It would seem that the real reason for delay on the part of some international financiers is that the Bank's management wants to keep up the past rate of hard lending, while increasing at the same time the rate of soft lending. This would appear an artificial equation and I believe something has to give.

In this connection, there is no dictate in the Articles of Agreement of the International Bank for Reconstruction and Development (World Bank) which would bind member countries of the Bank to sustain a supplemental reserve in the nature of almost $1 billion.

In fact in article IV, section 6, is the only precise provision for a "special reserve," although admittedly interspersed in other sections of the Articles of Agreement are a few general references to "other reserves, surplus and capital available to the Bank."

Section 14(a) of article V, however, makes it clear that the Board of Governors is to determine annually how the Bank's net income shall be allocated or distributed. Based upon this article, therefore, there would appear to be no obstacle to the World Bank transferring a greater percentage of its reserves to IDA.

In the last analysis, Mr. Secretary, what we are talking about is whether the World Bank is really responsive to the desires of its member countries, including the United States-by far the largest single contributor-or whether it is responsive to the wishes of a select number of central bankers.

My answer, as well as a suggested prescription for a remedy, is contained in the amendment which I drew up last year. Before considering resubmitting this amendment in one form or another, I would respectfully appreciate your comments.

CHANNELING MORE OF BANK'S RESERVE INTO LOANS

Secretary KENNEDY. Senator, I share your interests and views on our balance of payments problem, and your interest in helping the developing countries. I also share your views that the World Bank should channel into the concessional loan program part of their reserves. The question is how much and how that should be done.

This agreement was worked out with the other nations and, at this point, to impose a requirement that the World Bank do something, as you suggest, would require them to go back and renegotiate which I would prefer to avoid if at all possible. It would really upset the multilateral lending concept which I think is important and I think should be pursued in this field. I think that the assurances that I have been given from the president of the World Bank that they have in mind. stepping up their contribution out of their reserves will be effective.

Now, how much and when I am not sure. But I appreciate the comments you make, and I share with you the concern that they do channel into this part of their activity some of their earnings.

But I would not want to impose that as a restriction on this piece of legislation. I think it is past due. We are behind the parade, so to speak. The other nations have stepped up and if we don't do this the whole program on this would fail. We would have to start de novo and work through the whole program.

Senator SYMINGTON. Thank you, Mr. Secretary.

If you have any further thoughts, I would appreciate your furnishing them for the record at this point before we consider any amendments. I thank the Chair for yielding.

Secretary KENNEDY. Yes, sir.

(The following information was subsequently supplied by Secretary Kennedy :)

RECENT LOANS TO INDIA AND PAKISTAN

During negotiations for the second replenishment, several contributing courtries, including the United States, expressed concern over the high proportion of IDA credits going to India and Pakistan. The general view was that opportunities are now increasing for effective use of assistance on a broader geographic front and that therefore IDA should seek wider diversification in its lending activities. As a result, the subject was considered by the board of executive directors of IDA recently, and I have been informed that a clear understanding was reached that the percentage of IDA financing for India and Pakistan would be substantially reduced under the new replenishment, with consequent_increases in the volume of funds being lent in other geographic areas, including Latin America. This objective has my full support.

From the limited uncommitted resources available to it in fiscal year 1968, IDA extended credits of $106 million. Ten million dollars of this went to Pakistan and none went to India. During the first half of the current fiscal year neither country received an IDA credit.

Since January 1, 1969, however, the board has approved a $125 million credi: to India for essential industrial imports. This credit had been under consideration by IDA for some time. Also two credits have been made to Pakistan-one of $2 million for consultants on the development of water resources in East Pakistan, and another of $16 million for telecommunications. These credits have been made out of funds received from the $75 million IBRD transfer approved last October and the advance replenishment contributions which now total almost $225 million. The combined share of funds going to India and Pakistan in fiscal year 1969 is expected to be about 50 percent, and for fiscal year 1968 and fiscal year 1969 together, lower than that. This contrasts with a cumulative high of 74 percent to these two countries at the end of fiscal year 1967.

There is no question that IDA lending to these countries will be fully consistent with the goal of greater diversification in the use of IDA funds.

COMMENT ON IBRD RESERVES AND TRANSFERS OF NET EARNINGS TO IDA

As of February 28, 1969, IBRD reserves were $1.25 billion. They consist of two components: (1) the special reserve ($291 million), and (2) the supplemental reserve ($963 million). The special reserve represents commissions which are required by the IBRD charter to be set aside and held in liquid form to be used only for the purpose of meeting liabilities of the Bank on its borrowings and guarantees. The supplemental reserve represents retained earnings that have bee fully committed along with the World Bank's paid-in capital and borrowings to the Bank's own lending operations under contracts with borrowers.

This earned surplus represents an increase in the Bank's equity, and thus it improves both the Bank's equity-debt ratio, and the ratio between the Bank earnings and the interest charges it must pay on its funded debt. These relationships-the equity-debt ratio and the interest-earnings cover-are of great importance to the judgment of the market about the Bank's financial position, and hence to the Bank's credit rating.

It is a fact of financial life that buyers of World Bank bonds want to be assured that the reserve position of the Bank will be reasonably maintained. Notwithstanding that government guarantees in the form of callable capital also stand behind Bank issues, purchasers of these bonds require assurance of the integrity of the Bank's balance sheet itself. The Bank's callable capital is intended only as a protection or last resort, and if the Bank were ever required to draw upon it in order to meet debt obligations, its ability to tap capital markets for further lending operations would, no doubt, be adversely affected. Nor is a prudent reserve policy rendered unnecessary by the fact that World Bank loans, which are made almost exclusively to developing countries, are made to or guaranteed by governments and backed up by a lien on the investment financed.

Maintenance of the Bank's present "triple A" rating would not be possible if the equity-debt ratio and interest-earnings cover of the Bank were to be materially impaired. The market for Bank bonds has come to expect that a portion of the Bank's annual earnings will be allocated to the supplemental reserves. Moreover, both the Bank and IDA would suffer from a policy that did not consider the adequacy of reserves, since the Bank's volume of lending and its earnings would

decline with a consequent impairment of its ability over the long run, to make transfers to IDA.

Bank policy very wisely calls for transfers to be determined annually by the Governors on the basis of actual earnings for the previous year. All circumstances relevant to the determination-such as the Bank's cash needs and borrowing prospects for the following year-are also taken into account. This practice should be continued.

As I said in my opening statement, the Bank transferred $75 million out of fiscal 1968 net earings, compared with only $10 million the previous year. I am very pleased that the Bank has increased its contribution to IDA. I do not foresee a decline in such transfers. On the contrary, should conditions permit, transfers from net earnings over the 1968 level would be in order. I am assured by the President of the World Bank that he will support this objective before his governing board.

Again, as I said in answers to questions, a proviso which would limit the yearly U.S. contribution to the same amount as the World Bank transferred to IDA from its reserves or net earnings should not be adopted, since the material change this would require in the IDA resolutions would negate any favorable congressional action on H.R. 33, and would undoubtedly frustrate the replenishment agreement from coming into effect.

WORLD BANK CONTRIBUTION TO IDA

The CHAIRMAN. In that connection, they agreed to $75 million in 1968.

Secretary KENNEDY. That is right.

The CHAIRMAN. But what for 1969? Do they operate on a calendar year at the Bank?

Secretary KENNEDY. Fiscal year.

The CHAIRMAN. What is the fiscal year?

Secretary KENNEDY. The same as the U.S. Government's fiscal

year.

The CHAIRMAN. In fiscal year 1968 they gave $75 million. In the current 1969 fiscal year what are they giving, have they said?

Secretary KENNEDY. When the year is over, as I understand it, they will take a look at their earnings and make their contribution, and I have been assured by the President, Mr. McNamara, that he will support a transfer at least equal to last year's.

The CHAIRMAN. There is no good reason why it couldn't be more, is there, that you know of?

Secretary KENNEDY. No; and I would be in hopes it would be more. Senator CooPER. Mr. Chairman.

The CHAIRMAN. Senator Cooper.

OPPOSITION TO SYMINGTON AMENDMENT

Senator COOPER. I am sorry, Senator Symington is gone, but Senator Gore is here. I know both of them supported this proposal very strongly last year. May I say I voted against the amendment in committee, and while I can understand that I think it is proper as you suggested that the World Bank take into consideration its own. work and earnings and make contributions, I think it is wrong for one country, the United States or any other country, in this multilateral organization to hinge its own contribution upon the action of the World Bank. It is a multilateral organization and it has its own obligation and duties.

I think if we get into imposing different conditions on such a multilateral organization as the World Bank we will perhaps end up by not having a multilateral organization.

(The following correspondence was later added to the record:) CORRESPONDENCE BETWEEN SENATOR COOPER AND SECRETARY KENNED. CONCERNING WORLD BANK TRANSFERS TO IDA

Hon. DAVID M. KENNEDY,
Secretary of the Treasury,
Washington, D.C.

APRIL 23, 1969.

L

DEAR MR. SECRETARY: In connection with the hearings conducted by the Senate Committee on Foreign Relations on H.R. 33, the international development authorization bill, several questions were raised concerning the policy of the World Bank to make annual contributions out of current earnings to IDA and the legal authority of the World Bank, under its articles of agreement, to increase substantially these contributions.

I wish to say that I support the bill, It would be helpful to my consideration of these matters if you would provide me with your comments concerning these specific questions raised at the hearing and any other information that you believe appropriate.

With kind regards, I am,
Yours sincerely,

T

JOHN SHERMAN COOPER.

bi

Hon. JOHN SHERMAN COOPER,
U.S. Senate, Washington, D.C.

THE SECRETARY OF THE TREASURY,
Washington, April 24, 1969.

DEAR SENATOR COOPER: Thank you for your letter of April 23, 1969, expressing your support for the second replenishment of the International Development Association. I am pleased to comment on the World Bank's annual contributions to IDA, as requested in your letter.

Since IDA was instituted as a "soft-loan" window of the World Bank, the Bank has transferred $285 million from net earnings to IDA's resources. These transfers average 40 percent of the Bank's earnings since 1964. I feel that the World Bank has significantly supported IDA. I was pleased by the Bank's decision to transfer $75 million out of fiscal year 1968 net earnings. I wish to emphasize that I do not foresee a decline in such transfers. Rather, as conditions permit, I will actively support transfers from net earnings over the 1968 level. The President of the World Bank has assured me that he will support this objective before his governing boards.

While I am in favor of strong Bank support for IDA, I am firmly opposed to adding a provision to H.R. 33 limiting the yearly U.S. contribution to an amount equal to World Bank transfers to IDA. Establishment of such a linkage would be almost impossible to negotiate and any attempt to renegotiate would be a serious blow to multilateral cooperation not only in IDA but also in other fields. Moreover, it would be financially unwise for the Bank to undertake an unalterable advance commitment to transfer a fixed amount of its future earnings to IDA.

In response to Senator Symington's request at the hearing on April 16, I have submitted for the record additional comments on this point. I am enclosing a copy of these comments for your information. [See p. 16.]

Sincerely yours,

The CHAIRMAN. Senator Gore?

Senator Aiken, do you have any questions?
Senator AIKEN. Not now, maybe never.

The CHAIRMAN. Maybe never.

Senator Gore, do you wish to question?

DAVID M. KENNEDY.

TOTAL U.S. COMMITMENT TO INTERNATIONAL FINANCIAL INSTITUTIONS

Senator GORE. Mr. Secretary, what is the total of our commitments to the international financial institutions?

Secretary KENNEDY. To the international financial institutions? Senator GORE. Yes.

I seem to recall on an almost annual basis in the last 10 years that the Congress has been asked to commit billions to one international monetary or financial institution after another. The staff tells me the total commitment now is more than $17 billion.

Secretary KENNEDY. I would have to look at that, I don't know what that comprises. This is for a 3-year program, $160 million a year. We haven't been up for the Asian Development Bank yet. You may be taking into account the full amounts that have been put into the various multilateral agencies since 1946, that is probably what it is, Senator, callable capital, our IMF quota and all of that.

Senator GORE. Do you anticipate asking the Congress for further commitment this year to the Asian Development Bank?

Secretary KENNEDY. I was in Sydney at the meeting of the Asian Development Bank and just returned yesterday morning. We will come up with proposals. It will not be precisely what it was before, but we have not determined what it will be.

Senator GORE. You do anticipate making a request?
Secretary KENNEDY. Yes.

Senator GORE. Thank you.

Senator CASE. Will the Senator yield at that point?

RETAINING CONTROL OVER PUBLIC MONEY

I hope when you do come up, Mr. Secretary, since Senator Gore raised the question of the Asian Bank, that you may have some suggestions that meet the point that I have been increasingly concerned about. This is the placing of large amounts of our American taxpayers' money in the hands of international organizations or even the executive branch of our Government with wide discretion, with almost no limitations as to uses to which that money may be put. We are getting further and further away from control by Congress, which means control by the people. I raised this question several years ago and I know that it is a matter that has had study downtown, but I have not had any serious discussion with anybody as a result of that concern. I just want to reiterate that the concern still exists and I hope you may have some suggestions by which we may be able to continue the control over public money that the public expects the Congress of the United States to have.

Secretary KENNEDY. I will be glad to look into that and talk to you further on it. I think there is a good point there. Senator CASE. Thank you.

Thank you, Senator.

AMERICAN BUSINESS COMMUNITY OVERSEAS

Senator GORE. If you have not become aware already, Mr. Secretary, I hope you will become aware that there is a very studied and vigorous effort on the part of the large American business community doing business overseas to shift American foreign aid into so-called lending operations. As Senator Symington pointed out, some of the loans are really not loans at all. It is grant aid and much of the motivation, I am sure you will come to see if you have not already done so,