U.S. Department of the Treasury

(Archived Content)

Chairman Kolbe, Ranking Member Lowey, Members of the Committee, thank you for the opportunity to testify before you today about the Bush Administration's FY2002 budget request for Treasury's international programs. I look forward to

working closely with all of you during this Administration to help advance American interests in a growing and stable global economy.

This year's request totals $1.4 billion. It includes $1.2 billion in funding for our annual commitments to the Multilateral Development Banks (MDBs), $224 million toward our commitment to the Heavily Indebted Poor Countries (HIPC) debt relief initiative, and $6 million for international technical assistance programs.

Let me begin by saying that I believe that the World Bank and the other MDBs have an important role to play in increasing productivity and thus improving the standard of living of people around the world.

But I also believe that these institutions can do a much better job than they have done in the past. I want them to be associated with success rather than failure. We who are in leadership positions must look for ways to change these institutions and then make the tough decisions that will bring about the needed changes. This is our fiduciary responsibility to the American people who pay the taxes that go to fund these institutions.

I recognize that reform of these institutions has been a concern of Congress, including members of this Committee, for several years, as reflected in legislation and a number of informative hearings and reports. Thanks to this work, many useful reforms have been proposed and some of these have already been implemented. Nevertheless, I believe that there is still much to do.

There are three components to the FY2002 request of $1.4 billion for Treasury's international programs:

As a consequence of our international negotiations in recent years, U.S. annual commitments to these institutions have been substantially reduced, from $1.9 billion in FY1996 to $1.2 billion in FY2002.

Consistent with the President's overall budget priorities for FY2002, we have confined our request for the MDBs to a level sufficient to cover our scheduled annual commitments. U.S. arrears to the MDBs remain to be addressed at a later time. In order to maintain U.S. leadership and leverage as we pursue our reform agenda in the institutions, it is important that we avoid further accumulation of arrears by meeting fully our annual commitments this year.

Among our requests this year are contributions to the Asian Development Fund and the International Fund for Agricultural Development under replenishment agreements completed last year, for which we are also requesting the necessary congressional authorizations. Replenishment negotiations get underway this year for several institutions, including the International Development Association, which is the largest provider of concessional financing to the poorest countries, the African Development Fund and the Global Environment Facility.

For FY2002 our request for debt reduction programs is $224 million. for a U.S. contribution to the HIPC Trust Fund, the multilateral component of the enhanced HIPC initiative This amount, in combination with $16 million in uncommitted debt account balances if fully applied to the HIPC Trust Fund, will complete the total U.S. commitment of $600 million to the Trust Fund. The Trust Fund helps regional development banks and other multilateral institutions meet the costs of providing debt reduction to heavily indebted poor countries committed to economic, social and governance reforms. Twenty-two countries have begun receiving significant debt relief under this program, and continued U.S. support is essential to assist the poorest countries to achieve economic growth and poverty reduction.

There is no FY2002 request for appropriations for debt relief under the Tropical Forest Conservation Act, but we intend to use $13 million transferred from USAID's Development Assistance account to fund additional activities under the TFCA.

Our request also includes $6 million for Treasury technical assistance programs, which form an important part of our effort to support countries engaged in fundamental reforms. These programs were created in 1990 and 1991 to assist countries in the Former Soviet Union and Central and Eastern Europe.

Beginning in FY1999, a direct Congressional appropriation allowed us to expand the program selectively and effectively. For FY2002, we are requesting funding to support modest current programs in countries in Africa, Asia, Central and South America and to expand into other countries committed to sound economic reform policies.

The World Bank and the other multilateral development banks should have a clear set of objectives. In my view their number one priority should be to raise the standard of living of people throughout the world. History tells us that the driving force behind increases in income per capita is rising productivity-the amount that each worker can produce.

If you look at per capita income in different parts of the world, the disparities between countries are clear - and I can tell you that virtually all of those differences can be explained by differences in productivity. Poor countries are poor-poverty exists-because productivity is low in these countries. I can also tell you, from my own experience in business, that the opportunities for increasing productivity are now greater than at any time in history. The technology and the ideas are there. The challenge is to spread these ideas and to use them.

I believe that the scope of the World Bank's activities is now too diffuse, and this reduces its focus on the core objective of raising income per capita. In the case of each new loan and each new grant we need to ask: how is this decision going to raise income per capita, or raise productivity? Economic research and historical experience tell us that more and better education is an essential ingredient for higher productivity growth. I would like to see the MDBs place greater emphasis on education. President Bush has made education a top priority for the U.S. economy. It should also be a top priority for the world economy.

Productivity can also be increased through more capital and better technology. Entrepreneurial activity in the private sector is what will make these productivity increases happen. Open markets, free trade, low tax rates and sensible regulation - the keys to U.S. growth over the past 20 years - are essential to sparking such entrepreneurial activity and, therefore, productivity. I also believe that greater priority should be given to strengthening the rule of law and promoting good governance. Assessments of borrower fiduciary policies should be central and done prior to the provision of grants or loans. Eliminating corruption should also factor more directly in Bank lending decisions.

In addition to these external policy changes, internal MDB governance should also maximize transparency and ensure compliance with approved policies. We must achieve stronger internal oversight mechanisms to oversee compliance with internal policies and broader information disclosure practices to enhance accountability.

When we recommend that these institutions become more focussed, we must also provide guidance on areas that can be scaled back. I am not of the view that each MDB must be a full-service supermarket for the developing world. Each of them could, for instance, focus its lending and grants on essential development goals. While we will be working to give some direction on this front in the coming months, cultural heritage projects that have a peripheral development impact and large infrastructure projects that could easily attract private finance are some problematic areas that come to mind. We also have questions about MDB involvement in sophisticated electronic information-sharing systems that may duplicate work being undertaken by the private sector and that do not take into account the more basic information and capacity improvement needs of these countries.

I also believe that the MDBs should focus their resources more on countries that do not enjoy access to private finance, recognizing that many other countries' financing needs are more suitably met through the private markets.

I can also see scope for differentiated loan pricing to achieve better prioritization of lending to middle-income countries and better incentives for these countries to rely on private markets. And I think we should be providing more performance-based grants to those poorest and least creditworthy countries committed to sound policies.

We need to know more about what we are getting for the U.S. taxpayers' money. In this respect, I see greater scope for requiring prior actions before loans are made and less scope for increasing the share of budget support operations without evidence that it yields higher development effectiveness and without a clear assessment of its operational and fiduciary risks.

We are in the early days of this new Administration. Reform of the international financial institutions is a key priority. I have given you some of my views, and I look forward to hearing more about yours. I can promise you that we at Treasury will dedicate ourselves to these reform goals.

Because these institutions are international, reforming them means working closely with the other shareholders. I met at the end of last month with colleagues from around the world to review the work of these institutions, and I shared some of my views with them. I also had useful exchanges with other shareholders at the Asian Development Bank's annual meeting in Honolulu last week. I am optimistic that we can work together to make some real changes in the institutions. I ask for your support as we pursue a reform agenda aimed at producing an MDB system that is more effective in achieving results that increase economic growth and improve the everyday lives of people in developing countries.

Thank you very much.