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DepartmentoftheTREASURY TELEPHONE 566-2041  WASHINGTON, D.C. 20220  FOR IMMEDIATE RELEASE EXPECTED AT 1:30 P.M., EST MARCH 26, 1980  STATEMENT OF THE HONORABLE G. WILLIAM MILLER SECRETARY OF THE TREASURY BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS AND RELATED PROGRAMS COMMITTEE ON APPROPRIATIONS HOUSE OF REPRESENTATIVES I.  INTRODUCTION  I am pleased to be here today to endorse legislation  providing for the maintenance of the U.S. share of Inter­ national Monetary Fund quotas and the Administration’s Fiscal Year 1981 appropriations request for the multi­  lateral development banks (MDBs).  We meet in the context of  a difficult international situation which is characterized by greater tension — in both the strategic and economic  spheres — than has been the case in recent history. The tension affecting our strategic interests is most  clearly linked to events in Southwest Asia.  The unrest  in Iran and the Soviet aggression in Afghanistan have  heightened awareness throughout the world of the vulner­ ability of the world's major oil-producing region to both  internal instability and external aggression.  M-393   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  These  - 2 ~ '5  ..  ‘ *. ■  •’  ’  ‘•  /  • 7  j *  .  ’  » 4 • *1 ?  », ' •„  developments clearly threaten our' national interests, and we have set in motion a comprehensive program of action to  reinforce the U.S. political and military position in the  region and elsewhere. The economic tension stems from the somber global  economic outlook.  Much of the 1970's was characterized by high  inflation, soaring energy costs, low growth rates, and unprece­  dented imbalances in external payments.  Largely as a result  of various cooperative efforts, the international community weathered the economic turbulence reasonably well.  Nevertheless,  adverse oil market developments have again radically affected  economic prospects.  Many economic problems are not only  likely to persist for the foreseeable future but may well intensify.  The re-emergence of a large current account surplus  in the OPEC countries — projected at about $120 billion for 1980 — and the inevitable generation of a corresponding deficit  in non-OPEC countries will make serious balance of payments  pressures inevitable for a growing number of countries. Events in the Middle East have driven home dramatically  the linkages between foreign policy and economics.  Political  and military concerns cannot be addressed in isolation from the realities of the world economy, and conversely all basic economic issues have a large political element.  We can be  successful in the pursuit of our broad global objectives   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3  only if we deal with both the strategic and economic crises  which we face, and the inter-relationships between them. The Administration response to the increased tensions in  both the strategic and economic arenas has relied heavily  on the international institutional framework which has evolved  since World War II.  This framework was designed under U.S.  leadership to provide a system whereby all countries, large and small, could turn to seek cooperative solutions to their  fundamental concerns.  In the foreign policy area, the  United States has recently turned to NATO, the United Nations, and the World Court.  Economically, we rely heavily on the  institutions which are the subject of today’s hearings.  The International Monetary Fund (IMF) and the multilateral development banks (MDBs) are the front lines of defense for the  world economy.  During the 1970's, they were pivotal factors which  both facilitated needed economic adjustments and helped sustain  growth.  the IMF through its surveillance and oversight activities  and also through its expanded and liberalized financing facilities,  and the MDBs through their increasingly important role in Third  World development. The distinct but complementary operations of these institu­  tions serve U.S. interests greatly.  They will be invaluable  assets in facing the growing economic and financial problems of the new decade.  The uncertain world economic environment  which the Soviet Union will seek to exploit — makes it   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 all the more important for the United States to assure that the IMF and the MDBs can respond effectively to the needs  of their members.  In the economic arena, as in the international  political and military spheres, the United States cannot maintain an effective leadership role -- and assure our national security  _  unless we are willing to provide resources adequate to  the dangers confronted. The Administration's requests for both the International  Monetary Fund and the multilateral development banks are designed  to do that.  I am submitting for the record a detailed background  paper which deals fully with the Administration's request and  provides specific material on the operations of the Fund and the  banks.  In today's testimony I want to emphasize my conviction that it is absolutely crucial for the United States to  continue its strong support for these institutions.  They  are valuable examples of successful international cooperation.  More importantly they are directly supportive of vital long-term  U.S.  foreign policy interests.  Now is not the time to undermine  our influence in these institutions or reduce the constructive  role they play in global economic developments.  too high.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The stakes are  5 II.  THE INTERNATIONAL MONETARY FUND The purpose of the IMF is the maintenance of a strong  and orderly international monetary system.  aid.  It is not commodity financing.  It is not foreign  It is not like any other  institution in which our country participates. The IMF has two basic functions, and they are closely  related.  The first is general guidance over the operation  and evolution of the international monetary system.  The  second is provision of temporary financing in support of adjustment programs by IMF members facing balance of payments  problems. In its first function, the Fund has been given important  new powers of surveillance over exchange rates and the balance  of payments adjustment process.  The IMF membership has also  established the objective of making the Special Drawing Right  the principal reserve asset in the system, in order to avoid the instabilities inherent in a system based on a multiplicity of  national currencies. These changes have paralleled and to a large extent  reflected changes in the position and role of the dollar in the system.  The original Bretton Woods arrangements  assumed a fixed and central role for the dollar with the  U.S. position essentially passive and the product of other countries’ actions in pursuing their own balance of payments policies and objectives.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  That arrangement ultimately became  6  both unsustainable and intolerable in terms of U.S. economic interests.  The new arrangements have provided much more scope  for balance of payments adjustment by the United States and  recognize the need for greater symmetry in encouraging adjust­  ment by all nations — those in surplus as well as those in  deficit. At the same time, the world's reserve system has been  undergoing significant change.  Increases in the relative  economic size and financial capacity of other major countries have tended to bring some growing use of their currencies in  international transactions and reserves.  On the one hand,  such a development could help to mitigate some of the burdens on the dollar and U.S. financial markets that arose from its  extremely large international role.  On the other hand, the  process of change can itself be unsettling and disruptive,  and there is a widespread view that increasing reliance on the SDR — an internationally created and managed reserve  instrument — would be preferable to development of a fullscale multiple currency reserve system.  The IMF over the  past few years has taken a number of important steps to promote  the role of the SDR and is presently considering a potentially significant further step in its examination of the substitution  account. The dollar nonetheless remains critically important to  the operation of the international monetary system, and the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7  U.S. economy remains a powerful element of that system.  This will continue to be the case, and we recognize and accept the responsibilities incumbent on the United States to maintain a sound economic position and a stable dollar.  At the same time, a strong IMF — able to encourage effective  economic and balance of payments adjustment by all countries  and able to guide the orderly evolution of the resersve system — is of direct and immediate importance to our  economy and to our efforts to maintain the integrity and strength of the dollar. The IMF's second main function, balance of payments  financing for its members, is closely linked to its broader role in guiding the overall balance of payments adjustment The aim is to encourage timely adjustment by individual  process.  countries through policies that disrupt national or international prosperity as little as possible. This objective is in the interest of every country and  every IMF member is obligated to support it in concrete, financial terms.  This is a critically important point to bear in mind.  The IMF is a revolving fund of currencies, provided by every member.  Every member must allow its currency to be used by  the IMF, and every member in turn has a right to draw on the IMF's currency pool when in balance of payments need. When a country's currency is used by the IMF, that country receives an automatically available claim on the IMF, which it can use  to get needed foreign exchange if it runs into trouble.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  8 Financing flows back and forth through the IMF depending  on balance of payments developments. of lenders or borrowers.  There is no set group  Many IMF members, both developed and  developing, have been on both sides of the financing and drawing ledger, providing their currency at times and drawing other cur­  rencies at other times. In fact, while the U.S. quota subscription has been drawn upon many times over the years, our own drawings of $7.3 billion on the IMF are the second largest of the entire  membership.  As a net result of all IMF transactions in dollars  over the years — dollar drawings and repayments by others, and U.S. drawings — the IMF's holdings of dollars currently  exceed the U.S. currency subscription to Fund resources.  Consequently, there has been no net use of the U.S. currency subscription by the Fund over its 35 year history. Quotas are absolutely central in the IMF.  IMF's permanent resources. can draw.  They are the  They determine the amounts countries  They determine the distribution of SDR allocations.  They determine voting power.  Because of these important advantages,  the competition is always for increases in shares — not for  reduction, as is the case in many other institutions. IMF quotas are reviewed periodically and have been increased four times in the IMF's history in response to  growth in the world economy and international trade and finance.  These increases have been needed to keep the Fund's financing capability in some reasonable relation to demands that may arise.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9  The proposal for this quota increase resulted from a review that began in 1977.  Quotas had fallen to an unrealis­  tically low level, about 4 percent of world trade compared to 12 percent earlier, during a period of massive expansion  of payments imbalances and international financing needs. The recognition that an increase was necessary came early  in the review — even though a long period of negotiation was  required to reach agreement on the precise amount and shares. The 50 percent increase ultimately agreed in December 1978  — raising total quotas from about SDR 39 billion to SDR 58 billion — will barely halt the decline in the relative size of the IMF over the next five years.  a larger increase.  Many countries pressed hard for  The quota increase proposed for the United  States is 50 percent, amounting to SDR 4,202.5 million or about $5.3 billion at current exchange rates, and will raise our quota from SDR 8,405 million to SDR 12,607.5.  quota share intact at 21.5 percent.  This maintains the U.S.  Given the continuing large  role of the U.S. economy and the dollar in the international  monetary system, maintenance of an appropriate U.S. share and influence over decisions on the international monetary  system is particularly important.  An increased U.S. quota  will augment the foreign exchange resources available to us  should we need them for balance of payments purposes.  Without  the proposed increase in the U.S. quota, our veto power over  major IMF decisions affecting the operations of the entire system could be jeopardized.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  10  Developments since completion of the quota review and the IMF Governors' resolution formally proposing the increase have  only strengthened the need. We are now faced with the consequence of another round of huge oil price increases and with events in Iran and  Afghanistan that greatly heighten the level of world concern and tension.  These developments make it absolutely essential  that we have in place the institutional framework for assuring  monetary stability and providing advice and support to countries as they contend with radically altered economic prospects.  Both financing and economic adjustment are going to be more difficult in this environment.  The private financial  markets will have to meet the bulk of expanded international financing needs — no other source is available — and development  aid must continue to increase.  But some countries will run  into growing financing difficulties and pressures to bring their external balances into line with sustainable flows of financing.  Without adequate financing, the efforts of deficit countries  to adjust would necessitate curtailing economic growth so abruptly that it would cause severe human hardships and could well jeopar­  dize the political stability of a number of countries.  Countries  could also be forced to adopt restrictive trade policies in an attempt to ration the foreign exchange available to them, or to resort to aggressive exchange rate behavior.  In today's interde­  pendent world, the adoption of such policies — particularly   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11  because it could lead to retaliatory policies or emulation by other  countries — could have disastrous worldwide repercussions and would be reminiscent of the self-defeating economic policies followed in the 1930’s. The task of assuring a strong and stable international  monetary system in the circumstances of the 1980's will be formidable.  We cannot predict the amount of IMF financing that  will be needed.  No one can.  But we can foresee very tangible  dangers to the system and to ourselves if the Fund's resources  prove to be insufficient when they are called on.  It is  therefore critical that IMF operations in this period of stress  be buttressed by prompt Congressional approval of the proposed quota increase.  In so strengthening the base of the international  monetary system, the United States will not only be contributing enormously to an international environment conducive to effective  foreign policy but will also be strengthening a source of balance  of payments financing on which it has drawn many times itself. Before concluding this discussion of the IMF, I would like  to note that the Supplementary Financing Facility, for which U.S. participation was approved by the Congress late in 1978,  has proved to be an extremely important temporary reinforcement of IMF resources during a period of growing financial strain. The Facility began operation in early 1979 on the basis of  financial commitments amounting to about SDR 7.8 billion.  OPEC  is providing over 40 percent the total with Saudi Arabia the  largest single participant.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  To date, the facility has been  12  used in conjunction with IMF programs totaling $3.0 billion and is assisting a wide variety of countries of special  interest to the U.S. — including Turkey, Jamaica, Peru, Korea,  the Philippines and Sudan — in dealing with severe payments difficulties.  A number of countries are now discussing with  the IMF programs under the Facility, and total use before the Facility expires (scheduled for early 1981 or 1982) should  be substantial.  This Facility, designed as a temporary  bridge to the quota increase now in process,  is a timely and  valuable source of support for the Fund's operations in this period, and Congressional approval for it has proven to be  extremely wise. Finally, let me mention the question of the budget and  appropriations treatment of this quota increase.  The President s  budget proposes that a program ceiling on the increase be provided in an appropriations act.  We have been consulting closely on  this question with interested committees, and it appears that considerable interest is developing in an alternative approach  which would involve the following:   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Appropriations would be required in the full amount of the increase, and that sum would be included in  budget authority totals for fiscal year 1981.  Payment of the quota increase would result in budgetary  outlays as cash transfers are actually made to the IMF on the U.S. quota obligation.  13  —  Simultaneously with any cash transfer, an offsetting  budgetary receipt representing an increase in the U.S. reserve position in the IMF would be recorded. —  As a consequence of these offsetting transactions, transfers to and from the IMF under the quota obliga­  tions would not result in net outlays or receipts. Net outlays or receipts resulting from exchange rate  fluctuations in the dollar value of the SDR-denominated U.S. reserve position in the Fund would be reflected  in the Federal budget.  These net changes cannot be  projected and thus would be recorded only in actual budget results for the prior year.  We are continuing consultations on this matter.  The  point I would stress today is that under either the program ceiling contained in the President’s budget or this alternative  approach, U.S. payments on its quota subscription would not  affect net budget outlays or, therefore, the Federal budget  deficit.  Also under either approach, it is important that the appropriations action be denominated in SDR although I know  this is a departure from normal practice.  This is because our  IMF quota — and those of all other countries — is denominated in SDR, the IMF's unit of account.  We negotiated hard to main­  tain our quota share and influence over IMF decisions.  There were  many who sought increases in their own shares at our expense.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  We  14 should not allow a cut through inadvertence, which could happen  if the appropriation number were expressed in dollars and the  dollar depreciated in terms of the SDR prior to implementation of the quota increase.  An SDR denomination of the appropriation  figure — SDR 4,202.5 million — will protect us against that danger   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  15 HI.  THE MULTILATERAL DEVELOPMENT BANKS The United States has an important responsibility in  working to establish and maintain an international economic  environment which furthers the process of equitable economic growth in the developing countries.  This reflects the realities  of economic interdependence, in which the prosperity of each  nation depends upon the well-being of others.  The non-oil  developing countries have, for example, become the largest single market for U.S. exports.  In addition the countries  of the developing world are an increasingly important factor  in protecting U.S. security and other foreign policy interests.  It is a simple truism to recognize that the prospects for developing country support on global issues of importance to the United States will be enhanced by U.S. cooperation on issues  of keen interest to them.  In the case of most of the third world  countries, the fundamental concern is development.  Poverty exists on a large and pervasive scale in developing countries throughout the world.  There are large gaps between  developed and developing countries in terms of living conditions and the quality of life; in health and nutrition, literacy and  education, life expectancy, and in the overall physical and  social environment.  The natural growth of population and the  process of industrialization have compounded already immense problems of unemployment and underemployment and fueled a rapid  increase in the size of urban populations most of which are   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  16  without access to rudimentary health and sanitation services. In addition to new problems generated by this rapid urban growth,  the primary concerns in low income countries — with  large numbers of rural poor and heavy reliance on agriculture — remain with the requirements of the rural economy and the need  to improve production of the small farmer. The multilateral development banks (MDBs) are at the heart  of international efforts to address these development concerns. They are unique institutions by which the United States can work cooperatively with developing countries in support of their aspirations for economic and social progress. The banks have proven themselves to be effective instruments  for promoting growth with equity.  Last year they made loan  commitments totaling nearly $14 billion which helped to finance  425 projects in 90 developing countries. years,  During the past five  IBRD/IDA activities have provided the base for producing  one third of all increased fertilizer production in the developing countries for the first half of the 1980s, one fifth of the total investment in rural road networks in developing countries,  and one quarter of total public investment in developing country irrigation systems.  Furthermore, 358 IBRD/IDA agricultural  projects over these past five years have had the rural poor as their principal beneficiaries, and an estimated 60 million  of the 100 million direct beneficiaries of these projects had  incomes below the absolute poverty levels in their respective  countries.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  17 The banks now account for between 10 and 15 percent of the  total external resources moving to the developing world.  This  proportion is much higher for the poorer countries which do not  have access to the international capital markets.  Important as this transfer of resource function is for the MDBs, a far more important contribution to development lies in the way their projects have become the principal catalyst for  growth and contributed to rational sector and macro-economic  policies in developing countries.  In this regard, they have  organized increasing amounts of co-financing from private as well as from other public sources. The MDBs also have a key role in the transfer of  technology and in providing sound advice on economic policy associated with their lending activity.  This contribution  to "institution building" and "human capital formation" permeates the process of project implementation and is perhaps the greatest contribution made by the banks to the long-term  economic prospects of the developing countries.  It is the combination of project financer,  financial  catalyst, and institution builder which makes the MDBs such  unique and important agents in the development process. Throughout the history of bank operations, the United  States has supported and encouraged those adaptations in bank operations which we believed would further increase the  effectiveness of bank lending.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Among the more important results  f’.V  <ih  ‘ "*’7^ - 18 -  of past U.S.  initiatives are tie s.iift in the sectoral composi  tion of MDB lending to those sectors — such as agriculture and rural development — where project benefits accrue more  directly to the poor, the use of the MDBs' considerable aid leverage to promote policy changes in the borrowing countries  which favor the poor, and the recently emphasized stepped-up  MDB lending to increase developing country energy supplies. Reaching the Poor To more effectively reach the poor, all the MDBs are  engaged in modifying their organizational structures  and their project identification and appraisal procedures. The World Bank has established a Rural Operations  Review and Support Unit (RORSU) and an Urban Operations Review and Support Unit (UORSU) to develop poverty impact  methodology and to monitor and evaluate poverty-lending projects in their beginning, intermediate, and final stages. Ninety percent of the World Bank's rural development projects  have had provisions for monitoring and evaluation units. These units assist in the identification of the project's  beneficiaries,  insure during the project implementation  stage that the benefits are actually going where intended, and,  finally, evaluate the impact of the project in terms  of what changes were made in the lot of the poor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  19 The Inter-American Development Bank has designated a  specific unit within the Bank's organizational structure to define low income groups and to monitor the bank's  progress in reaching its current replenishment (1979-1982) goal to provide 50 percent of total lending to low income In addition, the Asian Development Bank is under­  groups.  taking a major expansion of its Post Evaluation Unit to  facilitate its greater attention to data collection and  benefit monitoring. Capital Saving Technology  The United States has also been successful in seeking policy decisions through which the MDBs will place increased emphasis on the use of capital saving technologies  in their projects.  Since these technologies involve the  productive and often innovative use of small-scale and labor-intensive processes, techniques, equipment, and tools  which are less complex and costly than those usually employed  by more developed countries, their application generally  will:  (1) create employment opportunities,  increase productivity,  and raise the incomes of poor people at lower per capita costs;  (2) ensure that the greatest number of people benefit  from development projects; and (3) promote the most efficient  use of scarce resources within developing countries in accordance  with relative factor endowments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  'sfc  »  20  By strengthening their project appraisal activities  at the preinvestment stage, the MDBs have enhanced their ability to select projects which incorporate techniques most appropriate to the circumstances and requirements of  the borrowing countries.  This has resulted in increased  utilization of capital saving technology in individual bank projects.  Most recently, capital saving technology --  in addition to continuing its important role in civil works  construction projects — has become an integral element in MDBfinanced renewable energy and urban and rural development projects. Economic Benefits of U.S. MDB Membership  As the Administration's chief fiscal officer, I am committed to budget restraint.  At the same time,  for the  reasons I have outlined, the United States must maintain a reasonable program of foreign assistance.  The multilateral  development banks reconcile these needs. First, other members contribute $3 for every $1 contri­ buted by the United States. Second, supported by callable  capital, the banks finance the bulk of their lending program  through borrowings in the private capital markets.  The result  is that U.S. budget expenditures are multiplied many times over in actual MDB lending.  For every dollar the United States  has paid into the World Bank over the past 35 years,  for example  the Bank has lent over $50 (at no net cost to the U.S. taxpayer,  because increased federal tax receipts from IBRD activities,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  21  i.e. procurement, administrative expenses, and net interest, have been more than double U.S. paid-in contributions to the  bank).  Our development assistance gets maximum leverage when  channeled through the MDBs. In addition, U.S. producers and consulting firms have  received the largest share of MDB-financed procurement contracts. This has led to a significantly beneficial impact on U.S. employment and GNP.  For every dollar we have paid into the  MDBs for the years 1977 and 1978, the U.S. economy has grown  by an average of $3. Over the life of the institutions, they have contributed a net surplus of $11 billion to our current account.  The cooperation among countries within the MDBs contributes significantly to the substance as well as the atmosphere of U.S. ties with developing countries.  U.S. participation in the  banks also reflects a successful partnership with Europe,  Japan, and Canada — with whom we work closely on MDB financing arrangements.  Any significant slackening of traditional  U.S. support for the MDBs would both seriously jeopardize  our relations with the developing world and weaken the confidence of our allies in U.S. ability to play a cooperative role  across a broad range of international activities.  Undermining  such a pillar of the international institutional framework  would also make it much more difficult for us to get the  support of the developing countries for our positions in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  22  other international bodies on issues of central concern to  our own national interests. The FY 1981 Appropriations Request and Callable Capital For FY 1981, the Administration has requested total budget  authority of $1,666 million for U.S. subscriptions and contri­  butions to the MDBs.  In addition, because of the shortfall  in actual appropriations for FY 1980 from what had to be  assumed when the FY 1981 budget was prepared, we will be submitting budget amendments which will increase this amount  modestly.  The outlay effect of the request will be spread  over time and, thus, will have only a minimal impact on this  year's or next year's budget. The amount of the FY 1981 request is much lower than that  for last year.  This is principally because we are seeking  a program ceiling rather than budget authority for the callable  portions of our capital subscriptions to the banks.  The "callable capital" concept is one of the most attractive features of the multilateral development banks and results in considerable budgetary savings for the U.S. Government.  With  callable capital as backing, the MDBs are able to borrow most  of the non-concessional funds they require in international capital markets.  The cost to the U.S. Government of subscrip­  tions to callable capital is solely contingent in nature, since callable capital can only be used to meet obligations of the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  23  MDBs for funds borrowed or guaranteed by them in the unlikely event that the banks' other resources are insufficient to meet  those liabilities. The risk of a "call" is virtually nil.  The loan port­  folios of the MDBs are distributed broadly, and major defaults are almost inconceivable.  In the more than thirty year history  of the World Bank, there has never been a loan default. Similarly there has never been a default at the Asian Development  Bank (ADB).  At the Inter-American Development Bank two very  small loans were defaulted in the 1960’s, but this was before  institution of the policy that all loans have the recipient country's government guarantee for loan repayment.  (One  of the IDB loans was fully recovered and the loss on the  other was $1.8 million.)  Even if a number of their largest borrowers were to default, the MDBs have considerable financial assets upon which they  could draw.  The first line of defense of the MDBs is their  paid-in capital and accumulated reserves, which total over  $6.0 billion at the World Bank, over $1.9 billion at the IDB,  and $1.5 billion at the ADB.  Moreover, prior U.S. subscriptions  to MDB callable totaling $11.5 billion have already been funded  by the Congress against the potential U.S. liabilities  and other donor countries have committed themselves to much larger amounts. It is therefore virtually certain  that there will not be budget outlays resulting from the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  24  callable subscriptions proposed in the legislation before the Committee.  Unlike other donor countries, however, the United States  in its budgetary procedures has heretofore treated callable capital subscriptions as though they would have an outlay impact. The issue of changing the appropriations and budgetary  treatment of callable capital has been under serious consideration  for over a year both within the Administration and between the Administration and Congress. The Administration has concluded  that appropriation for the full amount of callable capital, and the resulting scoring of the appropriated amounts as budget authority, distort the true size of the request for the MDBs and is not consistent with the treatment of other contingent  obligations of the United States Government. The Administration therefore proposes enactment of program  limitations in the FY 1981 Foreign Assistance Appropriations Act for U.S. subscriptions to callable capital instead of actual  appropriation and budgetary authority.  We have also submitted  proposed changes in the authorizing legislation which will enable us to make the subscriptions after program limitations are enacted  Full Congressional control over callable capital subscriptions is  retained both by the program'1 imitations and because subscriptions to callable capital and paid-in — which must be appropriated in  full — must be made in specified proportions.  The General  Counsel of the Treasury Department issued opinions in 1975   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  25  and 1979 that appropriations are not legally required to back  subscriptions to callable capital unless and until payment is required of the United States on a call made by an institution The Sixth Replenishment for the IDA (IDA VI)  The background paper submitted for the record details the specifics of the Administration's full appropriations request. I would like to highlight two of the larger components of the request: the sixth replenishment for the IDA and our remaining  subscription to the Special Capital Increase of the World Bank itself. The United States has important reasons for continuing  to support IDA.  We have a strong tradition of international  leadership in mobilizing the international community to give  special attention and effort to those most in need of help, and that is IDA'S reason for existence.  In this context,  IDA has an excellent track record as an effective instrument  for reaching the poor, providing job opportunities, and helping to meet basic human needs.  IDA is, in effect, the centerpiece of U.S. North/South strategy, and the symbol of our commitment to Third World Development.  It serves to undermine those in the developing  world who favor confrontation with the United States, to  bolster U.S. economic and political interests in North/  South fora, and to improve prospects for multilateral cooperation on issues of primary importance to the United   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  26 States.  At a time when global economic difficulties have  exposed a large number of the world's poorest countries  to serious threats of political, economic, and social  instability, IDA operations make an invaluable contribution  to our national security and other U.S. foreign policy obj ectives. The extremely somber economic prospects for the low-income countries underscores the importance of IDA'S development  role in the 1980's.  IDA is the world's largest source of  concessional resources.  It is particularly important to  Black Africa, providing valuable assistance to such key  countries as Kenya, Somalia, and Sudan. are also important IDA borrowers.  Egypt and Pakistan  IDA will be crucial in  determining whether per capita food production in the poorest countries will increase and whether real progress is made in alleviating world hunger.  It will also depend largely on  IDA resources — utilized within broad-based development strategies — whether these countries will be able to improve education, health, sanitation and housing standards and  produce material improvements in the lives of the poor  throughout the 1980's. IDA expresses the determination of the more advanced  countries to reduce, albeit slowly, the problems of absolute poverty in the poorer nations of the world.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The 54 IDA  27  borrowers account for approximately 31 percent of the world's population but only about 3 percent of the global gross  national product.  Approximately 90 percent of IDA'S funds  go to countries whose per capita income is below $300 per year (1977 dollars).  Lending is concentrated on those sectors  which promise to improve most directly the lives of  the very poor. With few exceptions, IDA recipient countries lack the  Physical and human resources to adapt quickly to the problems confronting the global economy. rated.  Their terms of trade have deterio­  They have not been able to attract sufficient capital to  maintain imports and thus sustain even their already low growth  rates.  Since 1974, the real value of their imports has declined.  As a result, most of the poorest countries achieved per capita growth of only around 1 percent per annum during the 1970's.  Even with a major effort by the poorest countries themselves,  additional concessional resources are required to achieve both higher rates of growth and greater progress in poverty allevia­  tion.  More than one-third of the total population of the developing  world — 800 million people — still subsist in conditions of absolute poverty. After eighteen months of negotiation, donor countries  reached agreement last December on a $12 billion IDA VI to  permit continued IDA lending for the three year period   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  28  beyond June 1980.  Relative to donors' gross domestic products,  the size of the replenishment remains at roughly the ratio  of IDA V and will thus permit a modest annual growth in IDA  lending. The United States joined other donors in supporting this  replenishment — noting, however, that our support was contingent  on the enactment of necessary authorization and appropriations legislation.  The United States insisted on a sharp reduction  in the U.S. share.  After lengthy negotiation, we achieved a  reduction in our share from 31 percent in IDA V to 27 percent in IDA VI.  This decline continues the downward trend in the U.S.  share of IDA from its initial level of 42 percent and was accom­  panied by a substantial increase in the shares of Germany (from 10.9% to 12.5%) and Japan (from 10.3% to 14.65%).  The reduction  of four percentage points in the U.S. share constitutes a very significant improvement in the distribution of responsibility for providing funds for IDA, saving us $480 million over the life of the agreement.  A U.S. share of 27 percent of a $12 billion IDA VI replen­ ishment results in an average annual U.S. contribution of  $1,080 million.  This represents virtually no increase in real  terms in U.S. funding for IDA — its annual lending rises by a modest amount, but our share declines by 4 percent.  All real  growth in IDA lending will be financed by other donors.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  29 World Bank Selective Capital In 1977, Congress authorized United States participation  in a Selective Capital Increase (SCI) for the IBRD.  The  United States has been behind in its scheduled SCI payments  since the first installment, however, even though 90 percent of our subscription represents callable capital and thus no budget outlays.  Reluctance to meet our full SCI subscriptions is ironic because the Bank's great success is to a large extent due to  the leadership the United States has provided in it since its creation in 1946.  The shortfall in U.S. funding is particu  larly inopportune now that the Bank, at U.S. initiative, has mounted a major program to increase world energy supplies. The World Bank's energy program will grow to at least 15  percent of total Bank lending within five years.  It will  amount to $7.7 billion over the period as part of projects totaling about $30 billion for the exploration, production,  and development of oil, gas, and coal, and for the construction  of new hydroelectric facilities.  In operation, these Bank  projects will produce additional primary energy estimated at 2-2.5 million barrels of oil a day, thus reducing by  that amount potential world demand for OPEC oil.  A U.S. failure to complete our SCI subscription could lead other members to insist on a significant cutback in the Bank's  annual lending program because doubts would be generated about   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  30 U.S. support for Bank lending throughout the 1980's. Such * Si a cut-back in the lending program would be disastrous for our relations with the developing world, underminina Bank  programs in countries and regions of particular concern to the United States (e.g. Egypt, Turkey, the Caribbean, and  Central America) and heightening international monetary  problems by increasing demand on private capital markets. Subscription of the full SCI amount is also essential to maintain United States voting strength above 20 percent  and thus protect the U.S. veto in the Eank.  The veto ensures  that no changes are made in the Charter which would have a detrimental impact on U.S. interests. The African Development Eank  The U.S. subscription to the African Development Eank (AFDB)  is an important new component of the FY 81 appropriations  request.  Subject to receiving authorization fcr U.S. membership  in the bank, an initial appropriation of $18 million is being  sought. Membership in che AFDE to date has been restricted to African nations.  The limited resources of the African members have,  however, severely restricted the Bank's access to the private  capital markets and its lending program.  As a result, in May  1S7S, the Governors of the Bank agreed, subject to necessary ratification by member governments, to invite nonregional countries to join their institution.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The proposed U.S. subscription would  31. represent 5.66 percent of the AFDB's total capital and 17.04 percent  of the non-regional subscription.  The United States will  therefore have its own Executive Director on the Board of the Bank. The United States has direct economic, humanitarian, and  political interests in assuring a strong ar.d viable Africa where poverty is reduced, the pace of economic growth accelerated,  and serious financial problems avoided.  While a wide range of  U.S. political and economic policies already contribute toward these objectives, our membership in the AFDB, the most prominent pan-African development institution, would help strengthen our ties with African nations and meet our growing interests in the region. Other Regional MDBs  The remainder of the Administration's request is for appro­  priations for capital subscriptions and contributions for the Inter American Eank (IBB), the Asian Development Eank (ADD)  and Fund (ADF), and the African Development Fund (AFDF):   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  $51.6 million in paid-in capital for the IDB and  $318 million for the Fund for Special Operations, the IDB's concessional lending window;  $25.2 million in paid-in capital for the ADD and $111.2 million for the ADF, the Eank's  concessional window; and $41.7 million for the AFDF, which provides conces­ sional financing for Africa's poorest countries.  32  As noted above, most of these numbers will have to be  supplemented by budget amendments to reflect the shortfall in actual FY 1980 appropriations. These regional institutions were established to complement  the activities of the World Bank Group and increase the direct involvement of the recipient countries in the development process They, now provide a central element in the development strategies  of many friendly nations and are unique positioned to bring to bear a special regional expertise to local problems.  The  regional MDBs also facilitate the mobilization of additional  resources from the developing countries themselves.  The Decision-Making Process I recognize that one of the major concerns regarding the MDBs is whether the United States has adequate influence to promote its interests effectively through such multilateral institutions.  The formulation of MDB policy and the extent  of influence exercised by the United States in their decision­ making involve both a formal and informal process.  The MDBs are like any other bank, or, indeed, any other  corporate entity.  They are controlled by a board  in their  case, of member country Governors and, through them, their  appointed Executive Directors.  Management is hired by the  national representatives of the member countries to carry out the day-to-day functions of the banks within the policy  framework set for the banks by the member governments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  33  management of the banks executes that policy under the general guidance of the Boards of Executive Directors. Their task  is facilitated greatly by the fact that there exists among bank members a broad consensus on both the aims and the  most effective usage of development lendinq. In practice, influence also is manifest in a variety of informal ways — official and unofficial meetings of  national officials at the bilateral and multilateral level;  informal discussions among the Covernors at the annual meetings; informal meetings preceding and during the perioaic replenishment negotiations; and countless exchanges between bank officials and national representatives at all  stages of the formulation and implementation of the banks' lending programs.  Subtly, and often imperceptibly, a  country's interests are advanced in such ways, and these interests become woven into the fabric of MDB activities. The cardinal test of U.S. influence is of course not procedure but substance — whether the institutions  have consistently pursued policies which promote the national  interests of the United States.  In my judgment, they clearly  have done so and continue to do so.  We have only to consider  MDB lending programs in agriculture aimed at increasing  production and providing employment, and now more effectively  concentrated on reaching the poorest rural inhabitants.  The  expansion of developing country energy supplies is a second   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  34 priority that the MDBs are employing which is also very  much in our interests.  The facts are that the United  States has steadily reduced its share of contributions to the MDBs while preserving its influence.  The MDBs are,  moreover, a constructive arena for Korth/South cooperation  on practical problems with the great confluence of interests  among all MCE member countries making these institutions  unique among North/South fora. Pestrictive Amendments The majority of MDB recipient countries operate economic  systems which are compatible with western oriented market systems.  Moreover, most MCB lending is directed to countries  which occupy strategic geographic positions, which are important sources of critical raw materials, or where the United States  has other key political and economic interests. There has understandably been serious concern however  about loans by the MDBs to Vietnam and perhaps a few other  countries.  But this issue is largely moot, given the sus­  pension of MDB lending to Vietnam and Afghanistan.  I must  urge you to oppose inserting restrictions on U.S. MDB contri­  butions into law.  Under their charters, the banks cannot legally accept contributions which are subject to unilaterally imposed condi­ tions from the United States or any other bank members.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  35 Acceptance of such restricted contributions would be incon­  sistent with Charter provisions dealing with (1) the purposes  of the banks,  (2) the permitted uses of Bank resources,  (3)  the prohibition on political considerations affecting loan  decisions, and (4) callable capital. The fact that the MDBs could not accept U.S. contributions  with country restrictions has been confirmed by legal opinions from the MDBs themselves, the Executive Eranch, the General  Accounting Office, the Congressional Reserach Service, the  American Bar Association, and an expert group of the District of Columbia Bar.  In 1975, the Inter-American Development refused  to accept contributions earmarked for a specific purpose by the United States because such acceptance would have violated  the charter of the Bank.  The funds were accepted only after  the earmarking requirement was repealed in subsequent legislation The imposition of restrictions by the United States would  also be unwise from a policy standpoint.  Other countries,  which are increasingly important contributors, could well emulate the United States and impose restrictions which would  not oe acceptable to us.  Clearly to start down this path  would run the very serious risk of damaging the global development effort by crippling the ability of the MDBs to  execute their operations objectively and efficiently. The real issue posed by restrictive amendments, therefore, is continued U.S. participation in the MDEs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The adoption of  36 such amendments would have the effect of taking the United  States out of the banks.  Such an outcome would have a  disastrous impact on U.S. foreign policy and national  interests, and would undermine greatly world confidence  in the United States just at a time when we are striving to mobilize a cooperative global response to the challenges emerging in Southwest Asia and other regions of the  world . IV.  CONCLUSION  In conclusion, Mr. Chairman, I would like to re-emphasize that the International Monetary Fund and the multilateral development banks are essential to U.S. interests.  The international monetary system is undergoing a period of major change and political strain.  The IMF is our central  institution for monetary cooperation and an important source of strength, stability, and broad direction as we try to contend with these changes.  We need, of course, to recognize our own  continuing large role in the world economy, and our responsi­ bility for maintaining a strong U.S. economy and a sound dollar.  Eut we need also to understand that a strong IMF  role in guiding the system is of direct importance to our own  efforts to strengthen the economy and maintain the integrity of the dollar.  In strengthening the IMF, the United States  will be making an important contribution to an international environment which greatly facilitates effective foreign policy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  37 We will also be strengthening a source of balance of payments  financing on which we can and do draw ourselves. U.S. national interests clearly require that we maintain a reasonable program of foreign assistance. directly supports U.S. economic,  Such a program  foreign policy, and national  security objectives which we have in the less developed  countries of the world.  It also directly benefits substantial  numbers of the most deprived and disadvantaged people in the  poorest countries.  Foreign assistance is a particularly  important and necessary complement to other parts of the  President's budget request which have been designed to enhance the protection of our national security and foreign policy  interests.  We need the support of developing countries on  a broad range of international issues.  We cannot expect this  support unless we, in turn, help address their fundamental concern of development. The multilateral development banks are the most cost-  effective instrument for promoting economic growth and political stability  world.  and hence U.S. interests — in the developing  They encourage sound national economic policies and  provide an effective framework for bringing the developing  countries into the open market system we espouse.  Moreover,  the banks give us good value for our money with U.S. budgetary  expenditures multiplied many times over in actual bank lending. They benefit borrowers and lenders, developing and developed   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4 countries alike.  t  - 38*  The importance of the banks have been reinforced  by the fact that recent economic difficulties have exposed  a number of developing countries to serious threats of political,  economic, and social instability. These problems have a direct bearing on our national  security interests.  able.  They are difficult but not unmanage­  Given a reasonable degree of international cooperation,  we have the resources to assure a gradual expansion of the world economy.  Healthy and growing economies strengthen the  foundation of the international economic system and maintain  an environment conducive to multilateral cooperation on a  broad range of other issues critical to the United States. The seriousness of the current world situation leaves little doubt about the importance of a sound international structure for dealing cooperatively with vital issues.  Now  is clearly the time for renewed United States leadership in support of the Fund and the multilateral development banks and  of the mutually beneficial endeavors which they represent.  For  these reasons, the Administration urges Congress to provide the necessary funding to sustain the operations of these institutions and to encourage their pivotal role in building a cohesive and  stable world.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  DepartmentoftheTREASURY WASHINGTON, O.C. 20220  TELEPHONE 566-2041  FOR IMMEDIATE RELEASE EXPECTED AT 1:30 P.M., EST MARCH 26, 1980  STATEMENT OF THE HONORABLE G. WILLIAM MILLER SECRETARY OF THE TREASURY BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS AND RELATED PROGRAMS COMMITTEE ON APPROPRIATIONS HOUSE OF REPRESENTATIVES I.  INTRODUCTION  I am pleased to be here today to endorse legislation  providing for the maintenance of the U.S. share of Inter­ national Monetary Fund quotas and the Administration's Fiscal Year 1981 appropriations request for the multi­  lateral development banks (MDBs).  We meet in the context of  a difficult international situation which is characterized by greater tension — in both the strategic and economic spheres — than has been the case in recent history.  The tension affecting our strategic interests is most  clearly linked to events in Southwest Asia.  The unrest  in Iran and the Soviet aggression in Afghanistan have  heightened awareness throughout the world of the vulner­  ability of the world's major oil-producing region to both  internal instability and external aggression.  M-393   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  These  2  developments clearly threaten our national interests, and  we have set in motion a comprehensive program of action to reinforce the U.S. political and military position in the  region and elsewhere. The economic tension stems from the somber global economic outlook.  Much of the 1970's was characterized by high  inflation, soaring energy costs, low growth rates, and unprece­ dented imbalances in external payments.  Largely as a result  of various cooperative efforts, the international community  weathered the economic turbulence reasonably well.  Nevertheless,  adverse oil market developments have again radically affected economic prospects.  Many economic problems are not only  likely to persist for the foreseeable future but may well intensify.  The re-emergence of a large current account surplus  in the OPEC countries — projected at about $120 billion for 1980 — and the inevitable generation of a corresponding deficit  in non-OPEC countries will make serious balance of payments  pressures inevitable for a growing number of countries. Events in the Middle East have driven home dramatically  the linkages between foreign policy and economics.  Political  and military concerns cannot be addressed in isolation from the realities of the world economy, and conversely all basic economic issues have a large political element.  We can be  successful in the pursuit of our broad global objectives   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  3  only if we deal with both the strategic and economic crises  which we face, and the inter-relationships between them. The Administration response to the increased tensions in  both the strategic and economic arenas has relied heavily on the international institutional framework which has evolved  This framework was designed under U.S.  since World War II.  leadership to provide a system whereby all countries, large  and small, could turn to seek cooperative solutions to their  fundamental concerns.  In the foreign policy area, the  United States has recently turned to NATO, the United Nations, and the World Court.  Economically, we rely heavily on the  institutions which are the subject of today's hearings.  The International Monetary Fund (IMF) and the multilateral  development banks (MDBs) are the front lines of defense for the world economy.  During the 1970's, they were pivotal factors which  both facilitated needed economic adjustments and helped sustain  growth:  the IMF through its surveillance and oversight activities  and also through its expanded and liberalized financing facilities,  and the MDBs through their increasingly important role in Third World development. The distinct but complementary operations of these institu­ tions serve U.S. interests greatly.  They will be invaluable  assets in facing the growing economic and financial problems  of the new decade.  The uncertain world economic environment  — which the Soviet Union will seek to exploit — makes it   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  4  all the more important for the United States to assure that the IMF and the MDBs can respond effectively to the needs  of their members.  In the economic arena, as in the international  political and military spheres, the United States cannot maintain an effective leadership role — and assure our national security  — unless we are willing to provide resources adequate to the dangers confronted.  The Administration's requests for both the International  Monetary Fund and the multilateral development banks are designed to do that.  I am submitting for the record a detailed background  paper which deals fully with the Administration's request and provides specific material on the operations of the Fund and the banks.  In today's testimony I want to emphasize my conviction  that it is absolutely crucial for the United States to continue its strong support for these institutions.  They  are valuable examples of successful international cooperation.  More importantly they are directly supportive of vital long-term U.S.  foreign policy interests.  Now is not the time to undermine  our influence in these institutions or reduce the constructive  role they play in global economic developments.  too high.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The stakes are  5 II•  THE INTERNATIONAL MONETARY FUND The purpose of the IMF is the maintenance of a strong  and orderly international monetary system.  aid.  it is not commodity financing.  It is not foreign  It is not like any other  institution in which our country participates.  The IMF has two basic functions, and they are closely related.  The first is general guidance over the operation  and evolution of the international monetary system.  The  second is provision of temporary financing in support of  adjustment programs by IMF members facing balance of payments problems.  In its first function, the Fund has been given important new powers of surveillance over exchange rates and the balance  of payments adjustment process.  The IMF membership has also  established the objective of making the Special Drawing Right  the principal reserve asset in the system, in order to avoid the  instabilities inherent in a system based on a multiplicity of national currencies.  These changes have paralleled and to a large extent  reflected changes in the position and role of the dollar in the system.  The original Bretton Woods arrangements  assumed a fixed and central role for the dollar with the U.S. position essentially passive and the product of other  countries  actions in pursuing their own balance of payments  policies and objectives.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  That arrangement ultimately became  6  both unsustainable and intolerable in terms of U.S. economic interests.  The new arrangements have provided much more scope  for balance of payments adjustment by the United States and recognize the need for greater symmetry in encouraging adjust­  ment by all nations — those in surplus as well as those in  deficit. At the same time, the world's reserve system has been  undergoing significant change.  Increases in the relative  economic size and financial capacity of other major countries  have tended to bring some growing use of their currencies in international transactions and reserves.  On the one hand,  such a development could help to mitigate some of the burdens on the dollar and U.S. financial markets that arose from its  extremely large international role.  On the other hand, the  process of change can itself be unsettling and disruptive,  and there is a widespread view that increasing reliance on the SDR — an internationally created and managed reserve  instrument — would be preferable to development of a fullscale multiple currency reserve system.  The IMF over the  past few years has taken a number of important steps to promote  the role of the SDR and is presently considering a potentially significant further step in its examination of the substitution account. The dollar nonetheless remains critically important to the operation of the international monetary system, and the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  7 U.S. economy remains a powerful element of that system.  This will continue to be the case, and we recognize and accept the responsibilities incumbent on the United States to maintain a sound economic position and a stable dollar. At the same time, a strong IMF — able to encourage effective  economic and balance of payments adjustment by all countries  and able to guide the orderly evolution of the resersve  system — is of direct and immediate importance to our economy and to our efforts to maintain the integrity and strength of the dollar. The IMF's second main function, balance of payments  financing for its members, is closely linked to its broader role in guiding the overall balance of payments adjustment The aim is to encourage timely adjustment by individual  process.  countries through policies that disrupt national or international prosperity as little as possible. This objective is in the interest of every country and  every IMF member is obligated to support it in concrete, financial terms.  This is a critically important point to bear in mind.  The IMF is a revolving fund of currencies, provided by every member.  Every member must allow its currency to be used by  the IMF, and every member in turn has a right to draw on the IMF's currency pool when in balance of payments need. When a country's currency is used by the IMF, that country receives  an automatically available claim on the IMF, which it can use  to get needed foreign exchange if it runs into trouble.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  8 Financing flows back and forth through the IMF depending  on balance of payments developments. of lenders or borrowers.  There is no set group  Many IMF members, both developed and  developing, have been on both sides of the financing and drawing ledger, providing their currency at times and drawing other cur­  rencies at other times. In fact, while the U.S. quota subscription  has been drawn upon many times over the years, our own drawings of $7.3 billion on the IMF are the second largest of the entire  membership.  As a net result of all IMF transactions in dollars  over the years — dollar drawings and repayments by others,  and U.S. drawings — the IMF's holdings of dollars currently exceed the U.S. currency subscription to Fund resources.  Consequently, there has been no net use of the U.S. currency subscription by the Fund over its 35 year history.  Quotas are absolutely central in the IMF. IMF's permanent resources.  can draw.  They are the  They determine the amounts countries  They determine the distribution of SDR allocations.  They determine voting power.  Because of these important advantages,  the competition is always for increases in shares — not for  reduction, as is the case in many other institutions. IMF quotas are reviewed periodically and have been increased four times in the IMF's history in response to  growth in the world economy and international trade and finance.  These increases have been needed to keep the Fund's financing capability in some reasonable relation to demands that may arise.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  9 The proposal for this quota increase resulted from a  review that began in 1977.  Quotas had fallen to an unrealis­  tically low level, about 4 percent of world trade compared to 12 percent earlier, during a period of massive expansion  of payments imbalances and international financing needs. The recognition that an increase was necessary came early  in the review — even though a long period of negotiation was required to reach agreement on the precise amount and shares. The 50 percent increase ultimately agreed in December 1978  — raising total quotas from about SDR 39 billion to SDR 58 billion — will barely halt the decline in the relative size of the IMF over the next five years.  a larger increase.  Many countries pressed hard for  The quota increase proposed for the United  States is 50 percent, amounting to SDR 4,202.5 million or about $5.3 billion at current exchange rates, and will raise our quota from  SDR 8,405 million to SDR 12,607.5.  quota share intact at 21.5 percent.  This maintains the U.S.  Given the continuing large  role of the U.S. economy and the dollar in the international  monetary system, maintenance of an appropriate U.S. share and influence over decisions on the international monetary  system is particularly important.  An increased U.S. quota  will augment the foreign exchange resources available to us should we need them for balance of payments purposes.  Without  the proposed increase in the U.S. quota, our veto power over major IMF decisions affecting the operations of the entire  system could be jeopardized.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  10 Developments since completion of the quota review and the  IMF Governors' resolution formally proposing the increase have only strengthened the need. We are now faced with the consequence of another round of huge oil price increases and with events in Iran and  Afghanistan that greatly heighten the level of world concern and tension.  These developments make it absolutely essential  that we have in place the institutional framework for assuring  monetary stability and providing advice and support to countries  as they contend with radically altered economic prospects. Both financing and economic adjustment are going to be more difficult in this environment.  The private financial  markets will have to meet the bulk of expanded international financing needs — no other source is available — and development  aid must continue to increase.  But some countries will run  into growing financing difficulties and pressures to bring their external balances into line with sustainable flows of  financing.  Without adequate financing, the efforts of deficit countries to adjust would necessitate curtailing economic growth so abruptly  that it would cause severe human hardships and could well jeopar­ dize the political stability of a number of countries.  Countries  could also be forced to adopt restrictive trade policies in an attempt to ration the foreign exchange available to them, or to resort to aggressive exchange rate behavior.  In today's interde­  pendent world, the adoption of such policies — particularly   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  11  because it could lead to retaliatory policies or emulation by other countries  could have disastrous worldwide repercussions and  would be reminiscent of the self-defeating economic policies  followed in the 1930's. The task of assuring a strong and stable international  monetary system in the circumstances of the 1980's will be  formidable.  We cannot predict the amount of IMF financing that  will be needed.  No one can.  But we can foresee very tangible  dangers to the system and to ourselves if the Fund's resources prove to be insufficient when they are called on.  It is  therefore critical that IMF operations in this period of stress  be buttressed by prompt Congressional approval of the proposed quota increase.  In so strengthening the base of the international  monetary system, the United States will not only be contributing enormously to an international environment conducive to effective  foreign policy but will also be strengthening a source of balance  of payments financing on which it has drawn many times itself.  Before concluding this discussion of the IMF, I would like to note that the Supplementary Financing Facility, for which  U.S. participation was approved by the Congress late in 1978,  has proved to be an extremely important temporary reinforcement of IMF resources during a period of growing financial strain. The Facility began operation in early 1979 on the basis of  financial commitments amounting to about SDR 7.8 billion.  OPEC  is providing over 40 percent the total with Saudi Arabia the  largest single participant.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  To date, the facility has been  12  used in conjunction with IMF programs totaling $3.0 billion and is assisting a wide variety of countries of special  interest to the U.S. — including Turkey, Jamaica, Peru, Korea, the Philippines and Sudan — in dealing with severe payments  difficulties.  A number of countries are now discussing with  the IMF programs under the Facility, and total use before the Facility expires (scheduled for early 1981 or 1982) should  be substantial.  This Facility, designed as a temporary  bridge to the quota increase now in process, is a timely and  valuable source of support for the Fund's operations in this  period, and Congressional approval for it has proven to be extremely wise. Finally, let me mention the question of the budget and appropriations treatment of this quota increase.  The President s  budget proposes that a program ceiling on the increase be provided in an appropriations act.  We have been consulting closely on  this question with interested committees, and it appears that considerable interest is developing in an alternative approach  which would involve the following:  —  Appropriations would be required in the full amount  of the increase, and that sum would be included in budget authority totals for fiscal year 1981.  —   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Payment of the quota increase would result in budgetary outlays as cash transfers are actually made to the IMF on  the U.S. quota obligation.  • ’JNL*  13  —  Simultaneously with any cash transfer, an offsetting  budgetary receipt representing an increase in the U.S. reserve position in the IMF would be recorded.  —  As a consequence of these offsetting transactions,  transfers to and from the IMF under the quota obliga­ tions would not result in net outlays or receipts.  Net outlays or receipts resulting from exchange rate fluctuations in the dollar value of the SDR-denominated U.S. reserve position in the Fund would be reflected  in the Federal budget.  These net changes cannot be  projected and thus would be recorded only in actual budget results for the prior year. We are continuing consultations on this matter.  The  point I would stress today is that under either the program ceiling contained in the President's budget or this alternative approach, U.S. payments on its quota subscription would not  affect net budget outlays or, therefore, the Federal budget deficit.  Also under either approach, it is important that the  appropriations action be denominated in SDR although I know this is a departure from normal practice.  This is because our  IMF quota — and those of all other countries — is denominated  in SDR, the IMF's unit of account.  We negotiated hard to main­  tain our quota share and influence over IMF decisions.  There were  many who sought increases in their own shares at our expense.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  We  14 should not allow a cut through inadvertence, which could happen  if the appropriation number were expressed in dollars and the  dollar depreciated in terms of the SDR prior to implementation  of the quota increase.  An SDR denomination of the appropriation  figure -- SDR 4,202.5 million -- will protect us against that danger   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  15 111•  THE multilateral development banks  The United States has an important responsibility in working to establish and maintain an international economic  environment which furthers the process of equitable economic growth in the developing countries.  This reflects the realities  of economic interdependence, in which the prosperity of each  nation depends upon the well-being of others.  The non-oil  developing countries have, for example, become the largest  single market for U.S. exports.  In addition the countries  of the developing world are an increasingly important factor in protecting U.S. security and other foreign policy interests.  It is a simple truism to recognize that the prospects for  developing country support on global issues of importance to the United States will be enhanced by U.S. cooperation on issues  of keen interest to them. In the case of most of the third world countries, the fundamental concern is development.  Poverty exists on a large and pervasive scale in developing countries throughout the world.  There are large gaps between  developed and developing countries in terms of living conditions  and the quality of life; in health and nutrition, literacy and  education, life expectancy, and in the overall physical and social environment.  The natural growth of population and the  process of industrialization have compounded already immense problems of unemployment and underemployment and fueled a rapid  increase in the size of urban populations most of which are   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  16  without access to rudimentary health and sanitation services.  In addition to new problems generated by this rapid urban  growth, the primary concerns in low income countries — with large numbers of rural poor and heavy reliance on agriculture —  remain with the requirements of the rural economy and the need to improve production of the small farmer.  The multilateral development banks (MDBs) are at the heart  of international efforts to address these development concerns. They are unique institutions by which the United States can work cooperatively with developing countries in support of their aspirations for economic and social progress.  The banks have proven themselves to be effective instruments for promoting growth with equity.  Last year they made loan  commitments totaling nearly $14 billion which helped to finance  425 projects in 90 developing countries.  During the past five  years, IBRD/lDA activities have provided the base for producing  one third of all increased fertilizer production in the developing countries for the first half of the 1980s, one fifth of the  total investment in rural road networks in developing countries,  and one quarter of total public investment in developing country irrigation systems.  Furthermore, 358 IBRD/lDA agricultural  projects over these past five years have had the rural poor as their principal beneficiaries, and an estimated 60 million  of the 100 million direct beneficiaries of these projects had incomes below the absolute poverty levels in their respective  countries.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  17  The banks now account for between 10 and 15 percent of the  total external resources moving to the developing world.  This  proportion is much higher for the poorer countries which do not  have access to the international capital markets.  Important as this transfer of resource function is for the MDBs, a far more important contribution to development lies in  the way their projects have become the principal catalyst for  growth and contributed to rational sector and macro—economic policies in developing countries.  In this regard, they have  organized increasing amounts of co-financing from private  as well as from other public sources. The MDBs also have a key role in the transfer of technology and in providing sound advice on economic policy  associated with their lending activity. to  This contribution  institution building" and "human capital formation"  permeates the process of project implementation and is perhaps  the greatest contribution made by the banks to the long-term  economic prospects of the developing countries. It is the combination of project financer, financial  catalyst, and institution builder which makes the MDBs such  unique and important agents in the development process. Throughout the history of bank operations, the United  States has supported and encouraged those adaptations in bank operations which we believed would further increase the  effectiveness of bank lending.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  Among the more important results  "  ifb, .< tv  ’  *  - 18 -  of past U.S. initiatives are tie s.iift m the sectoral composi tion of MDB lending to those sectors — such as agriculture and rural development — where project benefits accrue more  directly to the poor, the use of the MDBs' considerable aid leverage to promote policy changes in the borrowing countries  which favor the poor, and the recently emphasized stepped-up  MDB lending to increase developing country energy supplies. Reaching the Poor To more effectively reach the poor, all the MDBs are  engaged in modifying their organizational structures  and their project identification and appraisal procedures. The World Bank has established a Rural Operations  Review and Support Unit (RORSU) and an Urban Operations Review and Support Unit (UORSU) to develop poverty impact  methodology and to monitor and evaluate poverty-lending projects in their beginning, intermediate, and final stages. Ninety percent of the World Bank's rural development projects  have had provisions for monitoring and evaluation units. These units assist in the identification of the project's  beneficiaries, insure during the project implementation  stage that the benefits are actually going where intended,  and,  finally, evaluate the impact of the project in terms  of what changes were made in the lot of the poor.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  19 The Inter-American Development Bank has designated a  specific unit within the Bank's organizational structure to define low income groups and to monitor the bank's  progress in reaching its current replenishment (1979-1982) goal to provide 50 percent of total lending to low income  groups.  In addition, the Asian Development Bank is under­  taking a major expansion of its Post Evaluation Unit to facilitate its greater attention to data collection and benefit monitoring.  Capital Saving Technology The United States has also been successful in seeking  policy decisions through which the MDBs will place  increased emphasis on the use of capital saving technologies in their projects.  Since these technologies involve the  productive and often innovative use of small-scale and  labor-intensive processes, techniques, equipment, and tools  which are less complex and costly than those usually employed by more developed countries,  will:  their application generally  (1) create employment opportunities,  increase productivity,  and raise the incomes of poor people at lower per capita costs;  (2) ensure that the greatest number of people benefit  from development projects; and (3) promote the most efficient  use of scarce resources within developing countries in accordance  with relative factor endowments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  -■’t .  2Q e •  Jr  By strengthening their project appraisal activities  at the preinvestment stage, the MDBs have enhanced their  ability to select projects which incorporate techniques most appropriate to the circumstances and requirements of the borrowing countries.  This has resulted in increased  utilization of capital saving technology in individual bank projects.  Most recently, capital saving technology --  in addition to continuing its important role in civil works  construction projects — has become an integral element in MDBfinanced renewable energy and urban and rural development projects.  Economic Benefits of U.S. MDB Membership As the Administration’s chief fiscal officer, I am committed to budget restraint.  At the same time,  for the  reasons I have outlined, the United States must maintain a reasonable program of foreign assistance.  The multilateral  development banks reconcile these needs. First, other members contribute $3 for every $1 contri­ buted by the United States. Second, supported by callable  capital, the banks finance the bulk of their lending program  through borrowings in the private capital markets.  The result  is that U.S. budget expenditures are multiplied many times over in actual MDB lending.  For every dollar the United States  has paid into the World Bank over the past 35 years,  for example,  the Bank has lent over $50 (at no net cost to the U.S. taxpayer, because increased federal tax receipts from IBRD activities,   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  21  i.e. procurement, administrative expenses, and net interest,  have been more than double U.S. paid-in contributions to the bank).  Our development assistance gets maximum leverage when  channeled through the MDBs.  In addition, U.S. producers and consulting firms have  received the largest share of MDB-financed procurement contracts. This has led to a significantly beneficial impact on U.S. employment and GNP.  For every dollar we have paid into the  MDBs for the years 1977 and 1978, the U.S. economy has grown  by an average of $3. Over the life of the institutions, they have  contributed a net surplus of $11 billion to our current account. The cooperation among countries within the MDBs contributes significantly to the substance as well as the atmosphere of U.S. ties with developing countries.  U.S. participation in the  banks also reflects a successful partnership with Europe, Japan, and Canada — with whom we work closely on MDB financing  arrangements.  Any significant slackening of traditional  U.S. support for the MDBs would both seriously jeopardize our relations with the developing world and weaken the confidence  of our allies in U.S. ability to play a cooperative role across a broad range of international activities.  Undermining  such a pillar of the international institutional framework would also make it much more difficult for us to get the  support of the developing countries for our positions in   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  22 other international bodies on issues of central concern to  our own national interests.  The FY 1981 Appropriations Request and Callable Capital  For FY 1981, the Administration has requested total budget authority of $1,666 million for U.S. subscriptions and contri­ butions to the MDBs.  In addition, because of the shortfall  in actual appropriations for FY 1980 from what had to be  assumed when the FY 1981 budget was prepared, we will be submitting budget amendments which will increase this amount  modestly.  The outlay effect of the request will be spread  over time and, thus, will have only a minimal impact on this  year's or next year's budget. The amount of the FY 1981 request is much lower than that for last year.  This is principally because we are seeking  a program ceiling rather than budget authority for the callable portions of our capital subscriptions to the banks.  The "callable capital" concept is one of the most attractive features of the multilateral development banks and results in considerable budgetary savings for the U.S. Government.  With  callable capital as backing, the MDBs are able to borrow most  of the non-concessional funds they require in international capital markets.  The cost to the U.S. Government of subscrip­  tions to callable capital is solely contingent in nature, since  callable capital can only be used to meet obligations of the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  23  MDBs for funds borrowed or guaranteed by them in the unlikely event that the banks' other resources are insufficient to meet those liabilities. The risk of a "call" is virtually nil.  The loan port­  folios of the MDBs are distributed broadly, and major defaults are almost inconceivable.  In the more than thirty year history  of the World Bank, there has never been a loan default. Similarly there has never been a default at the Asian Development Bank (ADB).  At the Inter—American Development Bank two very  small loans were defaulted in the 1960's, but this was before  institution of the policy that all loans have the recipient country's government guarantee for loan repayment.  (One  of the IDB loans was fully recovered and the loss on the  other was $1.8 million.) Even if a number of their largest borrowers were to default,  the MDBs have considerable financial assets upon which they  could draw.  The first line of defense of the MDBs is their  paid-in capital and accumulated reserves, which total over  $6.0 billion at the World Bank, over $1.9 billion at the IDB, and $1.5 billion at the ADB.  Moreover, prior U.S. subscriptions  to MDB callable totaling $11.5 billion have already been funded  by the Congress against the potential U.S. liabilities and other donor countries have committed themselves to  much larger amounts. It is therefore virtually certain that there will not be budget outlays resulting from the   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  —  24 callable subscriptions proposed in the legislation before  the Committee. Unlike other donor countries, however, the United States in its budgetary procedures has heretofore treated callable  capital subscriptions as though they would have an outlay impact. The issue of changing the appropriations and budgetary  treatment of callable capital has been under serious consideration for over a year both within the Administration and between  the Administration and Congress. The Administration has concluded that appropriation for the full amount of callable capital,  and the resulting scoring of the appropriated amounts as budget authority, distort the true size of the request for the MDBs  and is not consistent with the treatment of other contingent  obligations of the United States Government. The Administration therefore proposes enactment of program  limitations in the FY 1981 Foreign Assistance Appropriations Act  for U.S. subscriptions to callable capital instead of actual  appropriation and budgetary authority.  We have also submitted  proposed changes in the authorizing legislation which will enable us to make the subscriptions after program limitations are enacted  Full Congressional control over callable capital subscriptions is retained both by the program'1 imitations and because subscriptions to callable capital and paid-in — which must be appropriated in  full — must be made in specified proportions.  The General  Counsel of the Treasury Department issued opinions in 1975   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  25  and 1979 that appropriations are not legally required to back subscriptions to callable capital unless and until payment is  required of the United States on a call made by an institution The Sixth Replenishment for the IDA (IDA VI)  The background paper submitted for the record details the specifics of the Administration's full appropriations request.  I would like to highlight two of the larger components of the  request: the sixth replenishment for the IDA and our remaining subscription to the Special Capital Increase of the World Bank itself.  The United States has important reasons for continuing  to support IDA.  We have a strong tradition of international  leadership in mobilizing the international community to give special attention and effort to those most in need of help, and that is IDA'S reason for existence.  In this context,  IDA has an excellent track record as an effective instrument  for reaching the poor, providing job opportunities, and helping to meet basic human needs. IDA is, in effect, the centerpiece of U.S. North/South  strategy, and the symbol of our commitment to Third World Development.  It serves to undermine those in the developing  world who favor confrontation with the United States, to bolster U.S. economic and political interests in North/  South fora, and to improve prospects for multilateral cooperation on issues of primary importance to the United   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  26 States.  At a time when global economic difficulties have  exposed a large number of the world’s poorest countries  to serious threats of political, economic, and social instability, IDA operations make an invaluable contribution  to our national security and other U.S. foreign policy objectives. The extremely somber economic prospects for the low-income  countries underscores the importance of IDA’S development  role in the 1980's.  IDA is the world's largest source of  concessional resources.  It is particularly important to  Black Africa, providing valuable assistance to such key  countries as Kenya, Somalia, and Sudan. are also important IDA borrowers.  Egypt and Pakistan  IDA will be crucial in  determining whether per capita food production in the poorest countries will increase and whether real progress is made in alleviating world hunger.  It will also depend largely on  IDA resources -- utilized within broad-based development  strategies — whether these countries will be able to improve education, health, sanitation and housing standards and  produce material improvements in the lives of the poor  throughout the 1980’s. IDA expresses the determination of the more advanced  countries to reduce, albeit slowly, the problems of absolute  poverty in the poorer nations of the world.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The 54 IDA  27  borrowers account for approximately 31 percent of the world's population but only about 3 percent of the global gross  national product.  Approximately 90 percent of IDA'S funds  go to countries whose per capita income is below $300 per  year (1977 dollars).  Lending is concentrated on those sectors  which promise to improve most directly the lives of the very poor.  With few exceptions, IDA recipient countries lack the physical and human resources to adapt quickly to the problems confronting the global economy.  rated.  Their terms of trade have deterio­  They have not been able to attract sufficient capital to  maintain imports and thus sustain even their already low growth rates.  Since 1974, the real value of their imports has declined.  As a result, most of the poorest countries achieved per capita growth of only around 1 percent per annum during the 1970's. Even with a major effort by the poorest countries themselves,  additional concessional resources are required to achieve both higher rates of growth and greater progress in poverty allevia­ tion.  More than one-third of the total population of the developing  world — 800 million people — still subsist in conditions of absolute poverty. After eighteen months of negotiation, donor countries  reached agreement last December on a $12 billion IDA VI to  permit continued IDA lending for the three year period   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  28  beyond June 1980.  Relative to donors' gross domestic products,  the size of the replenishment remains at roughly the ratio  of IDA V and will thus permit a modest annual growth in IDA lending.  The United States joined other donors in supporting this replenishment -- noting, however, that our support was contingent  on the enactment of necessary authorization and appropriations legislation.  The United States insisted on a sharp reduction  in the U.S. share.  After lengthy negotiation, we achieved a  reduction in our share from 31 percent in IDA V to 27 percent in IDA VI.  This decline continues the downward trend in the U.S.  share of IDA from its initial level of 42 percent and was accom­ panied by a substantial increase in the shares of Germany (from 10.9% to 12.5%) and Japan (from 10.3% to 14.65%).  The reduction  of four percentage points in the U.S. share constitutes a very  significant improvement in the distribution of responsibility for  providing funds for IDA, saving us $480 million over the life of the agreement.  A U.S. share of 27 percent of a $12 billion IDA VI replen­  ishment results in an average annual U.S. contribution of $1,080 million.  This represents virtually no increase in real  terms in U.S. funding for IDA — its annual lending rises by a  modest amount, but our share declines by 4 percent.  All real  growth in IDA lending will be financed by other donors.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  29  World Bank Selective Capital  In 1977, Congress authorized United States participation in a Selective Capital Increase (SCI) for the IBRD.  The  United States has been behind in its scheduled SCI payments since the first installment, however, even though 90 percent of our subscription represents callable capital and thus  no budget outlays. Reluctance to meet our full SCI subscriptions is ironic  because the Bank’s great success is to a large extent due to  the leadership the United States has provided in it since its creation in 1946.  The shortfall in U.S. funding is particu  larly inopportune now that the Bank, at U.S. initiative,  has mounted a major program to increase world energy supplies. The World Bank's energy program will grow to at least 15  percent of total Bank lending within five years.  It will  amount to $7.7 billion over the period as part of projects totaling about $30 billion for the exploration, production, and development of oil, gas, and coal, and for the construction  of new hydroelectric facilities.  In operation, these Bank  projects will produce additional primary energy estimated at 2-2.5 million barrels of oil a day, thus reducing by  that amount potential world demand for OPEC oil.  A U.S. failure to complete our SCI subscription could lead other members to insist on a significant cutback in the Bank's  annual lending program because doubts would be generated about   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  30  U.S. support for Bank lending throughout the 1980's.  Such  a cut-back in the lending program would be disastrous for  our relations with the developing world, underminina Bank programs in countries and regions of particular concern to the United States (e.g. Egypt, Turkey, the Caribbean, and  Central America) and heightening international monetary  problems by increasing demand on private capital markets. Subscription of the full SCI amount is also essential to maintain United States voting strength above 20 percent  and thus protect the U.S. veto in the Eank.  The veto ensures  that no changes are made in the Charter which would have a detrimental impact on U.S. interests.  The African Development Eank The U.S. subscription to the African Development Eank  (AFDB) is an important new component of the FY 81 appropriations recuest.  Subject to receiving authorization for U.S. membership  in the bank, an initial appropriation of $18 million is being  sought. Membership in che AFDE to date has been restricted to African nations.  The limited resources of the African members have,  however, severely restricted the Bank's access to the private capital markets and its lending program.  As a result, in May  1S7S, the Governors of the Eank agreed, subject to necessary  ratification by member governments, to invite nonregional countries to join their institution.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The proposed U.S. subscription would  31 represent 5.66 percent of the AFDB's total capital and 17.04 percent  of the non-regional subscription.  The United States will  therefore have its own Executive Director on the Board of the Bank.  The United States has direct economic, humanitarian, and  political interests in assuring a strong and viable Africa  where poverty is reduced, the pace of economic growth accelerated, and serious financial problems avoided.  While a wide range of  U.S. political and economic policies already contribute toward  these objectives, our membership in the AFDB, the most prominent pan-African development institution, would help strengthen our ties with African nations and meet our growing interests in the region.  Other Pegional MDBs The remainder of the Administration’s request is for appro­  priations for capital subscriptions and contributions for the Inter American Eank (IBB), the Asian Development Eank (ADB)  and Fund (ADF), and the African Development Fund (AFDF):   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  $51.6 million in paid-in capital for the IDP and  $318 million for the Fund for Special Operations, the IDB s concessional lending window; $25.2 million in paid-in capital for the ADB  and $111.2 million for the ADF, the Eank's  concessional window; and $41.7 million for the AFDF, which provides conces­  sional financing for Africa's poorest countries.  32  As noted above, most of these numbers will have to be supplemented by budget amendments to reflect the shortfall  in actual FY 1980 appropriations. These regional institutions were established to complement  the activities of the World Bank Group and increase the direct involvement of the recipient countries in the development process They now provide a central element in the development strategies  of many friendly nations and are unique positioned to bring to bear a special regional expertise to local problems.  The  regional MDBs also facilitate the mobilization of additional  resources from the developing countries themselves. The Decision-Making Process  I recognize that one of the major concerns regarding the  MDBs is whether the United States has adequate influence to promote its interests effectively through such multilateral  institutions.  The formulation of MDB policy and the extent  of influence exercised by the United States in their decision­ making involve both a formal and informal process.  The MDBs are like any other bank, or, indeed, any other corporate entity.  They are controlled by a board — in their  case, of member country Governors and, through them, their appointed Executive Directors.  Management is hired by the  national representatives of the member countries to carry out the day-to-day functions of the banks within the policy framework set for the banks by the member governments.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The  33  management of the banks executes that policy under the general  guidance of the Boards of Executive Directors. Their task  is facilitated greatly by the fact that there exists among bank members a broad consensus on both the aims and the  most effective usage of development lending. In practice, influence also is manifest in a variety  of informal ways — official and unofficial meetings of national officials at the bilateral and multilateral level; informal discussions among the Covernors at the annual meetings; informal meetings preceding and during the  periodic replenishment negotiations; and countless exchanges between bank officials and national representatives at all  stages of the formulation and implementation of the banks' lending programs.  Subtly, and often imperceptibly, a  country’s interests are advanced in such ways, and these  interests become woven into the fabric of MDB activities.  The cardinal test of U.S. influence is of course not procedure but  substance — whether  the institutions  have consistently pursued policies which promote the national interests of the United States.  In my j udgment, they clearly  have done so and continue to do so.  We have only to consider  MDB lending programs in agriculture aimed at increasing  production and providing employment, and now more effectively concentrated on reaching the poorest rural inhabitants.  The  expansion of developing country energy supplies is a second   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  34 priority that the MDBs are employing which is also very  much in our interests.  The facts are that the United  States has steadily reduced its share of contributions to the MDBs while preserving its influence.  The MDBs are,  moreover , a constructive arena for North/South cooperation  on practical problems with the great confluence of interests among all f4DD member countries making these institutions  unique among North/South fora. restrictive Amendments  The majority of MDB recipient countries operate economic systems which are compatible with western oriented market  systems.  Moreover, most MEB lending is directed to countries  which occupy strategic geographic positions, which are important  sources of critical raw materials, or where the United States t has other key political and economic interests.  There has understandably been serious concern however  about loans by the MDBs to Vietnam and perhaps a few other countries.  But this issue is largely moot, given the sus­  pension of MDE lending to Vietnam and Afghanistan.  I must  urge you to oppose inserting restrictions on U.S. MDB contri­ butions into law.  Under their charters, the banks cannot legally accept contributions which are subject to unilaterally imposed condi­  tions from the United States or any other bank members.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  35 Acceptance of such restricted contributions would be incon­  sistent with Charter provisions dealing with (1) the purposes of the banks, (z) the permitted uses of Bank resources,  (3)  the prohibition on political considerations affecting loan decisions, and (4) callable capital. Ihe fact that the MDBs could not accept U.S. contributions  with country restrictions has been confirmed by legal opinions from the MEBs themselves, the Executive Branch, the General  Accounting Office, the Congressional Eeserach Service, the  American Bar Association, and an expert group of the District of Columbia Bar.  In 1975, the Inter-American Development refused  to accept contributions earmarked for a specific purpose by  the United States because such acceptance would have violated the charter of the Bank.  The funds were accepted only after  the earmarking requirement was repealed in subsequent legislation The imposition of restrictions by the United States would  also be unwise from a policy standpoint. which are  Other countries,  increasingly important contributors, could well  emulate the United States and impose restrictions which would not be acceptable to us.  Clearly to start down this path  would run the very serious risk of damaging the global  development effort by crippling the ability of the MDBs to execute their operations objectively and efficiently.  The real issue posed by restrictive amendments, therefore, is continued U.S. participation in the MDEs.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  The adoption of  36 such amendments would have the effect of taking the United  States out of the banks.  Such an outcome would have a  disastrous impact on U.S. foreign policy and national  interests, and would undermine greatly world confidence  in the United States just at a time when we are striving to mobilize a cooperative global response to the challenges emerging in Southwest Asia and other regions of the  world . IV.  CONCLUSION In conclusion, Mr. Chairman, I would like to re-emphasize  that the International Monetary Fund and the multilateral  development banks are essential to U.S. interests. The international monetary system is undergoing a period  of major change and political strain.  The IMF is our central  institution for monetary cooperation and an important source of strength,  stability, and broad direction as we try to contend  with these changes.  We need, of course, to recognize our own  continuing large role in the world economy, and our responsi­ bility for maintaining a strong U.S. economy and a sound  dollar.  Eut we need also to understand that a strong IMF  role in guiding the system is of direct importance to our own  efforts to strengthen the economy and maintain the integrity of the dollar.  In strengthening the IMF, the United States  will be making an important contribution to an international environment which greatly facilitates effective foreign policy.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  37 We will also be strengthening a source of balance of payments financing on which we can and do draw ourselves. U.S. national interests clearly require that we maintain  a reasonable program of foreign assistance.  Such a program  directly supports U.S. economic, foreign policy, and national security objectives which we have in the less developed  countries of the world.  It also directly benefits substantial  numbers of the most deprived and disadvantaged people in the poorest countries.  Foreign assistance is a particularly  important and necessary complement to other parts of the President's budget request which have been designed to enhance the protection of our national security and foreign policy  interests.  We need the support of developing countries on  a broad range of international issues.  We cannot expect this  support unless we, in turn, help address their fundamental  concern of development. The multilateral development banks are the most cost-  effective instrument for promoting economic growth and political stability — and hence U.S. interests — in the developing world.  They encourage sound national economic policies and  provide an effective framework for bringing the developing  countries into the open market system we espouse.  Moreover,  the banks give us good value for our money with U.S. budgetary  expenditures multiplied many times over in actual bank lending.  They benefit borrowers and lenders, developing and developed   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis  38 countries alike.  The importance of the banks have been reinforced  by the fact that recent economic difficulties have exposed a number of developing countries to serious threats of political,  economic, and social instability. These problems have a direct bearing on our national security interests.  able.  They are difficult but not unmanage­  Given a reasonable degree of international cooperation, ♦  we have the resources to assure a gradual expansion of the world  economy.  Healthy and growing economies strengthen the  foundation of the international economic system and maintain  an environment conducive to multilateral cooperation on a broad range of other issues critical to the United States.  The seriousness of the current world situation leaves  little doubt about the importance of a sound international structure for dealing cooperatively with vital issues. is clearly the time for  renewed  United  Now  States leadership in  support of the Fund and the multilateral development banks and  of the mutually beneficial endeavors which they represent.  For  these reasons, the Administration urges Congress to provide the  necessary funding to sustain the operations of these institutions  and to encourage their pivotal role in building a cohesive and stable world.   https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis