[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                     THE STATE OF THE INTERNATIONAL 
                        FINANCIAL SYSTEM AND THE 
                      INTERNATIONAL MONETARY FUND 
=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 28, 2002

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-58







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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 28, 2002............................................     1
Appendix:
    February 28, 2002............................................    33

                               WITNESSES
                      Thursday, February 28, 2002

O'Neill, Hon. Paul H., Secretary, U.S. Department of the Treasury     7

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    34
    Bereuter, Hon. Doug..........................................    36
    LaFalce, Hon. John J.........................................    39
    Waters, Hon. Maxine..........................................    42
    O'Neill, Hon. Paul H.........................................    44

              Additional Material Submitted for the Record

Weldon, Hon. Dave:
    Written questions for Secretary Paul H. O'Neill..............    58







                     THE STATE OF THE INTERNATIONAL
                        FINANCIAL SYSTEM AND THE
                      INTERNATIONAL MONETARY FUND

                              ----------                              


                      THURSDAY, FEBRUARY 28, 2002

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                    Washington, DC.
    The committee met, pursuant to call, at 1:05 p.m., in room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley, 
[chairman of the committee], presiding.
    Present: Chairman Oxley; Representatives Leach, Bereuter, 
Lucas, Paul, Gillmor, Weldon, Ose, Biggert, Tiberi, LaFalce, 
Frank, Waters, Sanders, Sherman, Inslee, Gonzalez and Lucas.
    Chairman Oxley. The hearing will come to order. Good 
afternoon. This hearing of the Committee on Financial Services 
will please come to order. Pursuant to the Chair's prior 
announcement, I'll recognize myself for 5 minutes for an 
opening statement, as well as the Ranking Minority Member, the 
Chair and Ranking Minority Member of the Subcommittee on 
International Monetary Policy and Trade for 3 minutes each.
    All Members' opening statements will be made part of the 
record and it is so ordered.
    Today, the Committee is meeting to hear testimony from the 
Secretary of the Treasury, Mr. Paul H. O'Neill, on the state of 
the international financial system, IMF Reform, and compliance 
with IMF agreements. This hearing is mandated by the fiscal 
year 1999 foreign operations appropriations bill, which 
provided for an $18 billion increase in U.S. funding for the 
International Monetary Fund--IMF. To ensure that the IMF would 
effectively use these funds, Congress included as a 
requirement, authored by Representative Castle, a senior Member 
of our Committee, that the Treasury Department submit an annual 
report on the progress of IMF reforms and that the Treasury 
Secretary testify before this Committee on the state of the 
international financial system.
    As I am sure you are aware, Mr. Secretary, this Committee 
heard from Federal Reserve Board Chairman Alan Greenspan just 
yesterday about the conduct of monetary policy and the state of 
the domestic economy. Inasmuch as economic growth in the United 
States is necessarily intertwined with that of the remainder of 
the world, our Nation's economic growth is greatly impacted by 
disturbances and/or crises in the international economy, such 
as that currently occurring in Argentina. As a result, this 
Committee welcomes this opportunity to both oversee U.S. 
international economic policy and at the same time looks very 
much forward to your insights into where that economic policy 
is heading.
    At your appearance last year, you testified that reform of 
the international financial institutions was a key priority for 
this Administration and emphasized the need for the IMF and the 
World Bank to focus more narrowly on their core objectives.
    You highlighted a number of issues, among them 
transparency, accountability, IMF crisis prevention, converting 
loans to grants, increased education in poor countries, and the 
use of results-based performance indicators. The Department's 
October 2001 report provides a helpful review to your 
testimony, as well as an early insight into the success the 
Administration has had in pursuing congressional directives 
codified in Section 1503 of the International Financial 
Institutions Act related to market-oriented reforms, trade 
liberalization, sound banking systems, work-out systems for 
sovereign debt and a host of other issues.
    With a year as Secretary under your belt, the Committee 
looks particularly forward to your assessment of progress on 
these fronts.
    In light of the almost daily news on Argentina's financial 
turmoil, and the IMF's more than 20-year relationship with 
Argentina, I would expect that you will receive quite a number 
of questions about this long-term relationship and how 
Argentina could possibly find itself in the financial plight 
that it currently faces.
    Turkey is also a subject of interest, although perhaps less 
so than Argentina, since it has not faced suspension of IMF 
assistance. There is also a very strong interest in the 
Japanese economy. Although the Japanese are not recipients of 
IMF assistance, the IMF is conducting a Financial Sector 
Assessment Program in Japan. We would certainly welcome your 
thoughts on the prospects that Japan will finally address the 
long-term problem of non-performing loans in its banking 
system.
    While I am personally not of the opinion that the IMF and 
World Bank have done their jobs in ways that call for radical 
changes in the manner in which they undertake their 
responsibilities, I do nevertheless feel that the Treasury 
Department's annual review, as it relates to IMF reform, is and 
will be of particular importance on a going-forward basis, and 
I look very much forward to receiving your views on this and 
other matters of import that you would like to discuss this 
afternoon.
    Let me just take a moment in closing to say how much I 
personally appreciate the strong leadership skills that you 
have frequently exhibited during your service at Treasury to 
date. Please also know that this Committee appreciates the good 
work that you and other members of your team have accomplished, 
such as reform of the Multilateral Development Banks and the 
International Monetary Fund; combating the financing of 
terrorism, and working very closely with us on our money 
laundering legislation; the reconstruction of Afghanistan; 
attempts to raise the level of sustained global economic 
growth; and lastly, ongoing efforts to strengthen the bilateral 
economic relationship between the United States and Russia.
    With all that being said, Mr. Secretary, let me welcome you 
to your third appearance before our Committee. It's good to 
have you. And I now yield to the gentleman from New York, the 
Ranking Member, Mr. LaFalce.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 34 in the appendix.]
    Mr. LaFalce. Thank you very much, Mr. Chairman.
    Secretary O'Neill, welcome. You appear before us at a very 
important time for the global economy and for United States 
policies as they relate to the global economy. Today, I would 
like to highlight two areas. First, the on-going negotiations 
to replenish the World Bank's International Development 
Association, so-called IDA, and the discussions related to the 
creation of a mechanism for handling debt crises, particularly 
in the aftermath of the Argentine debt default.
    First, I'd like to offer my support for your efforts to 
shift more of IDA assistance toward grants. The grants 
initiative is a natural extension of our debt relief efforts 
which are already bearing some fruit in the heavily indebted 
poor countries, never enough, but they are freeing up some 
budgetary resources in those countries to devote to critical 
social spending. Yet, each year that we continue to provide 99 
percent of IDA assistance in the form of loans, particularly 
for non-economic expenditures, such as AIDS relief, nutrition 
and education, we chip away at the benefits that debt relief 
provides to these countries. So, in effect, we forgive debt 
with one hand and pile on new debt with the other.
    You don't think and I don't think that this is a viable 
long-term development strategy. Few of the objections that 
critics to the grants proposal have ring true to me. In 
particular, that a shift to grants inappropriately moves the 
World Bank onto the United Nations turf as the international 
grant making institution. I think those arguments smack of 
defending the status quo at the expense of doing what's best 
for the world's poor. So that's where I agree with you.
    Now, I do think though that the intransigence of the 
Europeans on this issue may reflect some other problems with 
the United States' position when it comes to funding for IDA 
and for official development assistance in general. Some 
individuals who I greatly respect, for example, David Beckman 
of Bread For the World, has said that these critics are 
suspicious of the grants proposal because they've long 
perceived the United States to be stingy when it comes to 
development assistance. And I think that perception is correct.
    You've attempted to counter that perception by offering 
increases in the IDA contribution over the next 3 years, 
starting at $850 million in 2003 and increasing it to just over 
$1 billion by 2005. So far, so good. But then you condition 
those on what I think you call performance targets. And here's 
where I begin to have reservations and doubts, Mr. Secretary. 
Now, I believe that the United States should commit, at a 
minimum, to the upper range of the funding levels you've 
proposed independent of what I think are artificial performance 
targets. As you know, Nobel economist Joe Stiglitz has said 
that--and he used to be the Chief Economist for the World Bank 
and Chairman of the Council of Economic Advisors, I have great 
regard for Joe--that even if the United States doubled its IDA 
contribution, we could be confident that the money would be 
well-spent absent performance targets. His point is that the 
World Bank has already come a very long way in evaluating 
successes and failures and in using that information to improve 
development assistance. As a result, a large number of viable 
development projects go unfunded for lack of adequate donor 
support.
    Of course, we should look to benchmarks for progress as we 
allocate funds to all of the MDBs, but here's where I'm 
concerned. I'm concerned that the performance target 
initiatives will encompass areas that are inherently difficult 
to measure and do not lend themselves to use as annual 
benchmarks. For example, you've rejected school enrollment as 
an appropriate metric in favor of outcome-oriented measures 
such as ability to read and write. Well, I share your desire to 
focus on outcomes, but one only needs to consider the painfully 
slow process of seeking education performance measures in the 
United States of America to recognize the very practical 
problems with doing the same in the world's poorest countries.
    Rather than a finely-tuned matrix of empirical measures, I 
fear that what we will really get is a highly subjective 
judgment from Treasury officials about whether a target has 
been met or not, something akin to the OMB scorecard for agency 
performance that was unveiled in this year's budget. And with 
Mitch Daniels desperate to find cost savings around every 
corner, there will be enormous pressure to keep U.S. funding 
for IDA as close to the baseline as possible. And so while I do 
not dismiss and absolutely reject the use of benchmarks or 
performance targets entirely, I have great reservations and 
doubts and concerns. I'm willing to await the details before 
final judgment, but you're going to have to convince me on that 
one.
    Let me go very briefly to the so-called international 
bankruptcy regime, and I'll only take a minute. I've been a 
long-time advocate for the creation of a debt workout 
mechanism. I've put provisions in the 1986 and 1988 trade bills 
along those lines. Argentina has demonstrated, once again, such 
a need. There's always a country almost every year. But I think 
now we have some momentum. Ann Krueger is the new Deputy 
Director of the IMF, and she has been advocating some type of 
bankruptcy mechanism.
    Now I know that John Taylor--is John here today? No.--made 
some recent comments, and it would appear that his comments are 
reflective of the Treasury's, that you part ways with the IMF 
on how best to structure the proposal, not how to get to the 
end, but on the means to the end. I'm eager to move the 
discussion beyond the academic and toward a concrete plan. I 
think it's very important. And perhaps it might be desirable to 
advance this through legislation too, but not necessarily. It's 
something I would dialogue with you on, and with the Chairman, 
of course. I thank you very much, Mr. Secretary.
    [The prepared statement of Hon. John J. LaFalce can be 
found on page 39 in the appendix.]
    Chairman Oxley. The gentleman's time has expired.
    The Chair is now pleased to recognize the Chairman of the 
International Monetary Policy and Trade Subcommittee, the 
gentleman from Nebraska, Mr. Bereuter.
    Mr. Bereuter. Mr. Chairman, thank you and thank you for 
scheduling these hearings. And Secretary O'Neill, thank you for 
your appearance today. I have a particular concern I didn't 
bring to your attention today, but I want to recognize and 
state my respect for you and the leadership you're bringing to 
the Department, and may I also mention preliminarily that our 
subcommittee recently held a hearing on IMF as it relates to 
Argentina, and Secretary John Taylor was very cooperative and 
very helpful to us in that hearing, and we will shortly be 
having another hearing with critics and supporters of current 
IMF policy, and if I have the time and questions, I'll pursue a 
few things in that area.
    I wanted to mention to you specifically though today that 
last year, the subcommittee not only passed important 
legislation related to the regional multilateral development 
institutions, specifically the Asian Development Fund and the 
International Fund for Agricultural Development, but also 
passed policy changes and on a wider variety of the regional 
development banks.
    For tactical reasons, important tactical reasons, we have 
linked that legislation with the reauthorization of the Export-
Import Bank legislation, wanting to bring them to the floor at 
the same time. We passed those on October 31st of last year. 
But, because of authorized or unauthorized threats of veto from 
Treasury because of problems between the Export-Import Bank and 
the Treasury Department on the use of Eximbank's Tied Aid War 
Chest transactions, we've been at an impasse.
    Last month, I was finally successful in bringing together 
Treasury, Export-Import Bank officials and the White House 
representatives to see if we can't find some resolution to what 
I think has been an arbitrary and inappropriate position and 
statement on the part of Treasury officials early in last year 
on several projects.
    I think they violated their own vaguely described criteria, 
and we have to have some changes, in my judgment. I understand 
that every Administration would like to have a clean, 
straightforward reauthorization under most circumstances, but I 
think reforms are really essential in this area. The 
subcommittee has worked well on trying to bring itself to a 
conclusion that was acceptable to all, and I think we have 
succeeded, but I do need to have a resolution on this issue. 
Just because of things that have happened in the last few 
weeks, I believe it is now much more difficult, in fact, to 
pass an Export-Import Bank reauthorization. We've already had 
it extended to March 31st through an appropriation bill, but I 
know I will resist, and I think this Committee would resist an 
end run around the Committee through the appropriations process 
because we really need to have some reforms. And I would hope 
that we might shortly find a resolution.
    Mr. Secretary, I sent you a letter on this subject on 
February 15th. To my knowledge, we haven't received a reply. 
However, we are having significant problems in opening our 
irradiated mail, so if you reply, please don't respond by the 
U.S. Mail, because we're still getting Christmas cards and our 
people are getting sick as a result of opening irradiated mail 
now. So fax, personal delivery or whatever, but we need to have 
a solution on this.
    I conclude, Mr. Chairman, by mention to the Secretary that 
I understand we'll be expecting a significant reauthorization 
legislation request on other issues this year from the 
Administration, African Development Fund, the Global 
Environmental Facility, and most controversially and most 
significant in terms of dollars, the International Development 
Association. You will need the Committee's cooperation and 
assistance on this, and we will need yours.
    Thank you, Mr. Secretary, and thank you, Mr. Chairman.
    [The prepared statement of Hon. Doug Bereuter can be found 
on page 36 in the appendix.]
    Chairman Oxley. The gentleman's time has expired.
    The Chair is now pleased to recognize the Ranking Member of 
the aforementioned subcommittee, the gentleman from Vermont, 
Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman.
    Mr. O'Neill, welcome and thank you for being with us. I 
just very briefly in my opening remarks want to touch on three 
issues that I hope you will be responding to in questions later 
on. That is, number one: the IMF; number two: the Export-Import 
Bank; and number three: the huge trade deficit this country 
currently has and its impact on manufacturing, something I 
suspect you know something about.
    Mr. Secretary, needless to say, in the United States and 
throughout the world there has been a lot of concern about 
globalization and the impact that globalization has on people 
in the developing world as well as working people in this 
country. My particular concern is that one of the aspects of 
globalization, it seems to me both in the United States and 
abroad, is that it creates a growing gap, an increased gap 
between the rich and the poor. In the United States today we 
have the most uneven distribution of wealth and income of any 
major nation, in which the richest 1 percent of the population 
owns more wealth than the bottom 95 percent. I see that as a 
very, very serious problem, and that phenomenon exists 
increasingly in developing countries, as well, where the elite 
of those countries own enormous wealth, while the poor in many 
cases get poorer.
    Second, as I think you know, I just returned from a trip to 
Russia which was in the unfortunate position of having been 
guided in its transition by the IMF, among other institutions. 
And some gentlemen in Russia said, ``Well you guys were smart, 
you ignored your economic advisors. You sent them to Russia.'' 
The result is, in many ways--not totally I understand--but, has 
been a disaster among men in Russia. As you may know, in the 
last 11 years, life expectancy has declined by 10 years, which 
is a-historical, never happened before in the history of the 
modern world. You have senior citizens, older people, living on 
$25 a month in pensions. We saw in Moscow, which is the 
wealthiest area of the country, old people begging out on the 
streets. It was not a pleasant site.
    The IMF also apparently has created disasters in Asia, and 
according to some people at least, has done a very poor job in 
Argentina. According to a recent op ed in the Wall Street 
Journal, the IMF's quote was: ``30 programs in Argentina 
contributed to the collapse of tax receipts, sky high interest 
rates to compensate for currency uncertainty, and investments 
stand still and deadline riots and the fall of the government. 
The IMF's policy pattern is as clear in Argentina as in 
previous collapses around the globe. It gives countries bad 
economic advice, then lends heavily to them, allowing them to 
waste the new funds, and watches as the government's popularity 
plunges.''
    I would hope that you would agree with me that the IMF is 
an institution in desperate need of some structural adjustment 
itself. I can remember several years ago at a subcommittee 
hearing we had the U.S. representative to the IMF before us. I 
think we had to threaten a subpoena to get her, as a matter of 
fact, but she was there. And I asked her about some of the 
votes that had taken place in the IMF, and later on she told 
us, to my amazement, is there are relatively few votes, that 
kind of consensus agreements are worked out and it seems to me, 
for the well-being of this country and for developing 
countries, that there needs to be infinitely more transparency, 
not quiet back room dealings. Very often, the people who are 
most effected by these austerity measures, who see education 
and health care budgets cut, read about it in the newspaper. In 
a sense, these measures are forced on their governments who 
will not receive loans unless the governments go along with it.
    So, in terms of the United States, the U.S. has a huge role 
in the IMF, and if we are interested in winning the support of 
poor people around the world, developing countries, I don't 
think we want to be part of a process which imposes austerity 
programs on those people which often cause a great deal of 
suffering among the poorest people in those countries, so maybe 
we'll talk about the IMF later.
    Second issue----
    Chairman Oxley. The gentleman's time has--can you get to 
that in questioning?
    Mr. Sanders. Very briefly, if I can. Export-Import Bank, as 
you may know, Mr. Secretary, the Export-Import Bank approved a 
$300 million loan for Enron in a project in Dahol, India, to 
build a natural gas power plant, even though the World Bank 
repeatedly refused to finance that project because it was not 
economically viable, so we'll want to be talking about Export-
Import Bank, their loans to Enron, and in general, the non-
productive work that that agency sometimes does. Thank you very 
much.
    Chairman Oxley. The gentleman's time has expired.
    We now turn to the Secretary of the Treasury, the Honorable 
Paul O'Neill. Welcome back to the Committee, Mr. Secretary. 
It's good to have you back, and please feel free to begin.

 STATEMENT OF HON. PAUL H. O'NEILL, SECRETARY, U.S. DEPARTMENT 
                        OF THE TREASURY

    Secretary O'Neill. Thank you, Mr. Chairman, Congressman 
LaFalce. We prepared a fairly long statement which I'd like to 
have included in the record, which tries to summarize and then 
develop in some detail the things that we've been doing over 
the last 13 months.
    Chairman Oxley. Without objection, the full statement will 
be made part of the record.
    Secretary O'Neill. Thank you very much. And, Mr. Chairman, 
with that, what I'd like to do is make just a few opening 
remarks, and then turn to your questions. Thank you for 
inviting me here today to discuss President Bush's 
international economic agenda and our efforts at the Treasury 
Department to advance that agenda.
    Before we turn to today's important topic, I'd like to take 
a moment on something else. You are all Members of the 
Financial Services Committee and you know how important the 
full faith and credit of the United States is. You know we're 
going to reach a debt limit in late March. I urge you to act 
quickly to permanently increase the debt limit. Delay creates 
uncertainty that can threaten our economic recovery and 
undermine U.S. leadership as we pursue the war on terrorism. 
You may want to come back to this.
    But, with that, let me turn to the subject at hand.
    When I accepted the job of Secretary of the Treasury, 
President Bush directed me to meet a number of important 
challenges. One of those challenges, one I take very seriously, 
is our Nation's role in international economic development. The 
President's message to me was very clear: if we care, and we 
have simple respect for human dignity, then we must finally 
deliver on a half-century of unfulfilled promises. We must 
raise the standard of living of poor people living in the world 
today.
    The leaders of the free world joined together more than 50 
years ago with a commitment to speed the progress in the 
underdeveloped world. Over those 50 years, we've witnessed 
incredible feats of human progress. Today, more people than 
ever before in the history of the world have the opportunity to 
reap the benefits of their labor and creativity in free 
markets, and to create wealth. And yet, for many nations, 
progress has been slow or non-existent. And it causes a 
question to be asked often, I think, why are so many people 
still poor?
    The nations that have failed lack systems that support the 
realization of new ideas. Most of the building blocks for 
progress are not expensive: good government, the rule of law, 
respect for property rights, a commitment to free markets, and 
a commitment to peaceful relations with neighboring countries 
are the essential ingredients. But for many countries, these 
foundations for development are out of reach. They lack 
capital, know-how or encouragement from the international 
community, and in some cases countries have gone down the wrong 
road because of the policy prescriptions from the international 
community or perverse incentives that our international 
assistance programs themselves have created.
    Let me take a few minutes to discuss some of the ways we're 
trying to improve the system. To unleash human economic 
potential, it is vital that economies have a sound and stable 
environment to grow and attract private business. Capital is a 
coward. It goes where it feels secure, and can grow. 
Cultivating macroeconomic conditions that support growth and 
attract capital is the job of the International Monetary Fund. 
Rather than serving as a firefighter for crises, as it has in 
the past, we believe the IMF should become more like a 
gardener, nurturing the seeds of private sector growth. Thus, 
our first task is to prevent the eruption of crises that 
undermine and reverse growth.
    With our encouragement, the IMF is taking steps to 
strengthen its early warning systems so that it can better 
preempt crises before they explode. Greater transparency is 
also fundamental, both on the part of the IMF and its member 
countries, so that financial markets can discern the true 
performance and potential risk of individual economies and the 
system as a whole.
    With our support, the IMF is also narrowing the focus of 
its involvement in member economies. As the IMF has 
acknowledged, the organization has at times allowed its 
activities to expand beyond the scope of its primary mission, 
overlapping with the mandates of the Multilateral Development 
Banks in areas such as promoting agricultural reform and 
judicial reform. This has diminished the Fund's effectiveness 
in pursuing central objectives. We believe the fund should 
focus on monetary, fiscal, exchange rate, and financial sector 
policies that lay the macro-economic framework for growth. In 
addition, we're making clear that there are limits on official 
support to countries in unsustainable situations that have a 
history of making bad policy choices and avoiding reform.
    Despite several recent incidents, there remains no clear 
consensus approach for dealing with unsustainable situations, 
and the uncertainty that remains creates too much pressure for 
large-scale lending by the IMF, and may contribute to decreased 
investor willingness to invest in emerging markets. To help 
reduce this uncertainty, we're working to develop a sovereign 
debt restructuring mechanism that will provide a more 
predictable framework for debt workouts. Having such a workout 
strategy may help reduce the pressure for large-scale 
financing, and it may also create increase capital flows to 
emerging markets at lower interest rates.
    Let me turn now briefly to the World Bank and the 
Multilateral Development Banks. As President Bush has said: ``A 
world where some live in comfort and plenty, while half of the 
human race lives on less than two dollars a day is neither just 
nor stable.'' Poverty today remains widespread and deep. It's 
clear that we can and must do better. Rising productivity is 
the driving force behind increases in economic growth and 
rising per capita income. We are urging the multilateral 
development banks to focus more intently on operations that 
raise productivity, concentrating on education and health, 
promoting private enterprise, promoting good governance and 
opening economies to trade and investment. Productivity is now 
receiving more emphasis in the debate on MDB policies within 
the institutions and among the other shareholders. We are also 
urging the MDBs to establish monitoring and evaluation systems 
that measure development results.
    Private sector development is crucial to economic growth 
and poverty reduction. MDBs should play a larger role in 
promoting needed investment climate reform and in channeling 
technical assistance on project finance to fund viable private 
sector projects in countries that have adopted core standards 
for a sound investment climate.
    Another significant initiative is President Bush's proposal 
that up to 50 percent of the World Bank and other MDB funds for 
the poorest countries be provided as grants rather than as 
loans. It simply doesn't make sense to pile more debt on the 
poorest nations of the world. Those debts have to be repaid by 
taking from people who live on less than two dollars a day. How 
can such new debt loads help them develop a vibrant, self-
sustaining economy? It would be irresponsible to assume that 
some time in the future, donors will be willing to finance 
another massive international debt reduction program for them. 
We continue to negotiate with our international partners to 
achieve a successful agreement on this initiative.
    While increased global trade is vitally important to the 
U.S. economy, it's also the cornerstone of our development 
efforts. Increased trade raises the standard of living of 
people here in the United States and in the rest of the world.
    Bilaterally, the United States is negotiating free trade 
agreements with Chile and Singapore and seeking meaningful 
commitments from countries seeking to join the WTO. Regionally, 
we're working hard to create a Free Trade Agreement of the 
Americas and the Doha Agreement last November gives us the 
opportunity to expand trade globally. President Bush feels that 
U.S. leadership is essential to meet the challenges of 
international development. The United States should be a 
locomotive of global economic growth and a champion of economic 
development in those parts of the world that have lagged 
behind. Economic growth produces peace, stability and 
democracy. These are important national goals that have gained 
significance since the September 11th attacks and the start of 
our war on terrorism.
    Mr. Chairman, I'd be happy now to take the questions of 
yourself and your committee Members.
    [The prepared statement of Hon. Paul H. O'Neill can be 
found on page 44 in the appendix.]
    Chairman Oxley. Thank you, Mr. Secretary. Let me begin by 
asking you a question that started really yesterday with 
Chairman Greenspan's testimony in which he indicated that he 
did not see a large spillover effect on the U.S. economy from 
the situation in Argentina and Japan. He also stated he did not 
see much potential of contagion for surrounding countries or 
regions in either case. You may have seen some press reference 
to that. Would you care to comment on that particular 
statement?
    Secretary O'Neill. Of course, I always agree with the 
Chairman, or almost always.
    Chairman Oxley. He indicated you served on the same board 
at Alcoa.
    Secretary O'Neill. That's right. We've been associates and 
colleagues for more than 30 years now, and it's true that we do 
very often agree with each other. To the specific question of 
direct effects on the U.S. economy from Argentina and Japan, I 
agree with him, though I did not see the press accounts. But I 
would go on to say this.
    In the case of Japan, they've now had 11 years of average 
growth of 1 percent, when their economic potential is something 
on the order of 3 percent. And while I think it's very hard to 
draw a connection between their slow rate of growth over this 
period of time--three recessions in the last 11 years--it is 
nevertheless true that our world is now so fundamentally 
interconnected that when a major economy like Japan, which is 
the second largest in the world, runs at significantly less 
than its potential, it has an effect in two different important 
ways. First of all, it has a material effect on the living 
conditions and the average income of the Japanese people 
themselves. I think that's the most important and telling. But 
second, it means that their economy is creating less capital 
that could be used for the purposes of economic development in 
the broader world at large. And so, I think it is very 
important that all economies, especially the very largest ones, 
act as locomotives for the rest of the world so that we can 
together help to overcome the problems I've addressed in my 
prepared statement of so many billions of people still living 
in the world today with income levels that are so small-- that 
it's almost impossible to conceive being able to live on less 
than a dollar a day, which is what billions of people are 
doing.
    Chairman Oxley. I want to get back to Argentina perhaps a 
bit later, but in my opening remarks I specifically mentioned 
Turkey, and I had the opportunity to visit there last June, I 
believe it was, May or June right at the time that Gemal 
Durbesh had been brought back from the World Bank to become the 
finance minister, and I must say I was most impressed with him. 
Could you give us a brief update on where Turkey is in their 
efforts to try to get their economy back on track?
    Secretary O'Neill. I'd be very happy to do that. Turkey is 
a very interesting case, because when I was here last year, I 
would say most of us considered Turkey and Argentina to be in 
the same place. They were both having enormous problems. They'd 
had multiple IMF programs. And I think shortly after I was here 
last year, the IMF told to Turkey that there were certain 
preconditions that it had to meet before more money was sent. 
President Ecevit and Minister Dervis set out to get some very 
difficult legislation through their equivalent of our Congress 
and only after they had met the conditions that were suggested 
to them,-- which frankly seemed very sensible, and were not 
about impoverishing the country or squeezing social spending,-- 
the money began to flow.
    And while I think they still have a very difficult economic 
situation, they are markedly different from where they were 
this time a year ago, or even where they were nine months ago, 
in spite of the fact that their tourism industry evaporated 
after September 11th for a period of time. President Ecevit was 
here about 6 weeks ago, and I had an opportunity to spend some 
time with him. I was very impressed by his articulated 
determination to keep on the track of a sustainable economic 
position for his country. I was very impressed by his quickness 
of mind and command of the issues. So this is not a case where 
just Minister Dervis is a very impressive person. The 
president, himself, is a very impressive person, and I thought 
some cabinet members that were with him were equally impressive 
in their understanding of what needed to be done and their 
apparent commitment to do it.
    Chairman Oxley. Thank you. My time has expired.
    The gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman.
    Mr. Secretary, I would like to focus on two issues at this 
point; the Export-Import Bank, and the trade deficit. In terms 
of Enron, the Export-Import Bank approved a $300 billion loan 
for an Enron-related project in Dahol, India, to build a 
natural gas power plant even though the World Bank repeatedly 
refused to finance this project because it was not economically 
viable according to Human Rights Watch, Amnesty International, 
and other groups. Enron subsidiaries paid local law enforcement 
to suppress opposition to its power plant, in which they 
arbitrarily beat and arrested dozens of villagers.
    I wonder if, when I'm finished, if you could give us some 
information on that, or get some information to us on that.
    Second of all, in terms of Export-Import Bank in general, 
the ostensible purpose of the Export-Import bank is obviously 
to create American jobs, right? That's its theory. Yet, some of 
the major recipients of Export-Import subsidies, Halburton, 
AT&T, Bechtel, Boeing and General Electric, have laid off 
hundreds of thousands of American workers over the last 10 or 
20 years. So the average American I think would say, why are we 
pouring and subsidizing some of the largest corporations in the 
world, very profitable, who, in fact, have announced to the 
world that they're shutting down plants in the United States 
and moving to Mexico and China, and we are giving them 
subsidies in the name of job creation. I think on the surface 
it is insane and I wonder if you would comment on that.
    Third point I would like to ask you to comment on. In your 
remarks you talk about trade, promoting global free trade, and 
you say, and I quote: ``trade has created million of jobs that 
pay above-average wages and has helped promote the global 
growth upon which America's own growth and prosperity 
ultimately depend.'' Yes. No question. Trade has created 
millions of jobs. Yet, there is another side to that equation. 
We have a $400 billion trade deficit. Speak to the people in 
the steel industry, speak to the people in the northeast 
kingdom of the State of Vermont, speak to the textile workers. 
When you have a $400 billion trade deficit and $100 billion 
trade deficit with China, the reality is that China is now our 
51st state in our manufacturing sector. Every major corporation 
in America has gone to China that pay people 20 cents an hour, 
rather than hire American workers at a living wage.
    Now, I am not against trade. Trade obviously works when it 
is based on fair trade. I would hope that you will speak and 
raise the issue of what I consider to be a fiasco in terms of 
our trade policies which have impacted millions of American 
workers. Mr. Secretary, a young person without a college degree 
who goes to the job market today is earning 20 percent less 
than was the case 25 years ago, because there aren't 
manufacturing jobs there; there are McDonald's jobs there. And 
I know that you are smart enough to understand this, and I 
would hope that we could go beyond the rhetoric the trade is 
just great. It ain't great when you have a $400 billion trade 
deficit, OK, and we've got to deal with that issue, and it's 
not talked about enough. So that's enough of my rhetoric. I 
would appreciate your response to those issues, please.
    Secretary O'Neill. Thank you very much, Congressman. To the 
first issue of Eximbank intervention or program support for the 
investment in India, I don't know anything about this, but from 
reading the newspaper accounts, I understand this was done 
sometime in the Clinton Administration 3 or 4 years ago.
    Mr. Sanders. Right. It's certainly not a new policy, no.
    Secretary O'Neill. Right. This is not something that the 
Bush Administration had anything to do with.
    Mr. Sanders. Oh, but they supported it, and they're 
actively involved. It's bipartisan, sir, bipartisan.
    Secretary O'Neill. I'd be happy to find out from the 
Eximbank what facts they looked at in making a decision.
    Mr. Sanders. I would appreciate it if you could get back to 
me. Talk a minute about Export-Import, the general philosophy 
on the issue that I raised.
    Secretary O'Neill. You know, I do think the Eximbank is 
there to support job creation and protection for companies in 
the United States. You know, I didn't honestly come prepared to 
defend the Eximbank today in great detail. But I'm sure there 
must be thousands of programs that they have supported over 
time, not only for big firms, but small firms. As a matter of 
fact, I think the issue of contention that Congressman Bereuter 
was speaking about had to do with a fairly small firm or 
transaction,-- it was a very small transaction involving a 
company from his district.
    Mr. Sanders. That's all true. But, does it make sense to 
you that if General Electric announces to the world that it is 
part of their program, they're going to be moving companies to 
China and to Mexico, and then they come in and ask for an 
Export-Import loan, does that make sense to you?
    Secretary O'Neill. I don't know. I guess I'd like to look 
at the circumstances. Maybe we can couple these together and I 
can talk to you from personal experience. When I was in my 
previous incarnation, or previous two, I made investments in 
China. I didn't make investments in China so that I could pay 
people, as you said, 20 cents an hour and be in competition 
with U.S.-based industry. I made investments in China because 
it was a market of 1.2 billion people and I thought my duty to 
my shareholders was to make sure that they participated in 
world economic growth, and I wanted to be an on-the-ground 
supplier of valuable goods in the Chinese market. And I did the 
same in 36 different countries, Congressman. It was not so that 
I could hurt my workers in the United States, which numbered 
50,000 and I more than tripled in the time I was there. It was 
so I could make good on the idea of being the very best company 
in my industry everywhere in the world.
    Mr. Sanders. Look, I respect that, but there are many 
companies who have done some very different practices, laid off 
American workers, moved to China, no question about that. Maybe 
you and I can discuss that at some point.
    Last question----
    Chairman Oxley. The gentleman's time has expired.
    Mr. Sanders. Trade deficit $400 billion, $100 billion with 
China----
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Nebraska, Mr. Bereuter.
    Mr. Bereuter. Thank you, Mr. Chairman. I wasn't going to 
bring up the Export-Import Bank again, but I would say to you 
that when Treasury steps in and reverses the decision of the 
Export-Import Bank on two transactions, one of which has, by 
the company's estimate, follow-on sales of $100 million a year 
on a manufactured product, this is not a small issue for me or 
my constituents.
    I want to go, however, to two questions, Mr. Secretary. 
One, I don't expect you to be necessarily familiar with the 
details of this, but there's a small institution, relatively 
speaking, International Fund for Agricultural Development. They 
are not reimbursed for their contributions to the highly 
indebted countries, the HIPC Initiative. All the other 
development institutions are.
    I sent a letter to Deputy Assistant Secretary Schurs 
February 4th, because he or someone from the department was 
headed for a donor's conference in Rome on February 7th. And I 
know that the U.S. was going to discuss this issue. At least it 
was on the agenda, as to why IFAD cannot be treated like the 
other multilateral institutions with respect to HIPC.
    Second, I think it's actually courageous and perhaps very 
good policy to move part of the loan activities of the World 
Bank and other multilateral institutions to a grant basis. 
There will be a lot of questions raised about it in Congress, 
but at least it's an issue that has reason for support. And I'd 
like to know the reactions that you've received from other 
countries that, to this point, have not at least appeared to be 
supportive.
    Finally, I want to share a story with you about the IMF. 
How at times I think their policy can actually be very 
counterproductive and how I think that the social costs created 
by some of the conditions, entirely appropriate conditions, 
have to be better met in coordination with the World Bank or 
the regional development banks.
    I chaired the Asian-Pacific subcommittee for 6 years, and I 
was chairman during that period of time when the Asian 
financial crisis started, which began, as you know, in 
Thailand. Thailand had a lot of problems in bank regulation and 
incestuous relationships between the private sector and 
commercial and public banks. Crony capitalism, in short, but 
they were not a fiscal basket case by any means. They had 
fiscal resources.
    Then it spread to the Republic of South Korea. They also 
did not have fiscal problems, but when Senator Roth and I met 
with the finance minister in Seoul, who was also, I think, the 
deputy prime minister, we asked him if he was considering 
accelerating public works projects, given the fact that they 
had the fiscal resources, financial resources to do so. Port 
development, highway constructions, things that were ready to 
go. And he said, ``Oh, I don't have that option under the IMF 
Directive.'' Even though they knew they were going to have 
unrest on the streets, high unemployment rates at a time when 
they could have financed it early-on in Thailand and in South 
Korea, they were told they were not allowed to do that. I think 
that is exactly counterproductive advice, and, of course, soon 
they did have fiscal problems and they had unemployment 
problems. So there is one example.
    You could go back to what happened in Latin America on the 
advise that was probably appropriate in a macro-economic sense, 
but not accompanied by the cooperative work of the World Bank, 
or the international development institutions in a regional 
nature. So I remember how the Treasury, in a previous 
Administration, actually led the effort to give bad advice 
through the IMF to Thailand and the Republic of Korea. And then 
to top it off, when Thailand got in deep trouble, the United 
States, its ally, was not there to help them. They got money 
from Hong Kong, they got money from the PRC, and from many 
countries, but we weren't there.
    Secretary O'Neill. Well, I appreciate your questions on the 
first issue. Bill is here with me, and we will get you 
something on the agricultural development funds.
    Your other two questions are wonderful questions. On the 
response that we're getting to proposing that we move from 
loans from the multilateral development banks to grants, many 
of you know we had some initial reactions that said that this 
was a very bad idea. And as we prepped them, the people who had 
voiced their opposition, tell us their reasons. One reason was 
``Well, these are banks and banks don't make grants,''-- didn't 
have anything to do with what's the right thing to do for world 
economic development. It was institutionally couched. And when 
people saw that wasn't a very useful argument,-- I mean, they 
were embarrassed after a while to make that kind of an 
argument,-- they started saying more directly what I think they 
really thought, which is ``We're really worried that you're 
using this as a way to reduce U.S. financial participation for 
helping the low-income countries to develop.''
    And, as was noted by the Chairman, in the President's 
budget, we've proposed that we increase the amount of money 
that's available for these multilateral institutions to make 
the point that this is not about being stingy, this is not 
about cutting back, this is about getting performance and 
getting results for our money in terms that are meaningful to 
the people in these countries,-- which is to say that their 
living standard goes up, not that we just send more money, but 
that something very important happens.
    And in the last couple of months, I would say we're making 
more and more progress with other countries on this issue to 
the degree that the Development Minister from Norway, Minister 
Hilde Johnson, has put forward a proposal that says we should 
identify things like aid to post-conflict countries, aid for 
HIV prevention projects, aid for countries that have average 
incomes of less than a dollar a day,-- and we would say aid for 
primary education,-- that these things should be done as 
grants, they should not be done as loans. And the response now 
has improved, and that would make a substantial difference in 
the level of money distributed through grants instead of loans.
    I won't tell you which one, but one of the European finance 
ministers said that was all fine as long as the total didn't 
exceed 10 percent,-- to which I said, tell me why 10 percent. 
And if you agree that these human-driven ideas are the right 
ideas, why do you say 10 percent is as far as we can go? 
There's not a good answer to that question. And so I would say 
we are making progress. It's slower than I would like, but we 
are making some progress.
    On the question of IMF--and I'll do this quickly, Mr. 
Chairman, as I see you're looking at the time--I agree with you 
that the IMF has in the past insisted on some policies that 
taken broadly and from the point of view of the leadership of a 
country don't make any sense. We've been working with the IMF 
over the last year to hopefully cause them to rethink how they 
relate to the world. Let me just to take a specific area, which 
makes great good sense to me, where I think we need to change 
our idea of what's acceptable in the world. For the longest 
time, I would say for 50 years, through our practice and our 
words and our loans, we have basically taught the developing 
world that if you're a low-income country, it's OK to be,-- in 
fact, we encourage you not to be an investment-grade country. 
What that means is that your debt is very, very suspicious and 
you have to pay a very high interest rate in order to get 
people to take your sovereign paper. Now if you think about it, 
it is the worst of all possible things to say to people who are 
living on less than a dollar a day, that you get the treat of 
paying 18 or 20 or 25 percent interest rates on your sovereign 
debt, because we're encouraged to do that by the development 
community. It is a very bad idea.
    And I think the only reason that we've permitted this to 
happen is because we constantly forget who pays the interest 
rate charges on sovereign debt. The people who make and live on 
less than a dollar a day pay it. The government doesn't have 
any money it doesn't apart from the people. And so we've been 
working to change the standard of what it means to be a 
developing country and to say therefore we should not ask 
developing countries to take more debt burden, which means the 
interest rates they have to pay go to 20 or 25 percent.
    Chairman Oxley. The gentleman's time has expired. Before I 
yield to the gentleman from Massachusetts, Mr. Secretary, there 
was an article in the Wall Street Journal talking about the 
same issue you were talking about, particularly Norway's 
minister of international development and the 10 percent issue. 
You were more outspoken in your speech. Let me quote from the 
Wall Street Journal:
    ``Mr. O'Neill's response was scornful. `Europeans say more 
than 10 percent is too much,' he told a couple of hundred 
guests at the Institute for International Economics and Center 
for Global Development. `I say the hell with it. Tell me a good 
reason.' '' So I think we know where you stand on that issue.
    The gentleman from Massachusetts.
    Mr. Frank. I thank the Chairman. Without a little 
scornfulness, Mr. O'Neill, people might not have recognized 
you, so I'm glad that he gave us a little context.
    I was pleased to see you single out aid to Afghanistan in 
your statement. We obviously have a moral obligation. I think--
like everyone else here, I agreed with what we did there, but 
having, in self defense, engaged in that military action in 
which tragically, innocent people got killed and I do wish the 
Pentagon was a little less grudging in acknowledging that and a 
little more careful about it, but it's inevitable. Obviously, 
we have a moral obligation to help rebuild, but I'm a little 
troubled.
    What's our contribution for the first year to the Afghan 
reconstruction fund?
    Secretary O'Neill. I've forgotten.
    Mr. Frank. I'm told it was about $200 million, and the 
total we're talking about here is, well, I just heard that it's 
going to cost us $30 billion a year for the war, and I'm 
troubled by the 150-to-1 disparity. I think frankly we are not 
meeting our moral obligation as a Nation to provide more 
funding. Obviously, you don't want to provide money that people 
can't use, but everything I read says we have people who are 
hungry, we have police officers and others not being paid, and 
I was impressed, Mr. Secretary, and I appreciate the passion of 
your rhetoric about the unsustainability of a world with such 
enormous disparities where people, through no fault of their 
own, are living so degraded.
    To be honest, I think we can do more, and I like the 
direction that you talk about going in. But let's start with 
Afghanistan. There was really no moral justification for a 300-
to-1 disparity or 150-to-1 disparity. I have trouble with my 
math. Between $30 billion and $200 million, in terms of what we 
contribute.
    Now let me say with regard to the grants, and I agree, and 
I've read some of these arguments. One of the ones that seemed 
to be silly to me was well, if we make it a grant instead of a 
loan, the country won't have ownership of the program. I think 
that's the kind of thing people say when they have nothing else 
to say. But there is one legitimate question here. And I must 
say, I appreciate the care with which the Administration has 
differentiated its approach on the grant versus loan from the 
Meltzer Commission. The Meltzer Commission was an 
intellectually respectable operation, but it was far more 
critical of these institutions than I think that I am, and I 
believe, I was pleased to see, the Administration was.
    So, what is important, and I think that gives rise to some 
of the fear that this is the way to get rid of these things. 
The problem, as you know, is that some of the financing that we 
do for future projects comes out of the reflows, and it would 
seem to me if the U.S. Government would just commit to making 
up any gap in financial availability of funds, that would come 
from the lack of the reflows, we could do away with that and we 
would have virtual unanimity. Can't we just say that, Mr. 
Secretary? That we would agree to make up, through an 
appropriation process, any gap caused by the cessation of 
reflows?
    Secretary O'Neill. I think the amount of money that we've 
suggested over the next 3 years stepped up through this 
performance idea would more than take care of the reflow 
associated with the U.S. proposal.
    Mr. Frank. Well, I agree, although we do understand that in 
the first couple of years, the reflows are fairly small, so 
would there be any objection in principle, or let me put it 
this way. Shouldn't we, to advance--because I think moving to 
grants is a very good idea--but, wouldn't it be helpful if we 
said that we, to the extent that you and I and others can 
commit people yet to come, that our policy would be that in the 
future, to the extent that there continued to be a need, we 
would continue to make up for any loss through the lack of 
reflows?
    Secretary O'Neill. The concept--I don't see anything wrong 
with that. I'm not sure about your rules and what that means 
for 10-year commitment for scorekeeping and----
    Mr. Frank. Well, one thing we've learned is anything we say 
today we could all undo tomorrow. But it does help, I think, to 
set the policy. After all, the move from loans to grants isn't 
binding. It could be undone. But we committed ourselves.
    Secretary O'Neill. I agree with you.
    Mr. Frank. Thank you. Let me then just make the last point. 
Again, I was struck, and I appreciate your passion on the issue 
and I think that is appropriate. Part of the problem we have, 
of course, is--and I guess when you talked about capital being 
a coward; I love that phrase, I think that's true. Capital is 
very mobile. Unfortunately, that gives capital an awful lot of 
sway in the world that it can sometimes beat down other 
considerations. One of the problems is that when countries are 
told to do the things that make them investment safe, the money 
to help alleviate the short-term social pain isn't there and 
that makes it harder to get these things accepted in a 
democratic society. Let me cut to the bottom here.
    I believe that as the wealthiest Nation in the history of 
the world, given the way you have framed this issue, even 
though you're talking about more, we're still not doing enough. 
We found $48 billion, we're going to find $48 billion over my 
objection to increase military spending. I think it's more than 
we needed. But, when we were threatened, we found $48 billion.
    I think we could do more with regard to precisely the 
issues you talk about. Now obviously we don't want to send 
money where it can't be well-spent, but alleviating hunger, 
dealing with AIDS, these are precisely the areas you talked 
about where grants could do some good, would you not agree that 
the world could absorb a significantly higher level than we're 
talking about, and can't we try to find somewhat more than we 
are doing? And that includes, I believe, just to close, Mr. 
Chairman, further pressing the international institutions fully 
to fund the HIPC. I think we as a bilateral effort have done 
more than they've done. We're not talking about an enormous 
amount of money; maybe it's billions more, but I think it would 
go pretty far. And as far as the rest of the world, you know, 
they've been critical of us because we're not doing enough; 
let's call their bluff, let's see them and raise them and see 
what they do in this poker game.
    Chairman Oxley. The gentleman's time has expired.
    Does the Secretary wish to respond?
    Secretary O'Neill. Maybe just to say one thing. One reason 
for wanting to be very, very forceful with the IMF and the 
World Bank in developing performance measures is so that we can 
create a basis for saying to the American people, not only 
should we do more, but we can assure you we're going to get 
real value for all of the money that flows through these 
institutions. My own view is that as we can demonstrate that we 
know what we're doing, we can make a case the American people 
will believe in and the Congress will be able to act on.
    I've asked Jim Wolfensohn of the World Bank to do 
something, which he's in the process of doing and hopefully 
we'll have before the Monterey conference, which is to write a 
report that learns the lessons of the last 50 years and says 
precisely and specifically what has worked and why it has 
worked. And even more precisely and specifically what hasn't 
worked and why it hasn't worked. Because I believe we have done 
a pitiful job of learning from experience, and as a 
consequence, our Government and other governments have not been 
believable when they say that they know what they're doing in 
this area of economic development. After 50 years, not only are 
people living on less than a dollar a day, there are places in 
the world where the living standard is worse now than it was 50 
years ago when we began this effort. I believe we can do 
better, and then I believe we will command the resources to 
expand and improve what we're doing.
    Chairman Oxley. The gentleman's time has expired. The 
gentlelady from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. Mr. Secretary, in 
wake of the terrorist attacks on September 11th, I think world 
leaders have been examining and reexamining the whole issue of 
global poverty and the fact that it does provide a breeding 
ground for terrorist movements. Some have argued for a renewed 
effort by developed countries to commit .7 percent of the GNP 
to global assistance and it certainly is a standard that 
neither we nor our allies can begin to meet. So could you take 
a moment and share with us how you feel the events of September 
11th have changed the focus of our international development 
policy?
    And could you talk about U.S. assistance to the World Bank 
and the multilateral banks within the context of the battle 
between democracy and these radical groups?
    Secretary O'Neill. Well, I think if you go back and look at 
what the President said at the World Bank in July, you will 
find that he said how important it is that we fulfill our 
responsibility in the broader world to work on meaningful 
economic development. So I would say, yes, all of us were 
affected in lots of different ways by the events of September 
11th. I don't think the President's view, and frankly my view, 
of the importance of working on these issues was changed in a 
marked way by September 11th. I thought for a long time, it's 
not worthy of civilized people who live like we do not to be 
concerned and making some progress in helping other people to 
improve their living standards.
    I think it is also true that, as I was saying earlier, that 
the IMF and the World Bank have fallen short of what they can 
do, and therefore there is a real need for a reassessment and 
redirection and realization of turning rhetoric into reality 
for people on the street.
    Mrs. Biggert. Well, certainly you know this Committee has 
played a role in the formulation of the Patriot Act and 
certainly looking at money laundering, and that's been linked 
again to the terrorist activity and trying to suppress them.
    What role then do you think that the IMF should play in the 
money laundering issues?
    Secretary O'Neill. This is a subject that we've worked on 
with Horst Kohler and his people at the IMF, and they've been 
very responsive to our request in being supportive and helping 
to encourage the association of all the countries in the IMF 
with our efforts on a worldwide assault on terrorist finances. 
We've been talking with them. As a matter of fact, I had 
breakfast with Horst Khler and Ann Krueger a week or 10 days 
ago and talked about them becoming a clearinghouse where 
countries would report on the actions that they've taken to 
establish appropriate mechanisms, and I think we'll get that 
done fairly quickly. And to connect back to your earlier 
question about how we're changed by the events of September 
11th, I must tell you it never occurred to me when I came here 
that I would be spending a significant fraction of my time 
designing systems to interdict and confiscate the funds of 
people who would do the horrible things that were done on 
September 11th.
    I would also say to you, I think we've done a good 
beginning job of connecting the world and the institutions of 
the world to help us in this worldwide fight. In that regard, 
on Sunday morning I'm beginning a 5-day trip to the Gulf states 
to meet with the leaders of the Gulf countries to work with 
them to further tighten our ability to deal with terrorist 
financing. This is not a finished piece of business. We're in 
the early stages.
    Mrs. Biggert. Right. Thank you, Mr. Chairman.
    Chairman Oxley. I thank the gentlelady. The gentleman from 
Texas, Mr. Gonzalez is recognized for 5 minutes.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    Good afternoon. My question has to do with NADBank, which 
is headquartered in my district, and for the past few weeks or 
months there's been discussion from Treasury about plans that 
would significantly restructure it and narrow its focus. My 
concern or course is great. Our problem has been, Mr. 
Secretary, that we have not been able to obtain from Treasury 
anything in writing as to what the proposal consists of. So, I 
would ask you today if you would provide me with that within, 
let's say, the same time next week. Do not mail it, that is 
true; email or fax. But it's my understanding that we have not 
been able to obtain anything that specifically outlines what 
Treasury has in mind, and further any time line.
    And my second request would simply be, I know there would 
be discussions in Mexico, and prior to any finalization of any 
agreement with Mexico relating to NADBank, could you again 
provide me, prior to finalization, the specifics. And when I 
say, prior, you know, what would be appropriate, I would just 
simply ask you to put yourself in my shoes as to what would be 
that appropriate courtesy. And that's the only thing I have 
right now is NADBank because that's still a very hot issue, 
when I get back this weekend, as a matter of fact. Thank you.
    Secretary O'Neill. We'll be happy to do that.
    Chairman Oxley. Thank you, Mr. Gonzalez. The other 
gentleman from Texas, Mr. Paul is recognized for 5 minutes.
    Mr. Paul. Thank you, Mr. Chairman, and welcome, Secretary. 
I'm glad that we're here talking about reform of the IMF. Of 
course, my belief is it's probably beyond reform, and that 
someday we might look at a more appropriate position on the 
IMF, and that is just for us to get out of the IMF. I have 
never seen anything that can morally justify our participating 
and taking money from poor people in this country to pump into 
the IMF. I've never yet seen any economic benefit come from the 
IMF, and I have not yet found anybody who can give me 
constitutional justification and authorization for us to belong 
to an international organization which serves special 
interests.
    I've never had a constituent in my district come up and 
say: ``Ron, I really want you to vote for the IMF funding this 
year.'' It has never happened. I'll bet it hasn't happened in 
anybody's district. But we do get lobbied for it. We get 
lobbied for the IMF appropriation by the banks and large 
corporations. So there must be a special reason they come to us 
and ask us for this appropriation and for us to stay in the 
IMF, especially in the midst of a crisis. You mentioned in your 
testimony that you would like to head off these crises, but I 
don't see how that's going to work either because sometimes 
when there are maladjustments in an economy, the crisis is 
really the market telling you you'd better do something. If 
there's something wrong with currency balances or imbalances, 
then you really need a crisis.
    But to try to prevent this by micromanaging, you get into a 
situation where you're becoming the biggest economic 
interventionist conceivable. So I think we're more or less 
trapped.
    But I do have two brief questions. You favor debt relief 
for some of the Third World countries. Why is it that we always 
have to appropriate that money? You know, if they owe us the 
money or we loan them the money, why don't we just say, you 
don't have to pay us? It obviously, or somewhat implies that 
this money goes to a corporation or to a bank and that's why 
they lobby us for it. They can't pay it anyway, so just relieve 
them of it, but don't appropriate the money. But, we always 
have to appropriate the money.
    Now, I have a quick question on the Exchange Stabilization 
Fund because it works so closely with the IMF. I believe the 
Exchange Stabilization Fund has more than $35 billion, which is 
more or less a slush fund, and it can come to the rescue, along 
with the IMF, to bail out these large corporations and the 
banks. I have a bill that would make the Exchange Stabilization 
more responsible, whether they are dealing in gold, or whether 
they're participating in a bailout, why can't they do that like 
it should be done through a direct appropriation or direct 
approval by Congress. Would you support something along that 
line where Exchange Stabilization Fund would be more 
responsible to the Congress?
    Secretary O'Neill. Let me start with the broadest question 
that you asked about the IMF. As I've already testified, I 
think there is a need for reform of the IMF and the World Bank. 
I think there's a very good case to be made for U.S. 
participation in the IMF and in the World Bank that goes 
directly to the self-interest of the people of the United 
States. It is evermore true that the world is interconnected. 
The affairs that were remarked on earlier--when Thailand and 
Malaysia and that part of the world, Korea, saw a rolling 
financial collapse--was not of transient interest to the people 
of the United States. They may not have known it and they may 
not have understood it, but when the rest of the world verges 
on losing its position as a market for U.S. goods, believe me, 
that's a real issue for U.S. farmers, because a huge part of 
the product of our great farm community goes offshore, and it's 
true of lots of our other goods.
    And so I think we have a decided, clear interest in the 
economic improvement of and stability in the rest of the world. 
And saying that, I would also join you in saying I don't want 
U.S. taxpayers' dollars to be thrown away. I want them to be 
used for leverage to create more stable conditions, so that 
those markets that we are ever--increasingly dependent on are 
there and they're stable and they pay good prices for our 
products. So I think there is a very good reason to have these 
organizations.
    Chairman Oxley. The time of the gentleman's expired, but 
you certainly may continue.
    Secretary O'Neill. May I just say one word in response to 
his Exchange Stabilization Fund question. In the 13 months that 
I've been at the Treasury, we have not used the Exchange 
Stabilization Fund to bail out anyone. And the flexibility that 
exists in the Exchange Stabilization Fund has been around for a 
very long time. In reviewing the history of the use of the 
fund, I think almost without exception, it has been used for a 
good public purpose. I'd be happy to discuss individual 
instances with you if you think there's some evidence to the 
contrary. But I do think that in a world that can turn on a 
dime, it makes sense for Administrations, both Republican and 
Democrat, to have some flexibility to respond to crisis 
conditions. And so I think the Exchange Stabilization Fund has 
served us well as a country, and I would hope that we don't put 
restrictions on it that make it more difficult to act when we 
must act in a hurry.
    Chairman Oxley. Thank you, Mr. Paul.
    The gentleman from California, Mr. Sherman, is recognized 
for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman. There are those who 
think that the war on terrorism is just an overblown rhetorical 
flourish. I hope they're wrong, because Iran and Iraq are right 
now trying to develop nuclear weapons. If they're successful, I 
believe they'll smuggle them into this country, and I believe 
that the equation is simply millions of dollars flow to the 
Iran or Iraq regimes this decade and that leads to millions of 
dead Americans next decade.
    But right now it seems as if we're doing business as usual 
with the IMF and the World Bank. Iran has received $232 million 
from the World Bank, $145 million for a ``sewer system'' and we 
at least opposed that, and $87 million for health and nutrition 
which we have not really bothered to oppose. Now you can say 
health and nutrition, these are wonderful things, but what if 
an American, through an intermediary, had sent $232 million to 
the Nazi Regime, and said well don't prosecute me for treason, 
here's a letter from the Fuhrer that says the money is going to 
be spent on sewers and health care systems.
    When you look at the IMF, Iran has borrowed $530 million, 
Syria another $100 million. Now we're told they're simply 
borrowing back their own capital, but look at the incredible 
benefit they're getting. They are members in good standing of 
the IMF, but they don't have to sacrifice liquidity, they get 
their money back. Imagine a partnership where some partners 
have to contribute capital and others contribute capital and 
then they get it back.
    So clearly, hundreds of millions of dollars of benefit 
going from the IMF and the World Bank to those that the 
Administration calls the ``axis of evil,'' but are actually the 
receivers of subsidies from the American taxpayer. Now we can 
just make some mild protests, easily ignored, so mild that 
nobody even heard them. I believe that there are Members of 
this Committee that don't know that the IMF and the World Bank 
is distributing funds, dispersing funds due to previously-
granted loans to Iran while we speak. Our protest was so soft 
it didn't even reach this room.
    Or we can instead threaten to pull out of these 
institutions, create a U.S. Bank instead of a World Bank so at 
least we can tell our constituents that our money is not 
subsidizing those that the President calls evildoers.
    Are we going to continue to do business as usual with these 
institutions and tell the American public in the surface we're 
at war with terrorism, and then somewhere deep in the financial 
pages, our money goes to the IMF and the World Bank, their 
money goes to the axis of evil.
    Have we told our European and Japanese friends that we hold 
them responsible for hijacking our money and sending it to 
those who are doing everything possible to develop weapons of 
mass destruction so that they can kill millions of Americans?
    And are we going to hide behind the idea that, oh, gee, 
there's nothing we can do. We were outvoted and there's just no 
replacement for these institutions. And if we hide behind that, 
can we at least go on the front page? Can the President of the 
United States at least explain to the American people that 
their money is gone to Baghdad, and especially that their money 
is going to Teheran, it is going to Damascus, and that when 10 
years from now, God forbid, millions of Americans are killed by 
an Iranian or Iraqi nuclear weapon, and we hold hearings in 
this room, if it's still here, who financed the Iran or the 
Iraq nuclear bomb, and unfortunately, part of that may be us.
    I'd like your comments. Are we going to continue to do 
business as usual?
    Secretary O'Neill. I must tell you I'm just staggered by 
that representation. It's simply not true.
    Mr. Sherman. The IMF and the World Bank do not make loans?
    Secretary O'Neill. You said the American taxpayers, your 
constituents were sending money. That's just not true.
    Mr. Sherman. No, my constituents, we have capital at risk.
    Secretary O'Neill. I'm sorry, Congressman. I tell you I 
care about these issues really deeply.
    Mr. Sherman. As do I.
    Secretary O'Neill. And I care a lot about what we say to 
the American people out there about what we're doing. We have 
never, ever supported sending the American taxpayers' funds to 
Teheran, or to Damasacus.
    Mr. Sherman. We have allowed our funds to be hijacked by 
others and sent there. It's our money mingled with European 
money that is going to Teheran right now.
    Secretary O'Neill. I'm sorry, that's not true.
    Mr. Sherman. The money isn't being----
    Chairman Oxley. The gentleman's time has expired.
    [The following information was subsequently furnished by 
Secretary O'Neill for the record.]

          Secretary O'Neill was correct in stating that 
        Treasury has never ``supported sending the American 
        taxpayers' funds to Teheran, or to Damascus.'' It is 
        true that the U.S. has not supported World Bank Group 
        projects for Iran and Syria. The following offers 
        greater detail.
          World Bank Group borrowing countries are divided into 
        IBRD-only; therefore, they are ineligible to receive 
        IDA assistance and receive none of the funds the 
        Congress annually appropriates to IDA. To meet its 
        lending requirement, the World Bank uses paid-in 
        capital from its shareholders to raise funds in the 
        market. That borrowed money is lent to countries as 
        ``IBRD loans,'' which they repay with interest and an 
        overhead charge.
          The U.S. has opposed all World Bank Group projects 
        for Iran or Syria, consistent with U.S. law and policy. 
        IBRD lending to Iran resumed im May 2000 with the 
        approval of two IBRD loans to Iran--a $145 million IBRD 
        loan for the Teharan Sewerage Project and an $87 
        million IBRD loan for the Second Primary Health Care 
        and Nutrition Project. The U.S. voted against these 
        projects, but other shareholders voted in favor. There 
        have been no loans to the Syrian Government. It should 
        be noted that Syria has been in arrears to the World 
        Bank since 1986.

    Chairman Oxley. The gentleman from California, Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    First, Mr. Secretary, I want to thank you for coming. I 
know you're very busy. I appreciate your taking the time. I'm 
especially appreciative of the effort that the Administration 
is putting toward establishing partnerships both within and 
without the North American Development Bank, with our good 
friend, Mexico, to the south. The old real estate saying with 
which I'm familiar, is ``you only want to own that which 
touches yours.'' Frankly, dealing with the problems in our 
backyard, are the height of leadership and I want to compliment 
you and your colleagues for doing that.
    I want to go on to another question. We've had a lot of 
conversation today about the highly indebted poor countries. 
There are basically two classes of borrowers at the IMF. 
There's the HIPC countries and there's everybody else. I 
believe in a previous appearance here, you made a very clear 
that people who borrow money should repay it.
    Secretary O'Neill. Right.
    Mr. Ose. Could you give us some sense of the borrowers, for 
instance the large borrowers not in the HIPC group, but 
everybody else and the status on their loans, please?
    Secretary O'Neill. Bill is reminding me there are almost no 
arrears in those that are not in the HIPC countries. You know, 
and I think to your point, we're making real progress on the 
idea that we should expect even very low income countries that 
they should be moving toward investment--grade sovereign debt. 
What that status would provide is a significant cushion against 
bad times in sovereign countries that have investment--grade 
debt. They would have in effect a balance sheet that lets them 
deal with unfortunate circumstance. We're moving in that 
direction. It's part of the reason we've been so forceful in 
saying we don't want to make loans to countries that are 
already saddled with debt that they can't pay because we're 
creating the next HIPC round.
    Mr. Ose. I do think your point is very well made in the 
sense of creating a, if you will, a pit that you both throw 
money into forever. Let me go back to my first comment about 
the relationship with our good friend to the south. Could you 
give us some sense of the partnerships, both private and 
public, that are undertaken to date by the Administration with 
Mexico?
    Secretary O'Neill. I would say we're making wonderful 
progress. Both President Bush and Vincente Fox have worked hard 
at this relationship since the very beginning of the 
Administration. We had a conference about 10 days ago, chaired 
by Deputy Secretary Dam, and we're in the process now of 
pulling together a whole array of ways that we can strengthen 
the relationship between the U.S. and Mexico, and the economic 
integration between the U.S. and Mexico, to the benefit of both 
sides of the border. It's very interesting as we work this 
issue. Maybe one could argue that these should not be new 
discoveries, but to discover the amount of fees paid by people 
who are working on the U.S. side, and have relatives and family 
in Mexico that they're sending money back to. It's surprising 
to learn that often times they're paying 20 or 25 percent fees 
to financial intermediaries to move their money back and forth 
across the border. You know, it just cries out for a solution 
and we're in the process, I think, of making those connections 
that will make a huge difference in the value of funds earned 
in the U.S. and repatriated to families back in Mexico.
    Mr. Ose. If I may make one observation on that particular 
point there have been discussions amongst us, particularly 
between me and the Chairman about trying to craft some 
statutory language that would facilitate the transfer of funds 
back and forth across the border between family members, and I 
look forward to interacting with you on that particular issue.
    Thank you, Mr. Chairman.
    Chairman Oxley. Thank you and thank you for your leadership 
on this issue.
    The gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman. I'd like to 
thank you for the time and I would like to thank Secretary Paul 
O'Neill for his willingness to testify before the Financial 
Services Committee today. I would also like to thank Chairman 
Bereuter for his comments on the International Fund for 
Agricultural Development and its contributions to HIPC.
    To the Secretary. Unfortunately, the HIPC Initiative has 
failed to provide a lasting solution to the problem of poor 
country debts, because the IMF and the World Bank have refused 
to provide their fair share of debt relief. While the U.S. and 
the G7 countries agreed to cancel virtually all of the 
bilateral debts that poor counties owe them, the IMF and the 
World Bank are reducing these countries' debts by less than 
half. At least 18 of the 24 countries that have received debt 
relief are still spending more money on debt payments than they 
are on health care.
    Zambia provides an excellent illustration of why deeper 
debt relief is necessary. Zambia is a deeply impoverished 
country with a per capita income of only $330. The infant 
mortality rate exceeds 1 percent of live births, and 27 percent 
of Zambian children under five are malnourished. Almost 10 
percent of the population is infected with the AIDS virus and 
650,000 children have been orphaned by AIDS. The HIV/AIDS 
epidemic has also ravaged the educational system by causing a 
shortage of trained teachers. Yet, Zambia's debt payments have 
actually increased following the receipt of debt relief. 
Moreover, Zambia still spends more than twice as much money on 
debt payments as it does on health care.
    The President's budget includes a request for $850 million 
to replenish the International Development Association--IDA--
through which the World Bank provides concessional loans to 
poor countries. The Financial Services Committee is expected to 
consider legislation this year to authorize a replenishment of 
IDA. IDA replenishment provides this Committee with an 
excellent opportunity to evaluate the progress of the HIPC 
Initiative and consider legislative language to provide deeper 
and more effective debt relief to impoverished countries.
    Mr. Secretary, are you willing to consider expanding the 
HIPC Initiative to provide deeper debt relief? Do you think 
that the expected replenishment of IDA this year will provide 
an appropriate opportunity to consider additional debt relief 
legislation? How much debt relief do you believe the IMF and 
the World Bank should provide?
    Secretary O'Neill. Well, thank you for your questions. As 
you've indicated, and I think we had a little bit of a 
conversation last year about HIPC, there are still significant 
debt loads in many countries. That's part of the reason the 
President has said that we should not pile more loans on low--
income countries, that we ought to move toward grant funding, 
especially for the lowest of low--income countries. And there's 
still much more to do. I think there's no doubt about that. One 
could think about expansion of HIPC as we see performance under 
the HIPC Initiative. Again, I think I said to you last year, 
one of the concerns I have about what we've done, or what the 
agencies have done, with HIPC is that they have presumed that 
having a forgiveness of certain kinds of loans, that countries 
are then in a financial condition that they can use the money 
that's theoretically freed up in interest payments and 
principle to go do other things of our determination. This is 
of great concern to me because it makes a presumption, I think, 
as you said in your own remarks, which is too often not true. 
The fact that certain debts have been forgiven doesn't mean 
that a country suddenly has a balance sheet that can support 
additional spending. It may not, in fact, be the right thing 
for the people of the country.
    So one of the things that we've worked hard on is to try to 
get not just the Fund and the World Bank, but the so-called 
NGOs, the non-governmental agencies, to take a broader 
perspective on how we all think about what we're doing, so that 
in effect, we're not saying to the president of a country, do 
our bidding and we don't care what your other circumstances 
are. We've forgiven the part of the debt that you owed to us 
and therefore you must do our bidding for something else. I 
think this is a mistaken notion which we've been working hard 
to try to overcome.
    But I think I agree with you, as I said earlier, that we 
should be building a case for more on the back of demonstrated 
performance that shows we know what we're doing, and we know 
what we're doing in a way that shows up in the average income 
levels of the people in these countries, not in some other 
measure that may be satisfying to us, but doesn't do any good 
in terms of the human living standards.
    Ms. Waters. Mr. Chairman, if I could get unanimous consent 
for 30 seconds?
    Chairman Oxley. Without objection.
    Ms. Waters. Thank you. Mr. Secretary, I would like to get 
back to the conversation that we had about technical assistance 
to some identified countries to have some demonstration of how 
we can help countries use some of their resources to deal with 
the problems of poverty. I just asked my staff if we had 
followed up. I think there's a letter in to you about that, and 
I'd like to get on the road in helping to make that initiative 
a possibility.
    Secretary O'Neill. I'd like very much to do that.
    Ms. Waters. Thank you.
    [The prepared statement of Hon. Maxine Waters can be found 
on page 42 in the appendix.]
    Chairman Oxley. The gentlelady's time has expired.
    The gentleman from Columbus, Ohio, Mr. Tiberi.
    Mr. Tiberi. Thank you, thank you, Mr. Chairman. Mr. 
Secretary, with respect to Argentina, I have some constituents 
who are U.S. citizens who are natives of Argentina who work at 
Ohio State University, have expressed a dire concern about 
what's happening in South America and that they believe 
Argentina is a key to stabilizing the entire region. What's 
your view on that theory and how we should proceed to the IMF?
    Secretary O'Neill. Well, I must tell you I've spent a good 
deal of time with the people at the Treasury and the State 
Department, spent a good deal of time being engaged with 
Argentina. In the 13 months that I've been at the Treasury, 
Argentina represents a measurable fraction of what I've spent 
my time on, because we join you in believing Argentina is a 
very important country. It's been a great friend and ally of 
the United States for a long time. About 2 months before we 
arrived, the Clinton Administration before us, had worked with 
the IMF to agree to a program for Argentina that at the time I 
think was judged to be the largest ever including both what the 
IMF was doing and what private resources were doing. As I 
recall, the amount of money that was in the first program, the 
Clinton Administration program, was $43 billion.
    In April all of that was gone, and we worked with the IMF 
and agreed a new program with Argentina that was some $20 
billion. In August, that was all gone. And at the end of 
August, we agreed, quite reluctantly I might say, to one more 
round which encompassed $8 billion. And as you know, it didn't 
save the government of Argentina because they couldn't pay 
their bills.
    It's not for want of trying on the part of the United 
States and the IMF that this failure has occurred. It was a 
long time in the making and there are difficult circumstances 
in Argentina which can only be fixed by the responsible 
officials in the Argentinian government. One of those problems 
is an ability on the part of the provinces, the equivalent of 
our States, to make binding obligations on the national 
government without the national governments having any say--so 
whether that's OK or not. As a consequence, the debt at the 
national level is so large that the revenue system only 
produces maybe 60 percent of the money that's required to pay 
the interest on the debt. This is a problem that can only be 
fixed in Argentina. We've had continuing conversations with 
President Duhalde and with the Finance Minister. I must say I 
am encouraged, that I think they are working in the right 
direction. Floating the peso was a good judgment.
    Today's newspapers report that they think they've fashioned 
a solution to this provincial/national government issue. I 
haven't seen any details yet, but I'm hopeful because it is 
also clear that before more money shows up in the form of IMF 
assistance, the holes in the bottom of the bucket must be 
fixed.
    Mr. Tiberi. Thank you, Mr. Secretary. Just to follow up, a 
number of Latin American countries are in a similar boat to 
Argentina. Ecuador is one that is trying to negotiate with IMF 
right now. Can you update us on that particular negotiation? 
And how does the proposed cut in the Andean Regional Initiative 
impact that negotiation?
    Secretary O'Neill. I'm happy to say--and as I do I knock on 
wood--that because of the way the Argentinian situation has 
been handled, that we've at least accomplished a pushback on 
the notion that existed in Washington a year ago or a year-and-
a-half ago that we and the world were hostages to so-called 
contagion,-- both economic and political contagion,-- and that 
if there was a problem in one country, no matter if it was on 
the other side of the world, that it spelled doom for emerging 
countries and developing countries all over the world.
    You know, I said at the beginning of this Administration I 
thought contagion was a man-made phenomenon and that it was 
possible for us to prove it wasn't necessarily so. We've worked 
hard to do that. And you know, I think as long as we are 
consistent--by we, I mean those of us in the developed world 
whose money is at risk or involved with IMF and the World 
Bank--as long as we are true to principles that we will help 
people with sustainable situations, and we won't bail people 
out who don't have sustainable situations, contagion doesn't 
need to exist in the world.
    Chairman Oxley. The gentleman's time has expired.
    The Chair is pleased to recognize the gentleman from Iowa, 
Mr. Leach.
    Mr. Leach. Thank you, Mr. Chairman. And I know it's been a 
long day for the Secretary. Let me just make a couple of 
comments. One, your statement is unusual in the sense that 
you've talked about many subjects that weren't asked by the 
Committee and I think that's to be very much respected. You've 
gone beyond the Committee request.
    Second, your leadership in terms of the grants issue is 
very impressive, and in terms of the European dissent from our 
position, based upon the lack of support the U.S. may have in 
the future for the international financial institutions, I will 
only say that obviously these institutions are always 
controversial. But I think Congress would be sympathetic to 
Treasury leadership, and that there is clear growing 
understanding in the United States, which will be reflected in 
Congress, of the need to balance the terrorism approach with 
the cause of terrorism remedies.
    And one of the impressive aspects of the creation of the 
World Bank and the IMF was not that they were necessarily 
created after the War, which they were, but the design at 
Bretton Woods was during the War, 1944 and at the same time, 
the United States was enmeshed in War, it was attempting to 
deal with the issue of the causes of war as well as the causes 
of the Great Depression. And these are things that we can't 
skip. I would also say that I'm very appreciative that the 
Treasury has come down in favor of support of the World Bank 
AIDS Trust Fund, and I would only suggest that I think there 
would be more support in Congress for a higher funding level, 
and I hope you keep an open mind to that extent.
    And the big picture is that we lost Americans on 9/11, but 
in Africa every two days more children die of AIDS than were 
killed in 9/11, and if there's an international world 
emergency, it has to be AIDS. And so I really think at this 
time, when we think of the international financial 
institutions, that has to be the forefront.
    Finally let me say with regard to these that, as you know, 
George Soros has come forth with a program involving special 
drawing rights. It's fairly complicated. It may not have 
perfect support in lots of places, but I think it's the type of 
initiative that people ought to keep a little bit of an open 
mind and try to work with and see if there are modifications. 
At least it has some hope for producing more resources on an 
immediate timing basis. So I hope Treasury is not fixed in 
cement completely and totally on that issue.
    Finally, because time is a little problem, I was really 
pleased in your opening statement that you mentioned the tax 
issue and international dimension of the tax issue. This 
Committee, as other committees of the Congress, have looked at 
aspects of Enron and to me, one of the obvious facts is that 
some of the legal aspects of Enron are in some ways deeper and 
more troubling than some of the illegal. And in particular, 
what appears to be a growing tendency of American corporations, 
not just Enron, to seek tax havens for that reason, to avoid 
taxation and to avoid American regulation.
    The United States Treasury has historically been the 
bedrock institution that should lead concerns in this area. So 
I hope that the Treasury has task forces that are looking at 
this issue. I think Congress would be very sympathetic to 
initiatives that look at the tax have issue in as serious a way 
as possible. I don't know if you're prepared to comment on 
that. I hadn't intended to raise it, but you raised it in your 
testimony. Do you wish to comment on that?
    Secretary O'Neill. I'd be very happy to if you'd like.
    Mr. Leach. Please.
    Secretary O'Neill. Let me just say one quick word about 
George Soros and his idea about special drawing rights. I have 
a lot of respect for George Soros. He's someone I've known, and 
I've seen him quite a bit in the last couple of months. I have 
a lot of respect for George because he's spending $750 million 
a year of his own money, not somebody else's money, his own 
money, to work on these issues of economic development. So I 
have a lot of time for him and for his ideas. I must say, and 
I've said this directly to him, I'm concerned about the special 
drawing rights idea, because it's first of all complicated and 
I'm one who believes that as we work on these issues of 
economic development, we should do it in a way that's very 
transparent. If it's our intent to give more resources, I would 
like for us to appropriate the resources and say to the 
American people, we know what we're doing, and here's the 
evidence for what we're doing, and we're not using some clever 
devices to avoid direct engagement with the people, because I 
think this is so important it needs to be a direct 
conversation.
    Now to the issue of so-called tax havens and tax structure. 
All the Members of this Committee are well-schooled in these 
things, and you know these two important things: that every 
aspect of the tax code was voted by the Congress and signed by 
some president. It's also true that there are characteristics 
of the tax code that a well-educated tax lawyer can look at and 
see, under a certain set of circumstances, that a company or a 
whole industry or many companies can reduce their legitimate 
tax bill by applying provisions that are in the tax code. 
There's no doubt about that, we all know that, and we call it 
tax avoidance.
    There are other things that are done that people do that 
are illegal and they're called tax evasion. And in cases where 
people are doing tax evasion, I've got to tell you I am really 
dedicated to the proposition that the IRS and the law 
enforcement organizations of the United States pursue to the 
ends of the earth people who would cheat their fellow citizens 
by not paying their determined tax bill.
    Having said those two things, I would say again what I say 
repeatedly. Our tax code is an abomination. It is just 
unbelievable how complex we have made these issues so that it's 
fairly difficult, I think even for the well-intentioned to 
figure out their tax bill. As I said the other night in a 
speech in Chicago, it's true there are five different 
definitions of a child in the U.S. tax code. You would think it 
would be easy to know whether or not, for taxpaying purposes, 
you have a child in your house. Not so easy. And the most 
complicated definition of a child is the definition having to 
do with the earned income tax credit, which means the lowest 
income people in our country are being asked to figure out the 
most complicated definition of what a child is when they apply 
for their entitlement to the earned income tax credit.
    The Commissioner of Revenue has said to me, if he had to 
make this application, he would need assistance to do it, and I 
give you that individual--what I think is a real hole in the 
way we've got our tax code structured,-- because I think people 
can connect to it. But the same kind of thing exists on the 
corporate side. Unbelievably complicated we made it, and I 
think we need to unmake it. In the next few weeks we at the 
Treasury are going to be presenting to Members of the Congress 
white papers on these subjects about what we can do for tax 
simplification to reduce the possibility that people will have 
the excuse that they didn't understand, so that the law can be 
clear and companies are very clear in what their tax obligation 
is to the rest of the American public.
    Mr. Leach. I appreciate that. My time has expired, but I 
hope that your statement is not implying that the issue of tax 
avoidance isn't serious, and the issue of American corporations 
going offshore to avoid American taxation isn't something the 
Treasury isn't going to be looking at, because I don't think 
you intended to, but when you make this distinction between 
evasion and avoidance, I hope you're not implying that the 
avoidance issue isn't serious too.
    Secretary O'Neill. I think it's a very serious issue and I 
think it's something we should look at together. What I was 
saying was that all of the opportunities for avoidance were 
enacted by the Congress and signed by a president. I'm not 
saying the Executive Branch doesn't have a hand in this. All of 
the opportunities for legal avoidance were enacted by Members 
of the Congress by a majority vote. I would be happy to work 
with you not only to eliminate the opportunities for avoidance 
but to make the tax code understandable.
    Chairman Oxley. The gentleman's time has expired.
    The Chair would say I hope the Ways and Means Committee 
doesn't get a copy of this transcript.
    [Laughter.]
    Chairman Oxley. We could have some problems.
    Mr. Secretary, we appreciate your appearance again, your 
testimony and your insightful answers to a number of questions 
that obviously covered a wide range of issues. The Chair thanks 
you. The Chair notes that some Members may have additional 
questions which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
Members to submit written questions to the Secretary and to 
place his responses in the record, and it's so ordered.
    Mr. Bereuter. Mr. Chairman, I ask that my opening statement 
be made a part of the record.
    Chairman Oxley. Without objection, so ordered.
    And again, Mr. Secretary, with our best wishes, thank you 
for being here. The hearing is now adjourned.
    [Whereupon, at 2:55 p.m., the hearing was adjourned.]
                            A P P E N D I X



                           February 28, 2002
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