G. PROVISIONS IN ADB STAFF REGULATIONS FOR SALARY ADVANCES

The Bank provides a strictly regulated and limited facility for salary advances to its employees. This facility is designed primarily to help Bank personnel get settled in the initial months that they are in Manila. This provides a comparable financing facility to those which are customarily available to employees of other international agencies, governments and private companies who move to a duty station other than their home. In addition there is a small limited facility under which staff may get salary advances in emergencies and in hardship cases.

Many employees in the Bank come from countries where they do not get foreign exchange made available to them when they move to Manila. Normally they are required to pay a rental advance of 3 months or more to obtain housing. And they need to purchase household furnishings and effects on moving to Manila. Many Asian countries maintain foreign exchange restrictions and new Bank employees could not get sufficient foreign exchange from their countries to buy the necessities for getting established in Manila. Thus they need some kind of salary advance from the Bank, particularly in order for them to arrange for housing for which there is no ADB allowance. So they do require some convertible currency, which then is converted into pesos in Manila to cover these costs.

On the 31st of December 1969, there were 77 individual outstanding loans. The average loan was $1,680, giving a total of $129,363 on that date. No defaults have occurred. The outstanding amount can be expected to be lower in the future because the peak of employment increase has already been reached.

Specifically, the salary advance arrangement provides for:

A. Assistance to staff members in getting settled in their duty station. Within 6 months after arrival at duty station a staff member is eligible for an advance not exceeding three months' salary, repayable within 18 months with interest at 5 per cent per annum; in special cases, but also only within 6 months of arrival in Manila and on approval by the President, an additional advance of up to $2,000 may be obtained which is repayable in 12 months with interest at 6 per cent per annum.

B. Assistance in special and unusual circumstances arising from disasters such as fire, flood, etc., and in cases of personal hardship or tragedy resulting from acute sickness, injury, or death in a staff member's family. After a minimum of 6 months' service with the Bank a staff member is eligible for such special salary advance not exceeding one month's salary repayable over 6 months. After 12 months' service a staff member is eligible for a special salary advance not exceeding two months' salary, repayable over 12 months. No special salary advance may exceed two months' salary and all such advances are at 5 per cent interest per

annum.

Question. What deadlines or target dates for action on S. 3543 and S. 3628 does the Administration have? What would be the consequences if such deadlines were not met by the United States Government?

Answer.

ASIAN DEVELOPMENT BANK

Delay on the part of the United States in taking favorable action on the proposed contribution to the Special Funds of the Asian Development Bank would be widely interpreted as lack of support for the Bank and would dishearten our friends in Asia. It would be a major set-back to the momentum which has brought substantial contributions to the Fund from other donor countries. Six of the developed country members of the Bank have already pledged contributions to the Special Funds, at least partly in anticipation of U.S. participation.

The concessional financing which the Bank can provide from its Special Funds resources is essential to the development of those countries most in need of assistance those countries which need long-term investment in basics but which have a very limited capacity to service loans on conventional terms. The United States should act now to join in building a strong, long-range concessional lending facility in the Bank. Only in this way can others be encouraged to maintain their support of or to contribute further to this facility.

The proposed legislation provides that the first year's contribution be for FY 1970. Therefore, it is hoped that the bill could be enacted promptly.

INTERNATIONAL MONETARY FUND

There are broad reasons for United States participation in the proposed increase in International Monetary Fund quotas. These reasons are explained in full

in Secretary Kennedy's testimony. In brief, the quota increases are needed so that the Fund's resources and credit facilities can keep pace with the general growth of the world economy. The United States should participate in this increase along with other countries, many of which will make their quota increases effective at the earliest time this can be done October 31, 1970. It is important for United States leadership in the Fund and in international monetary affairs generally that we be in a position to participate at that time.

In addition, there is a very specific reason why delay would be costly to the United States. Prompt action is necessary in order to avoid losing a substantial reserve gain. If all members except the United States were to accept their quots increases as they are entitled to do as of October 30th of this year, the United States share of quotas would decline to less than 19%. Since quota size determines the amount of SDRs which a member receives upon an SDR allocation, if the United States takes no action on this bill prior to the end of this year, it will receive $130 million less in SDR allocations on the next allocation date, January 1, 1971, than it would receive if the bill were passed. The United States thus would forego a substantial gain in reserve assets. Delay, therefore, would be very costly. Moreover, quota size determines voting power as well as SDR allocations. If all members except the United States accept their quota increases the United States voting power would decline from the present 21.40% to 17.13%. Even a temporary decline in voting power until the quota increase was finally approved would substantially damage the United States leadership position in the Fund. It would impair our voting position on a number of key issues where a vote of 80% or 85% of the total voting power is required. On 80% votes, a drop to 17% voting power would mean the loss of our right, acting alone, to block Fund action. In addition, there would be a possibility of a further drop in our voting power below 15% which would mean the loss of blocking power on 85% votes such as those to create SDRs.

WORLD BANK

With regard to the increases in subscriptions to the World Bank, United States action is required before other members can contribute the $1,975.9 million of subscriptions allocated to them. The total proposed increases in subscriptions to the World Bank are $2,222 million of which the United States share of $246.1 million represents only 11%. Other developed countries together will contribute much more than the United States, an aggregate of $1.4 billion or 63% of the total increase. The World Bank does not presently have enough authorized capital for the proposed special increases in subscriptions. As a practical matter, the increase in subscriptions to the World Bank can not go into effect unless the United States takes favorable action. The World Bank's Articles require that seventy-five percent of the total voting power vote in favor of an increase in capital stock. The United States has just under twenty-five percent of the total voting power.

The proposed increases in capital subscriptions are designed to parallel the special quota increases in the Fund. Since the founding of the World Bank and the Fund it has been a general principle that countries receiving special increases in their Fund quotas increase their subscriptions to the capital of the World Bank by a commensurate amount. The United States has in the past strongly supported the policy of parallel contribution on the ground that it results in a fairer sharing of contributions to the capital of the World Bank. Because of the burden sharing brought about by this policy, it is in the interest of the United States to continue its support.

Question. Under the Asian Development Bank Special Funds proposal the first installment of the projected U.S. Special Resources would be tied to purchases of American goods but discretion is left to the Treasury Department for determining whether the next two installments would be tied. What is the Department's current thinking about the likelihood that such untying of .S. contributions would be allowed? Answer. The proposal is designed to assure that the U.S. contribution will be used in a way which takes account of the U.S. international financial position, and at the same time makes maximum impact in furthering the Bank's development objectives.

It is intended that the first year's installment of the U.S. contribution would be available only for procurement of U.S. goods and services. However, for the second and third year installments, the U.S. Governor of the Bank, in consultation with the National Advisory Council, could allow eligibility for procurement in other ADB member countries if he determines that broadening the area of procurement eligibility would materially improve the ability of the Bank to

carry out the objectives of the Special Funds and would be compatible with the international financial position of the United States.

In addition to the United States balance of payment positions and prospects, in the National Advisory Council's consideration of this issue, one important question would be whether untying the second or third year's installment of the U.S. contribution would stimulate untied contributions from other donors. The greater the amount of untied contributions from other donors, the less would be the cost to the U.S. balance of payments from untying the U.S. contribution.

There has already been a movement away from tied procurement among the contributors to the ADB Special Funds. All the funds contributed by the Netherlands have been available for procurement in the developing member countries and in other countries making Special Funds contributions on similar terms. Following that initiative, Japan, which tied its first year's contribution, took the step when making its second contribution to permit procurement from other Special Funds contributors, as well as from all of the developing country members of the Bank. The U.K. is also following a pattern similar to the Netherlands' contribution. It is possible that a move in this direction by the United States would encourage other donors to move along the same lines and open the way for contributions from countries not willing to contribute to ADB Special Funds resources encumbered by procurement restrictions.

From the point of view of development assistance policy we want to give aid that is of as high quality as possible and to encourage other donors to do the same, in order to maximize the development impact of our assistance. The multilateral lending institutions are designed to provide an equitable sharing of the burden of development financing. It is especially important that they be able to make the most effective use of the funds at their disposal, regardless of source. Consequently, these institutions have endeavored to preserve the basic principle of competitive international procurement in their financing operations.

With respect to the Asian Development Bank, its Articles of Agreement provide that its Ordinary Capital resources be used on a competitive basis for procurement in any member country. The efficiency and economy of the Bank's Special Funds operations would be enhanced if they too were conducted in a manner under which all contributed resources would be available for utilization, as needed, for any and all projects.

Question. According to the mid-April figures on Asian Development Bank ordinary operations, a total of about $138 million has been loaned but only $10 million has been disbursed. Is that disbursement rate unusual or normal? To what degree does the Asian Bank have resources which it invests rather than disburses, and how much is invested in the United States?

Answer. As of March 31, 1970, disbursements against the $138 million loans from Ordinary Capital resources amounted to about $11 million. Such a level of disbursement is normal for an institution which is just beginning its lending activities and which is engaged primarily in financing long-term development projects. By the nature of the Bank's loans actual disbursements may follow loan commitments by some time, owing to the natural time lag between loan commitment and actual expenditure. Moreover, all of the Bank's loans to date have been approved over the past two years-$41.6 million in 1968 and $76.1 million in 1969. In March 1970 three loans from Ordinary Capital totalling $21 million were also approved. With the expected increase in the pace of the Bank's lending and with the increase in actual construction under those loans already approved, disbursements may be expected to increase in 1970 and subsequent years.

Question. Please explain the United States international balance-of-payments position for last year and for the current year on both the liquidity and official settlements bases. Why is there such a great discrepancy in the figures? Why has the Federal Reserve repudiated the accuracy of both conventional methods of determining the payments deficit or surplus, and what figures does it produce through its own measurements?

Answer. The unusually large differences in the past two years between the liquidity and official settlements measurements of our international payments balance reflect the great complexity of the various types of transactions involved in our international payments position and the inherent difficulties of developing any single definition of the over-all balance which will provide a fully accurate measurement of our position in the face of shifting circumstances.

The basic conceptual difference between these two measurements lies in their different definition of the types of U.S. liabilities to foreigners which are regarded as measuring and financing (along with changes in reserve assets) the over-all payments balance.

The liquidity balance emphasizes the distinction between liquid foreign claims on our money market and banks, whether held by foreign monetary authorities, commercial banks, or other foreigners, as compared with "nonliquid" inflows of foreign capital; whereas

the official settlements balance emphasizes the distinction between foreign official and private holdings of dollars, treating liquid claims of banks and other private holders as capital inflows and various medium-term placements, as well as liquid balances, of foreign monetary authorities as part of the "financing" used to calculate this balance.

Unavoidably, in both cases, the statistical distinctions used in drawing these balances are in some respects over-simplified and arbitrary.

Our payments situation in both 1968 and 1969 was characterized by a number of major and rather unusual developments, which have had the effect of greatly magnifying the scale and importance of the errors and distortions unavoidably associated with one or the other of these two measurements of our over-all balance. One such development, affecting both measurements, was the very large volume of borrowing by U.S. banks from the Eurodollar market and unusually high interest rates in that market, particularly in the second quarter of 1969, associated with the tight money situation in the United States. This had the effect of pulling into the Eurodollar market, either directly or indirectly, both sizable (unrecorded) outflows of U.S. private capital and substantial amounts of foreign official reserves previously held directly in the United States by foreign monetary authorities. As Eurodollars stemming from these two sources were borrowed back by U.S. banks through their foreign branches, the two balances were affected in opposite different ways:

The liquidity balance counted all of this borrowing as liabilities to foreigners (even though the unknown portion representing private outflows from the U.S. was essentially a roundabout transaction, via the Eurodollar market, not really related to or affecting our basic international position);

The official settlements balance, on the other hand, counted all of this borrowing as private investment in the United States (even though much of the related shift in foreign reserve holdings of dollars might well be highly temporary).

A further major factor, affecting primarily the liquidity balance, was the encouragement of foreign governments in earlier years to transfer substantial amounts of their liquid dollar claims into nominally non-liquid forms (giving an overoptimistic and considerably less meaningful measurement of our position during those years on the liquidity basis) following which there has been an opposite and similarly unreal distortion of this measurement as major amounts of these non-liquid holdings have subsequently been run down again.

The "adjusted over-all balance" calculated and shown in the analytical review of balance-of-payments developments published in the April 1969 as well as the April 1970 Federal Reserve Bulletin represents an analytical rearrangement of the items entering into the liquidity and official settlements balances in an effort to remove some of these large and irregular movements which, during 1968 and 1969, have tended to make these two conventional balances less useful as a measure of our underlying international payments situation.

While we are giving continual attention to improving the statistical presentation of our over-all balance of payments, we also believe that we must rely less on any one particular figure and concentrate instead on our trade and current account positions as perhaps the best reflections of the basic international competitive position of the United States.

Question. The United States almost every year now has been contributing increasing sums to an increasing number of international financial institutions. Can the Treasury Department foresee a point at which loan repayments and other factors will reverse the process and lead to increasingly smaller U.S. contributions? Please furnish an up-to-date tabulation of all existing United States contributions and commitments to international financial and lending institutions.

Answer. The World Bank and the Inter-American Development Bank rely very heavily at the present time for their funds for ordinary operations on borrowing from private capital markets and on loan repayments. For example, the World Bank in 1969 received loan repayments of $314 million and borrowed $713 million from capital markets. Comparable figures for the IDB are $48 million in loan repayments and $208 million in borrowing. Since the callable capital subscription of members acts as a guarantee for borrowings in private markets, it may be necessary, from time to time, to increase the callable capital subscription of members so that the Banks may continue their borrowing programs. It is expected that the Asian Development Bank will also follow a similar financing pattern.

With respect to the soft loan funds of the International Development Association, the Fund for Special Operations of the Inter-American Development Bank, and the Special Funds of the Asian Development Bank, these are loaned on concessionary repayment terms, including relatively long grace periods and long periods of repayment. These concessionary terms are essential if funds administered through these channels are to carry out their objective of financing high priority industrial, social, educational and infrastructure projects of great importance to the basic economic life of the developing countries. For example, IDA has a ten-year grace period and will just begin to receive repayments this year. Thus, it will be some time before the concessionary financing windows of the multilateral development banks receive sufficient funds through repayments to operate on a self-sustaining basis.

We do expect that the need for new U.S. contributions to the international financial institutions will begin to decline at some point in the future as more of the developing countries reach the stage of self-sustaining economic growth. It is impossible, however, to predict just how soon this will occur. The purpose of development assistance is to help the developing countries reach the point where they can finance their development from their own resources and from capital they are able to attract from abroad on commercial terms. A few developing countries which have received substantial assistance in the past have already reached this point, and there is reason to expect an increasing number to do so in the years ahead. We would expect, of course, that even before all of the developing countries have attained self-sustaining growth, the use of rising loan repayments by the international institutions will reduce and eventually eliminate the requirement for new contributions from donor countries.

U.S. subscriptions and commitments to international financial institutions as of the present time are as follows:

1 In addition, the Inter-American Development Bank administers the $525,000,000 Social Progress Trust Fund which was contributed by the United States.

Question. Which countries from Asia and outside the region are members of the Asian Development Bank? What are their subscriptions to the Bank?

Answer. With the formal accession of France, which is in process, the ADB has 35 members, which have subscribed $1,004 million of the Bank's $1,100 million authorized capital. Twenty-one members are regional countries, 3 of which are classified as developed-Japan, Australia and New Zealand; 14 members are developed non-regional countries, including the United States, Canada, and 12 European countries. With the accession of France the Bank will include among its members all the industrialized World Bank member countries of Asia, North America and Western Europe except Iceland, Ireland and Luxembourg. In addition, Switzerland is a member of the ADB.

The regional members of the ADB have subscribed to $624 million of the Bank's Ordinary Capital (including $200 million by Japan); the non-regional members have subscribed to $380 million (including $200 million by the United States).

A list of the members of the Asian Development Bank and their subscriptions to Ordinary Capital follows: