JAMES B. BURNHAM
I appreciate the opportunity to appear before you this morning. I commend Congress for taking the initiative to conduct a full-scale review of the role and operations of the various important multilateral financial institutions which have been established over the years. The results of the first phase of that review, the work of Professor Meltzer's International Financial Institution Advisory Commission, is a valuable step on the long road to badly-needed, substantive reform.
I would like to comment briefly on the Commission's development bank-related recommendations, make four suggests for Congressional action, and conclude with an important caveat. I approach these issues with a background of 40 years of service in banking, government, and research. This has included time as a Fulbright student in Brazil, as a Senior Vice President, Global Treasury for Mellon Bank, as U.S. Executive Director at the World Bank and IFC (1982-1985), and as a university teacher, researcher and consultant to business schools in several developing countries.
If we assume that the over-riding U.S. interest in the MDBs is to have them play as effective a role as possible in fostering rising living standards and longevity in the developing world, then the Commission's recommendations deserve the fullest possible measure of Congressional support. Contrary to the steamy, alarmist reaction from some officials of the World Bank, these proposals provide a much better way to alleviate poverty in the developing world than a continuation of policies which owe more to bureaucratic inertia than a clear appreciation of present-day economic realities and understanding of the development process.
In a world where controls on the movement of private capital between nations have largely disappeared, the role of the multilateral development banks (MDBs) needs to be recast if they are to play a useful role in economic development. Rather than having them act chiefly as financial intermediaries - transferring funds from donor governments and global capital markets to developing country governments - the MDBs should concentrate on something even more important, and where they have a distinct competence - intellectual capital and its distribution. They should help answer and inform others about what works and what doesn't work in the long and difficult process of economic development. The development banks should concentrate, as the Commission puts it, on their roles as sources of technical assistance and providers of regional and global public goods, such as the administration of the Consultative Group process, research and treatment of tropical diseases, agricultural research, environmental studies, and the like.
For the very poorest countries without access to the international private markets, capital transfers in the form of grants, rather than loans (but only in the proper policy environment) are probably preferable to loans, using the mechanism suggested by the Commission.
I support the write-off of heavily-indebted countries' MDB debt, but only if the MDBs (and their shareholders, including the U.S.) resist the temptation to return to the policies of the past which led to the present debacle. The most vocal advocates of debt write-offs have disturbingly vague about what policies they would follow after the write-offs are implemented.
I think the Commission's most important MDB recommendation concerns the establishment of a phased-in cutoff limit for bank lending to countries with access to the private markets - indicated by either an investment-grade bond rating, or a per capita income limit of $4,000. The establishment of a rigorous, enforceable "graduation" policy used to be a central objective of the United States government. There is little evidence that this is any longer the case, as indicated by Under Secretary Geithner's April 27 testimony to this subcommittee. I strongly support establishing an intiative of this sort, and the implementation of a process by each MDB to implement it. Indeed, I would consider making appropriations to the MDBs contingent upon their progress in this respect.
I share the Commission's concern at the substantial overlap in coverage between the World Bank and the regional development banks, and the costly duplication and complex coordination problems that arise from this state of affairs. However, given the amount of political and diplomatic effort that would be required to implement the Commission's recommendation (basically, confine World Bank financing operations to Africa and the Middle East), I would not place this very high on my "to do" list.
The core reason for my support of the Commission's proposals arises from my forty years of experience and study that the financial operations of the MDBs tend to displace (directly in some cases, indirectly in many others) other sources of investment financing. These sources can be from abroad or in-country (through the discouragement of domestic private investment, for example).
This "displacement effect" was a major concern of the United States when the World Bank was originally established. While early Bank Presidents and their staffs strenuously sought to guard against the problem, it receives relatively little attention today at either World Bank or most of the regional development banks.
The classic examples were lending for the development of proved oil and gas reserves, which required large amounts of capital but are fully capable of being financed by the private sector - from within their own countries in some cases - if governments permitted the private sector to operate freely. While such loans have diminished markedly in recent years, the problem is inherent in any sizable country lending or investment program (and I include activity by the "private sector" affiliates, such as the IFC) that a MDB group undertakes.
The invitation to come before you requested some suggestions as to what steps Congress could take to ensure that we manage our involvement in the MDBs more effectively and in our national interest. Here are four suggestions:
1. Congress should initiate a dialog with legislators in other major donor countries to encourage their governments to work with us to implement Meltzer Commission proposals. It is extremely difficult for the U.S. acting alone to bring about the desired changes, even if the Treasury Department was moderately sympathetic. At the very least, we need a strong "second" in G-7 and Executive Board meetings. Having interested Senators and Congressman work with their peers in the United Kingdom, Germany and a few other countries could pay big dividends.
2. The leadership of the relevant Congressional authorizing and appropriating subcommittees should insist on early and in-depth discussion with Treasury Department officials when MDB and IMF replenishment negotiations are in prospect. In my experience, the quality of communication between Congress and Treasury in this respect has been erratic, to say the least, and this can limit the effectiveness of our negotiating position.
3. Make appropriations to the MDBs contingent upon their progress with respect to developing and implementing rigorous and enforced "graduation" policies for countries with access to the private capital markets.
4. Take heart - and instruction - from the lesson from the Africa-CBI trade legislation passed by Congress and signed by the President in May. The best international mechanism for development is trade. Voluntary transactions between private parties, in place of taxpayer-supported transfers to governments, are by far the most effective and fairest way to spur development. I note that another opportunity to pursue this approach may arise soon, when Congress considers trade preferences for the Balkans.
Successful passage of the Africa-CBI legislation makes a broader point: there is an emerging consensus that foreign aid is neither necessary nor sufficient to reduce poverty. As the body of research on this issue grows, much of it from the World Bank's staff itself, the credibility of this statement increases, especially for those who haven't read any world economic history prior to 1945.
I began this testimony with the assumption that the over-riding U.S. interest in the MDBs (and the IMF) is the desire to foster rising living standards and longevity in the developing world. In reality, this objective has historically had to share priority with national security and diplomatic objectives. Despite a successful conclusion to the Cold War with Soviet Union, I see little evidence that the Executive Branch is prepared to drop these considerations from our approach to the MDBs and the IMF.
Secretary Summers' testimony last September to the House Banking Committee concerning IMF and World Bank assistance to Russia in 1998 made this quite clear in that particular case.
Under Secretary Geithner's recent testimony before this Committee made the point in much more general but very clear language. He stated:
The world is a complicated place and the sources of crises change all the time. We believe it is necessary to maintain a capacity for policy response in a wide range of circumstances and to deploy the IFIs effectively and flexibly in the face of crises that threaten our interests.
So long as this "honey bucket" approach to the MDBs and the IMF has equal, if not greater standing in our relationships with these institutions, we will continue to be dissatisfied with their effectiveness in raising living standards and longevity in the developing countries of the world.
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