, the two major issues.
    On transparency, I think the Fund is making substantial 
progress in that direction in collecting information and other 
things. I think that they are not very far apart from us. That 
is my interpretation, but there are some basic differences 
between us and those are two of them.
    Dr. Levinson. I would only add two points. The Fund got 
into longer-term lending as a consequence of the oil crisis 
which followed upon the Arab oil embargo in 1973 and the 
countries had difficulties repaying. So, the various facilities 
provided for longer amortization periods. That was the origin 
of it.
    The second thing is the basic difference comes down to the 
degree to which under the majority proposal, access to the 
Fund's fund would be automatic without conditions which address 
the underlying conditions which led to the crisis to begin 
with. What it really boils down to is whether or not you think 
it is legitimate for the Fund to enter into an agreement to 
address those issues with the country which seeks assistance. 
That is where I think the major area of disagreement is between 
the majority, the Fund, the Treasury, and Fred Bergsten and 
myself and Esteban Torres with respect to the Fund.
    Dr. Meltzer. Let me address that a little bit. The Fund has 
tried to have something called the CCL, which is a way of 
moving in the direction in which we would like them to go, with 
preconditions and so on, certifying countries in advance. The 
problem is that they gave countries no incentive to take those 
preconditions because they did not gain anything. If they got 
into a crisis, the Fund was going to be there to bail them out 
anyway, so why should they agree to that. And that is a tricky 
issue.
    So, it is important to try to get meaningful the idea that 
countries have to establish on their own, when there is not a 
crisis, conditions which are going to mitigate crises, prevent 
them. We cannot guarantee that there will be no crises. We can 
try to make them much less severe and much less burdensome to 
them and to us.
    Dr. Levinson. The assumption which underlies the majority, 
it seems to me--it seems to me there are two. One, that access 
to the IMF is too easy and too desirable for the borrowing 
member countries. Well, this is so fantastic if you talk to the 
officials in the borrowing countries. To go to the IMF, it is 
like going to the dentist for root canal work. Nobody wants to 
go to the IMF.
    Dr. Meltzer. But that is not our assumption.
    Dr. Levinson. Please. That is the assumption, that the 
countries have easy access to the IMF. Therefore, they do not 
have to take the measures. If they are not taking the measures, 
it is because there are deep, internal social and political 
impasses. That is the problem with Ecuador. That is the problem 
they are going to have in Argentina as they try and figure out 
a way out of this mess. That is the problem which has held up 
fiscal reform in Brazil for all these years, although the 
present government is making progress.
    The problem is, as I see it, Senator Hagel, that the 
majority just cannot face the fact that these are not simply 
financial issues. They reflect the historic impasses in these 
countries. So, what we have is two steps forward, one step 
back, in some cases one and a half steps back. It is a constant 
process of trying to nudge and help and pull and push as the 
countries themselves try and resolve their internal dilemmas. 
The question is, is the direction right? And I think that, on 
balance, a lot of progress has been made. But the assumption 
that countries do not undertake these reforms because they know 
they can go to the IMF just seems to me to be fantastic.
    Senator Hagel. I might point out in some of Dr. Calomiris' 
testimony, he recounts in some detail about how many nations 
over a period of how many years have drawn on the IMF like a 
bank account that is just there and available. Now, I am not 
passing judgment on that observation, but I did note that you 
made that point, and I suspect you are going to want to 
continue to further the point. Go ahead, Doctor.
    Dr. Calomiris. Mr. Chairman, you took the words out of 
mouth. There are 73 countries, who are members of the IMF, who 
have borrowed in 90 percent of the years that they have been 
members of the IMF. I think that that fact speaks for itself. 
Borrowing from the IMF is not an occasional thing that you do 
because you are absolutely up against the wall, and I cited the 
example of Pakistan as a country right now which, while it is 
having some problems with its debt crisis, it is much more of 
what I would call a subtle negotiation over of transfer of 
subsidy in exchange for some political favors. That is a better 
way to characterize that negotiation I think.
    Senator Hagel. Let me ask Dr. Meltzer if he has a response 
to this.
    Dr. Meltzer. I have two.
    The basic assumptions which operated in our Commission were 
not the ones that Mr. Levinson mentions. They are two in 
respect to the IMF. The crises are too frequent, too deep, and 
too burdensome, and we need to do something to stop it, that 
is, to slow that process down and make it less burdensome, less 
onerous.
    The second is that the biggest incentive for reform in the 
country is the capital market, the fact that you can get access 
to the capital market. That will be the incentive to reform. It 
is not what somebody tells them what they have to do. It is the 
idea that if you do not do these things, you are either going 
to pay more for the capital and you are going to get less of 
it. Those are the important reforms. So, we are going to say to 
them, here are the reforms. If you have met those reforms, we 
are going to give you certification of a kind, and if you have 
not met those reforms, we are going to withhold it from you. 
And then we are going to say, anybody who lends to somebody who 
is on the list of countries that have not met the reforms, let 
them take the risk, but let them bear it also.
    Senator Hagel. Thank you.
    Very briefly, Dr. Levinson.
    Dr. Levinson. For every irresponsible borrower, there is an 
irresponsible lender. What we have had is the countries have 
been encouraged to recur to the financial markets. Our own 
Treasury has encouraged them. Listen to what Mr. Gartner, the 
former Under Secretary of Commerce said, ``I never went on a 
trip when my brief did not include either advice or 
congratulations on liberalization,'' referring to 
liberalization of the financial markets.
    The fact of the matter is that this is not just a question 
of irresponsible countries and irresponsible officials. You 
have had an explosive growth in access to the financial 
markets. It has meant the democratization of the financial 
markets in terms of countries have been able to access those 
markets which have never had access. Entities within these 
countries have been able to access these markets. The problem 
is that we have gone too far too fast before institutions were 
in place with respect to bank regulatory authorities, et 
cetera. What is more, with respect to the Asian countries, 
remember the Asian countries followed the Japanese development 
model. It was directed credit. You did not have independent 
supervisory bank authorities because that would have interfered 
with the basic strategy of directing credit to strategic 
sectors.
    So, now we are talking about restructuring not just the 
financial sector, because that was part of, again, what I 
referred to as a social compact. In Korea you had a commitment 
to lifetime employment. In return, the workers agreed that the 
enterprise could distribute the workers with flexibility. Now 
you are telling the workers, no, now you are going to be 
subject to the vicissitudes of the market. You have a whole 
different philosophy.
    My problem with their approach is that it is really based, 
as I said at the beginning, upon the view that these are 
technical financial issues, and I see them as a part of a whole 
problem within a society of reconstituting and how to 
distribute the burdens and the costs of adjustment.
    Senator Hagel. And you have made that point extremely well. 
Doctor, thank you. I am going to move on to Senator Chafee.
    Senator Chafee. I am done, Mr. Chairman.
    Senator Hagel. You wanted another point.
    Dr. Calomiris. I do not see our disagreement the same way. 
I think we share a lot of objectives, and I do not think I am a 
narrow-minded technocrat. I like to think about people's lives 
as much as Professor Levinson does. But I think we have a 
disagreement, and I would like to explain historically some 
evidence that I think is consistent with my point of view.
    Senator Hagel. Doctor, if you do not mind, I want to get 
maybe one more question in and let you all go home. I would be 
very interested and intrigued with your point. Maybe we can do 
it again, but let me just keep it rolling so we do not keep you 
all up here.
    Dr. Calomiris. OK.
    Senator Hagel. Let me ask each of you. With the 
recommendations for preconditions that the majority report came 
in with, how would those preconditions have affected Asia, 
Russia, Argentina, and Brazil over the last few years? Would we 
have made the world better, more dangerous, more unstable?
    Dr. Calomiris. May I take a crack at that?
    Senator Hagel. You can jump right in.
    Dr. Calomiris. Remember that we are talking about phasing 
in over a 5-year period the preconditions. So, the right way to 
pose the specific counter-factual question is suppose we had 
phased in----
    Senator Hagel. Now, wait a minute. The issue here is not 
the correct way to present the question. I presented the 
question based on reality. Asia went down. We all thought, or 
at least most of us, I guess, thought it was a currency blip in 
Thailand in the summer of 1997 or June 1997. Now, no 
theoretical framing here. What could we have done as that Asian 
financial crisis spread? That is reality, and we have got 
problems on our hands. So, we do not back it up and start at 5 
years or 10 years. 1997 is now. What do we do?
    Dr. Calomiris. I was just trying to understand. Were you 
saying that our Commission would have met in 1996? Is that what 
you were saying?
    Senator Hagel. Well, if we were living with the 
preconditions that you have recommended, how would the IMF have 
responded? Would the IMF have responded?
    Dr. Calomiris. Let me try to answer it under those terms. 
If we had been living under those preconditions, then countries 
would have either qualified or not.
    Senator Hagel. If they would not have qualified, then what 
happens?
    Dr. Calomiris. If they would have not qualified, then the 
IMF would have made a determination whether global systemic 
stability required waiving the prequalification requirements to 
lend to them, which our report envisions their doing.
    And I suspect they would have. If they had waived the 
prequalification requirements, however, they could not have 
waived the penalty rate or the fact that these would have been 
senior loans. Therefore, we would have at least avoided 
complicity in the bailout of the domestic financial 
institutions and the international lenders because no flows of 
subsidies would have gone to them. So, we would have provided 
liquidity but not bailout.
    My view is that those countries would have, given a couple 
of years, prequalified and they would have acted very 
differently in the mid-1990's. And the real problem in Thailand 
and Korea and Indonesia was weak banking systems. Those were 
predicted crises. They were actually predicted in print in 
March and April 1997 in the Economist and in the Financial 
Times. And in fact, the Economist even said something like what 
took place in Mexico is about to happen in those countries, 
fully 3 to 6 months ahead of the actual crisis.
    I know Dr. Meltzer wants to address this as well, but are 
we putting too much of a burden and too high an expectation on 
these international financial institutions?
    Dr. Meltzer. Yes. We need to put much more of the burden 
and much more of the incentive on the country.
    Let me answer your question because I think it is the right 
question to ask because what we are concerned about is how will 
all this work. And the answer is let us take Korea, which is 
the biggest one of the countries that failed.
    Korea has had a bad banking system for years. When I first 
went to Korea in 1985, the question was, what do we do about 
the banking system? How can we open our capital markets with 
such a weak banking system? That is 12 years before this crisis 
occurred.
    How did Korea get such a bad banking system? It got a bad 
banking system because it uses the banking system to subsidize 
the industries that it wants to create. It did it with the 
chemical industry. It turned out to be a bad idea. Not all 
their ideas are bad, but that one turned out to be bad. They 
did it with the construction industry, and they subsidized a 
lot of construction in the Gulf when the oil countries had a 
lot of money and were building a lot of things. So, they 
subsidized the development. They later subsidized the country 
going into automobiles and semiconductor chips. So, these are 
subsidies. They lend at very low rates.
    The semiconductor market collapsed in 1996. The banking 
system took a big hit. So, with having negative net worth, it 
had even more negative net worth. It loaned as the banks did 
here or the savings and loans did here. It loaned at high risk 
loans. The Korean banks were lending money to Russia, buying 
GKO's in order to get the high returns that they could get and 
borrowing the money from the U.S. banks or from Japanese banks 
at very low rates and lending it in Russia to hold GKO's in 
order to earn the returns that they hoped would bail them out 
of some of the problems that they had. Now, if they had a 
strong banking system, they would not be doing that, or they 
certainly would be doing less of it.
    Therefore, I cannot say that Korea would not have suffered 
a crisis in 1997. Neither I nor anyone else knows that, but I 
can tell you that the banking system would not have collapsed 
if it had been adequately capitalized, if there had been 
American banks and Japanese banks and European banks there. 
When people ran from the country, they would run to the 
American banks, which were safe and sound and so on, as they 
did in Japan, as they did in Brazil.
    Now, how do I know that that is going to happen? Because 
look what happened in Brazil a few months later. In Brazil, 
everyone said there is going to be a big crisis. The exchange 
rate collapsed, but the banking system did not collapse.
    Why is that? Because Citicorp, ABN-AMRO, Chase Bank have 
been there, First Bank of Boston--Bank of Boston--they have 
been there for years and they have a commitment. They have 
assets and liabilities in the country. They do not run, and 
therefore they stabilize the situation. And that is the kind of 
system that we are trying to build. We are trying to build a 
system in which banks will take up some of the risk, that the 
banks will be well capitalized and that they will be risk 
absorbers.
    Now, what is the present system? The present system is 
Korea does not let in the U.S. banks or foreign banks. So, they 
lend to the Korean banks on 3-month notes. And those notes came 
renewable, and when the lenders see that a crisis is likely, 
they say the exchange rate is going to fall, there is no point 
to renew the loan, it is not going to appreciate, and so let us 
get out. And that exacerbates the crisis, and then the banking 
system goes down. And that is the nexus that we have to cut 
into by making the preconditions which say reform the financial 
system, reform the exchange rate system so that they do not 
spend $30 billion or $40 billion that they borrow in the world 
market in order to shore up the exchange rate system and then 
fail and then depreciate, and then of course, become--push, get 
out of their crisis by exporting mainly to us. That is really 
the system we have to break into and change, and that is what 
the reforms are about.
    Senator Hagel. Just one moment, Dr. Levinson. Would you 
just quickly, Dr. Meltzer, address my followup question on the 
burden that we are placing on the IMF and these international 
financial institutions?
    Dr. Meltzer. I think that is right. As I like to say, there 
are politics in those countries too. You cannot come in, as the 
IMF, in the midst of a crisis and clear away all the problems 
and make things all happy again by lending them some money in 
exchange for some commitment. There are many people in Asia who 
say the crisis did not go on long enough. Now, that does not 
mean that they like to see people suffer. What they meant was 
that as soon as the progress became clear, the reforms ended or 
slowed down a great deal.
    So, yes, the IMF comes in in the midst of a crisis. We 
criticize them because we say that their conditions do not 
work, do not work very well on average. But it is not because I 
think I have better conditions that I can put on and say, if I 
were running this show, I would do a better job. That is not my 
criticism at all. My criticism is let us not put ourselves in 
the position where we are bailing out countries that have not 
done what they need to do. Let us give them the incentives to 
do it and make those incentives hard so that they will want to 
pay the tough political price, which you understand better than 
I do, the tough political price to make the tough judgments 
which are required to provide greater stability in the world. 
That is what this report is about.
    Senator Hagel. Thank you.
    Dr. Levinson.
    Dr. Levinson. I think your two questions really point up 
the issue. You asked what would have happened if the 
Commission's recommendations had been in place. Well, Professor 
Meltzer has referred to Brazil. Recently Brazil has imposed 
conditions upon the entry of foreign banks. Why? Because in 
Brazil, the historic situation has been that the Brazilian 
banking sector, Brazilian owned, has continued to loan to the 
government, even in times of crisis because in Brazil, the 
Pavlista industrialists and bankers believe in Brazil. They do 
not run. The money does not leave. It is very nationalistic. 
The foreign banks advise their clients not to buy government 
securities because it was too risky. So, the Brazilians say, 
wait a minute, it is not in our interest to have a presence of 
the foreign banks because look at what they did in times of 
crisis. We know Brazil better than they do. So, they impose 
conditions limiting foreign bank ownership.
    If they impose conditions, under the majority criteria, 
they are not completely open to foreign capital. Therefore, 
they would not have been eligible for IMF financing. Brazil is 
large enough to have systemic consequences. You would have had 
to have a vote in the IMF as to whether they are large enough 
to have systemic crises.
    Professor Meltzer complains that the IMF did not act 
quickly enough. Do you think you could have gotten a quick 
consensus in the IMF on that fundamental question? I doubt it. 
Just as in Mexico, the United States and the Europeans 
disagreed as to whether the problem was systemic.
    In your second question you went on to ask if we have 
placed too much of a burden upon the international financial 
institutions. Of course, we have. It is the Willy Sutton 
principle of international finance. Remember Willy Sutton, the 
bank robber who was arrested in the 1950's in Florida, and they 
said to him, well, why did you rob only banks? And he said, 
``because that is where the money is.'' Why do we turn to the 
IMF and the World Bank? Because that is where the easily 
accessible money is to address a systemic crisis or a crisis 
which at least is perceived as systemic.
    So, the major industrialized countries have imposed upon 
the IMF and the World Bank to continually get into Russia, 
manage the transition in Russia, and to solve the East Asia 
crisis when the East Asia crisis has roots which are very 
different. Remember the World Bank World Development report--
the East Asia miracle of 1993 which said Korea went from a 
country in 30 years with $260 per capita income to the 11th 
largest industrial country in the world? Well, the banking 
system cannot be isolated from that strategy of development. 
So, when you are talking about revamping the banking system, 
you are talking about revamping the country's whole development 
approach which enabled it in 30 years to become the 11th 
largest industrial country in the world. That is going to be a 
wrenching change.
    So, the question is, do you want the international 
community to have a role in terms of helping them to get 
through that or not and leave it to the private financial 
markets? In essence, you asked the two questions which are at 
the heart of the issue.
    Senator Hagel. Thank you.
    Dr. Calomiris, would you like to respond in 60 seconds or 
less?
    Dr. Calomiris. I think I already responded to most of it, 
and I think I will just pass.
    Senator Hagel. Dr. Calomiris, thank you. Dr. Levinson, 
thank you, sir. Dr. Meltzer. You three have all added 
immeasurably to at least this weak-minded Senator's 
understanding of your contributions to our country through your 
time and effort on the Commission. So, we are grateful. The 
committee is grateful. Thank you.
    Dr. Meltzer. Thank you, Mr. Chairman.
    Dr. Calomiris. Thank you, Mr. Chairman.
    Dr. Levinson. Thank you, Mr. Chairman.
    Senator Hagel. The committee is adjourned.
    [Whereupon, at 4:45 p.m., the committee was adjourned.]
                              ----------                              


                   Statement Submitted for the Record


  Prepared Statement of C. Fred Bergsten,\1\ Director, Institute for 
                        International Economics
---------------------------------------------------------------------------

    \1\ C. Fred Bergsten is Director of the Institute for International 
Economics, the only major research institution in the United States 
devoted to international economic issues. He was Assistant Secretary of 
the Treasury for International Affairs during 1977-1987 and functioned 
as Under Secretary for Monetary Affairs in 1980-81. He was also 
Assistant for International Economic Affairs to Dr. Henry Kissinger at 
the National Security Council during 1969-71. He has written 27 books 
on international economic and financial issues including The Dilemmas 
of the Dollar: The Economics and Politics of United States 
International Monetary Policy (2d edition, 1996). He chaired the 
Competitiveness Policy Council created by Congress from 1991 to 1997.
---------------------------------------------------------------------------
 reforming the international financial institutions: a dissenting view
    It was a privilege and pleasure to be appointed to the 
International Financial Institutions Advisory Committee in January to 
replace Paul Volcker, who had to resign due to heavy commitments 
elsewhere. I enjoyed working with the group and appreciate this 
opportunity to spell out the views of the four commissioners who 
dissented from the recommendations of the majority. (Mr. Richard Huber 
signed both the report and the dissent, and explained his rationale for 
doing so in a statement of his additional views.)
    I and my fellow dissenters share the view that reform of the 
international financial institutions (IFIs) is desirable. We agree with 
a number of the proposals of the majority, in particular the need to 
clearly delineate the responsibilities of the IMF and the World Bank. 
But there are four central issues on which we disagree; I will 
summarize them briefly here and append the full dissenting statement 
signed by myself, Mr. Huber, Mr. Jerome Levinson and former Congressman 
Esteban Torres.
    First, the report paints a very misleading picture of the impact of 
the IFIs over the past fifty years. The economic record of that period 
is a success unparalleled in human history, both for the advanced 
industrial countries and for most of the developing nations. The severe 
monetary crises of recent years have been overcome quickly. Hundreds of 
millions of the poorest people on earth have been lifted out of 
poverty. The IFIs have contributed substantially to this record. The 
``bottom line'' is unambiguously positive but the majority portrays a 
negative tone that badly distorts reality.
    Second, the recommendations of the majority would totally undermine 
the ability of the IMF to deal with financial crises and hence would 
promote global instability. The majority would authorize the Fund, when 
facing a crisis, to lend only to countries that had prequalified for 
its assistance by meeting a series of criteria related to the stability 
of their domestic financial systems. This approach has two fatal flaws:

   it would permit Fund support for countries with runaway 
        budget deficits and profligate monetary policies (because the 
        majority believes that IMF conditionality does not work); this 
        would enable the countries to perpetuate the very policies that 
        triggered the crisis in the first place, squandering public 
        resources and eliminating any prospect of resolving the crisis 
        \2\ and
---------------------------------------------------------------------------
    \2\ The final version of the report added a sentence including a 
``proper fiscal requirement'' to the prequalification list. No 
rationale for that addition is stated, however, and the term is not 
even defined. If the ``fiscal requirement'' were intended to be a 
quantified level of permissible budget deficits, it would represent an 
international equivalent of the Maastricht criteria that have been 
extremely difficult to implement in relatively homogenous Europe and 
would be impossible globally. If it were simply a qualitative notion, 
the Fund would be back in the business of conditionality which the 
report rejects--and would face the prospect of dequalifying and 
requalifying countries as their policy stance shifted, adding an 
important new element of destabilization to the picture.

   it would prohibit support for countries that were of 
        systemic importance but had not prequalified, again running a 
        severe risk of bringing on global economic disorder.\3\
---------------------------------------------------------------------------
    \3\ The report again made a last-minute addition suggesting a 
takeout from these requirements ``in unusual circumstances, where the 
crisis poses a threat to the global economy.'' But the concept is never 
explained or defended so it cannot be taken seriously.

    As Paul Krugman put it in his op-ed on the report in the New York 
Times on March 8, the majority ``suggested restrictions that would in 
effect make even emergency lending impossible.''
    Third, the recommendations of the majority might well undercut the 
fight against global poverty despite their avowed intent to have the 
opposite effects:

   they would shut down two major sources of funding for the 
        poor, the regular lending program of the World Bank ($20-25 
        billion per year) and the Poverty Reduction and Growth Facility 
        at the IMF ($1-2 billion per year). The majority in fact 
        proposes a program of ``reverse aid'' to the world's richest 
        countries, returning capital to them from both the World Bank 
        and the International Finance Corporation (which they would 
        also shut down).

   they would terminate lending to even the poorest countries 
        if they had obtained access to the private capital markets, 
        which we should obviously be encouraging rather than 
        discouraging;

   they want the more advanced developing countries, even those 
        which still include tens of millions of the world's poorest 
        people (e.g., Brazil and Mexico), to rely wholly on the 
        volatile private capital markets; and

   most importantly, they would in the future rely wholly on 
        grant aid appropriated by rich-country governments when we know 
        that this Congress, and parliaments in many other countries, 
        are highly unlikely to support sharp increases in such funding 
        even if the majority's reforms were to produce much more 
        efficient aid programs.

    Third, the report makes a series of sweeping and radical proposals 
without a shred of supporting evidence or analytical support: closure 
of the International Finance Corporation and the Multilateral 
Investment Guarantee Agency, shifting all non-concessional lending to 
Latin America from the World Bank to the Inter-American Development 
bank and shifting all nonconcessional lending to Asia from the World 
Bank to the Asian Development Bank. Some of these proposals may have 
some merit but the report fails to make a case for any of them.
    Further, the report misses most of the central trade issues in its 
chapter on the World Trade Organization. This is not surprising since 
it is a report of the International Financial Institutions Advisory 
Commission and the members were not chosen for their knowledge of 
trade. The legislation authorizing the commission did not even ask it 
to review the statutes relevant to trade and we believe that the 
Congress should simply ignore this component of the report.
    We believe that there are a number of other important errors of 
both commission and omission in the report but that the four cited are 
the most critical. At the same time, we reiterate that there are 
numerous recommendations that merit serious attention. We hope that the 
Congress will focus on those and ignore the several damaging ideas 
highlighted in this statement and in the attached joint dissent.
                          dissenting statement
    There are numerous constructive proposals in the report. We agree 
that reform is needed at the international financial institutions 
(IFIs) and support a number of the report's most important 
recommendations: to clearly delineate the responsibilities of the 
International Monetary Fund and the World Bank, to promote stronger 
banking systems in emerging market economies, to publish the IMF's 
annual appraisals of its member countries, to avoid any use of the IMF 
as a ``political slush fund'' by its donor members, to fully write off 
the debt of the highly indebted poor countries (HIPCs) to the IFIs, to 
increasingly redirect World Bank support to the poorest countries and 
to the ``production of global public goods,'' and to provide that 
assistance on grant rather than loan terms.
    But some of the central proposals in the report are fundamentally 
flawed and/or unsubstantiated. They rest on misinterpretations of 
history and faulty analysis. They would greatly increase the risk of 
global instability. They would be inimical to the interests of the 
United States. We reject them totally and unequivocally.
Misreading History
    Most importantly, the report presents a misleading impression of 
the impact of the IFIs over the past fifty years. A visitor from Mars, 
reading the report, could be excused for concluding that the world 
economy must be in sorry shape. But we all know that the postwar period 
has been an era of unprecedented prosperity and alleviation of poverty 
throughout the world. The bottom line of the ``era of the IFIs,'' 
despite obvious shortcomings, has been an unambiguous success of 
historic proportions in both economic and social terms. The United 
States has benefited enormously as a result.
    Even a somewhat narrower ``bottom line'' evaluation would be much 
more favorable to the IFIs than is the report. Almost all of the crisis 
countries of the past few years, ranging from Mexico through East Asia 
to Brazil, have experienced rapid ``V-shaped'' recoveries. All of the 
East Asians except Indonesia, for example, have already regained output 
levels higher than they enjoyed before the crisis. Even Indonesia and 
Russia, the two laggards with deep political problems, are now growing 
again. The world economy as a whole rebounded quickly and smoothly from 
what President Clinton called ``the greatest financial challenge facing 
the world in the last half century.'' Whatever the difficulties along 
the way, the IMF strategy has clearly produced positive results.
    The history of successful development over the postwar period is 
even more dramatic. Never in human history have so many people advanced 
so rapidly out of abject poverty. The World Bank and the regional 
development banks contributed significantly to those outcomes. The 
report itself notes, at the outset of Chapter 1, that ``in more than 
fifty postwar years, more people in more countries have experienced 
greater improvements in living standards than at any previous time.'' 
It ignores that reality for the remainder of the text, however, and the 
tone throughout is so critical as to convey the message that very 
little progress has occurred.
    The other great success story of the postwar period is 
democratization. More than half of the world's population now lives 
under democratic governments--a dramatic shift over the past decade or 
so. Yet the report repeatedly argues that the IFIs undermine democracy 
by somehow precluding local governments from pursuing autonomous 
economic policies. The report is particularly critical of the Fund's 
role in Latin America, where virtually every country has become 
democratic during the very period when the IMF has been most active 
there. IMF conditionality is obviously not a roadblock to democracy. 
The allegations of the report simply fail to square with the facts of 
history.
Promoting Financial Instability
    Turning to the specific recommendations, the most damaging relate 
to the central responsibility of the International Monetary Fund for 
preventing and responding to international monetary crises. The report 
would limit the Fund to supporting countries that prequalified for its 
assistance by meeting a series of criteria related to the stability of 
their domestic financial systems. This approach has two fatal flaws.
    First, the majority would have the IMF totally ignore the 
macroeconomic policy stance of the crisis country--``the IMF would not 
be authorized to negotiate policy reform.'' Hence they would sanction 
Fund support for countries with runaway budget deficits and profligate 
monetary policies. This would virtually eliminate any prospect of 
overcoming the crisis; it would instead enable the country to 
perpetuate the very policies that likely triggered the crisis in the 
first place and thus greatly increase the risk of global instability. 
It would also provide international public resources for countries 
whose own policies were likely to squander them in short order, without 
any assurance of their even being able to repay the Fund. No reputable 
international institution would adopt such an approach.
    The proposal for adding an undefined ``proper fiscal requirement'' 
to the prequalification list smacks of an international equivalent to 
the Maastricht criteria, which have been extremely difficult to apply 
in the relatively homogenous European Union and would be totally 
unrealistic at the global level. If the ``fiscal requirement'' were 
left open as to content, it would require Fund negotiation 
(``conditionality'') of precisely the type that the majority rejects--
as well as the strong likelihood of periodic dequalifications and 
requalifications of countries that would be immensely destabilizing. 
Hence the prequalification list would in practice be limited to 
financial sector considerations, as clearly intended by the majority in 
any event, and fiscal as well as monetary policy would be completely 
ignored.
    Second, limiting Fund activity to any set of prequalifying criteria 
would almost certainly preclude its supporting countries of great 
systemic importance and thereby substantially increase the risk of 
global economic disorder. Whatever criteria might be selected, it is 
totally unrealistic to think that all systemically important countries 
will fulfill them even after a generous transition period. The Fund 
would then be barred from helping such countries and financial crises 
in them would carry a much greater risk of producing a severe adverse 
impact on the world economy. No reform of the Fund should block it from 
fulfilling its central responsibility as the defender of global 
financial stability through providing emergency support for all 
countries which could generate systemic threats. (The Executive Summary 
suggests a takeout from these requirements ``in unusual circumstances, 
where the crisis poses a threat to the global economy'' but Chapter 2 
on the IMF calls only for ``extraordinary events'' to be handled by 
``vehicles other than the IMF.'')
    These proposals apparently derive from five faulty lines of 
analysis in the report:

   that the overwhelming systemic problem that needs to be 
        addressed is moral hazard, despite a dearth of empirical 
        evidence that this phenomenon had much to do with any of the 
        three sets of crises in the 1990s (except for Russia, where the 
        market's ``moral hazard play'' was related primarily to that 
        country's being ``too nuclear to fail'' rather than to its 
        economy or to prior IMF policies);

   that countries will be deterred from getting into crises, 
        and hence having to borrow from the Fund, by according senior 
        status to the IMF's claims on the country and by charging them 
        ``penalty interest rates;'' the Fund already has de facto 
        senior status and has already sharply increased its lending 
        rates, however, and a crisis country in any event is motivated 
        primarily by acquiring additional liquidity rather than by the 
        terms thereof;

   that the IMF fails to require banking reform in borrowing 
        countries, whereas it has done so in every crisis case in 
        recent years;

   a misrepresentation of the extensive literature that 
        assesses IMF conditionality, which reaches agnostic conclusions 
        concerning its effectiveness rather than the negative verdict 
        claimed in the report; and, closely related,

   a failure to compare actual outcomes in crisis countries 
        with what would have happened in the absence of IMF programs; 
        crisis countries obviously experience losses of output and 
        other negative developments but the issue is whether they would 
        have fared even worse without IMF help and the report, while 
        noting the need to consider the ``counterfactual,'' does not 
        even attempt to address that central issue.

    Much more desirable proposals for reforming the International 
Monetary Fund can be found in the recent report ``Safeguarding 
Prosperity in a Global Financial System: The Future International 
Financial Architecture'' by an Independent Task Force sponsored by the 
Council on Foreign Relations. That group, unlike the current 
Commission, reached unanimous agreement. Its members included Paul 
Volcker, George Soros, several corporate CEOs, former Secretaries of 
Labor and Defense, former members of Congress Lee Hamilton and Vin 
Weber, President Reagan's former Chief of Staff Kenneth Duberstein, and 
top economists including Martin Feldstein and Paul Krugman.
    For example, the Independent Task Force suggested that the IMF 
should offer better terms on its credits to countries that have adopted 
the Basel Core Principles to strengthen their domestic banking systems 
in order to provide incentives for such constructive steps; this is far 
superior to the report's all-or-nothing approach, which would have the 
deleterious effects outlined above. That group also offers constructive 
and realistic reform proposals on how to alter the IMF's lending 
policies so as to reduce moral hazard without jeopardizing global 
financial stability, through better burden sharing with private 
creditors, and on how to shift the composition of international capital 
flows in longer-term and therefore less crisis-prone directions.
Undercutting the Fight Against Poverty
    The second major problem with the report is that its 
recommendations might well undercut the fight against global poverty, 
despite its stated intention to push the world in the opposite 
direction. In particular, its proposal to eliminate the nonconcessional 
lending program of the World Bank represents another reckless idea 
based on faulty analysis.
    First, the report would totally shut down two major sources of 
funding for the poor--the World Bank's nonconcessional lending program 
and the IMF's Poverty Reduction and Growth Facility. These programs 
help hundreds of millions of the world's poorest people, many of whom 
live in the poorest countries but many of whom also live in countries 
(e.g., Brazil and Mexico) whose average per capita income now exceeds 
the global poverty line.
    The report would in fact return substantial amounts of World Bank 
capital and more than $5 billion of IFC capital to the donor countries. 
This proposal would amount to massive ``reverse aid'' to the richest 
people in the world! It would be financed through sizable repayments of 
prior World Bank loans, draining real resources from some of the 
poorest people in the world (e.g., in Africa and India). The proposal 
belies the avowed intent of the report to improve the lot of the poor.
    Second, the report would bar World Bank lending even to the poorest 
countries if those countries had obtained access to the private capital 
markets. Why penalize countries like China and Thailand for doing 
precisely what the majority says it wants them to do--qualify for 
market credits? This proposal would create negative incentives for a 
large number of key developing countries.
    Third, and most critically, the report would rely wholly on 
appropriated grant funds from rich-country governments for future 
assistance to the poor. Callable capital that was no longer needed at 
the World Bank because of the shutdown in its lending programs could 
not simply be given to IDA; an entirely new authorization and 
appropriation process would be required in our own Congress and other 
legislatures around the world. Indeed, IDA would lose the funds now 
transferred to it from World Bank profits (and, under another of the 
report's proposals, the repayments of earlier IDA credits as well). 
This proposal comes at a time when Official Development Assistance, as 
measured annually by the OECD, has declined enormously--especially, as 
a share of total income, in the United States. Even if the report's 
proposals were to promote dramatic improvements in aid effectiveness, 
the results would take many years to show up and it takes a great leap 
of faith to believe that donor governments would provide substantially 
increased funds even then--let alone in the longish transition period 
when the changes were being implemented.
    Fourth, the report wants the more advanced developing countries to 
henceforth rely wholly on the private capital markets for external 
finance. But those markets are enormously volatile as we have seen in 
the crises of both the 1980s and 1990s; the private money can flow back 
out, deepening crisis conditions, even faster than it came in. 
Moreover, the markets do not care if their funds are used for 
developmental purposes, especially poverty alleviation.
Unsubstantiated Proposals
    The third major problem with the report is its cavalier 
recommendations for several sweeping institutional changes without any 
analytical foundation at all. While there may be legitimate reasons for 
some of these proposals, the rationale for pursuing them has not been 
established:

   elimination of the World Bank's Multilateral Investment 
        Guarantee Agency on the basis of three lines of assertions;

   elimination of the International Finance Corporation, one of 
        the most successful components of the World Bank family, and 
        the parallel entities at the regional development banks, 
        without a shred of evidence that such actions would be 
        desirable (and without acknowledging that such a step, along 
        with the elimination of MIGA, would undercut the report's 
        stated goal of increasing the flow of private sector resources 
        to the poor countries);

   a shift of funding for all country and regional programs for 
        Latin America and Asia from the World Bank to the Inter-
        American and Asian Development Banks, respectively, solely on 
        the basis of cryptic assertions that the latter would do a 
        superior job--which run counter to the judgments of most 
        observers.

    The fourth major problem is the chapter on the World Trade 
Organization. The global trading system, and U.S. policy toward it, is 
an enormously complex and important issue at this point in time. The 
Congress will indeed shortly be considering a vote on whether the 
United States should maintain its membership in the WTO. The chapter is 
totally inadequate and indeed full of errors in dealing with the issue, 
understandably so because the Commission members were not chosen for 
their expertise on trade topics.
    For example, the chapter suggests that ``there is considerable risk 
that WTO rulings will override national legislation'' when there is no 
such risk. It believes that WTO rulings ``should not supplant 
legislative decisions'' when there is no risk of their doing so. It 
recommends that ``WTO rulings . . . should (have) no direct effect on 
U.S. law'' when they neither do so now nor ever could do so. The 
group's title is the International Financial Institutions Advisory 
Commission and the report admits that ``the Commission had neither the 
time nor the expertise to evaluate all the changes that have occurred 
or the many proposals for future changes.''
Additional Problems
    There are numerous other flaws in the report:

   there is no reason to preclude the IMF from future 
        assistance to high-income countries, which might need its help 
        in future crises if global consequences are to be minimized;

   there is no reason to bar it from pushing member countries 
        to adopt more stable exchange rate systems;

   there is no reason to propose a new set of ideas for 
        strengthening banking systems in emerging market economies when 
        the Basel Core Principles have already been agreed and the 
        correct priority is to promote their adoption and effective 
        implementation;

   it ignores the fact that the dozen countries which receive 
        the bulk of the World Bank's loans also have the bulk of the 
        world's population, and hence deserve substantial official 
        funding;

   it ignores the valuable role of the Bank in strengthening 
        the hand of reformers in developing countries and thereby 
        tilting national policies in constructive directions; and

   it ignores central issues such as sustainable development 
        and core labor standards that must be addressed by all of the 
        IFIs.

    The report also fails to address some of the central issues that 
must be part of any serious reform of the IMF. It should advocate, for 
example, much more effective ``early warning'' and ``early action'' 
systems to head off future crises. It should offer a formula for 
``private sector involvement'' in crisis support operations, to assure 
sharing their financial burden between private creditors and official 
leaders (including the IMF), rather than simply ``leaving that issue 
for participants.'' It should address the cardinal practical issue of 
how emerging market economies will manage their floating exchange 
rates, rather than simply reiterating that these countries should 
either fix rigidly or float freely--which very few now or ever will do. 
It should promote more stable exchange-rate arrangements among the 
major industrial countries, which are crucial for global stability and 
without which the emerging markets will continue to have severe 
problems whatever their own policies.
    To conclude where we started: reform is needed at the IFIs and 
there are a number of constructive proposals in the report. But its 
recommendations on some of the most critical issues would heighten 
global instability, intensify rather than alleviate poverty throughout 
the world, and thereby surely undermine the national interests of the 
United States. These recommendations must be rejected and their 
presence requires us to dissent from the report in the strongest 
possible terms.

    C. Fred Bergsten, Director, Institute for International Economics.

    Richard Huber, Former Chairman, President and CEO, Aetna, Inc.

    Jerome Levinson, Former General Counsel, Inter-American Development 
        Bank.

    Esteban Edward Torres, U.S. House of Representatives, 1983-99.

                                   -