[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
WORLD BANK LENDING TO IRAN
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL
MONETARY POLICY, TRADE AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 29, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-59
92-903 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Domestic and International Monetary Policy, Trade and
Technology
PETER T. KING, New York, Chairman
CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice BERNARD SANDERS, Vermont
Chairman MELVIN L. WATT, North Carolina
JAMES A. LEACH, Iowa MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware BARBARA LEE, California
RON PAUL, Texas PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois BRAD SHERMAN, California
DOUG OSE, California DARLENE HOOLEY, Oregon
JOHN B. SHADEGG, Arizona LUIS V. GUTIERREZ, Illinois
MARK R. KENNEDY, Minnesota NYDIA M. VELAZQUEZ, New York
TOM FEENEY, Florida JOE BACA, California
JEB HENSARLING, Texas RAHM EMANUEL, Illinois
TIM MURPHY, Pennsylvania
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
C O N T E N T S
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Page
Hearing held on:
October 29, 2003............................................. 1
Appendix:
October 29, 2003............................................. 29
WITNESSES
Wednesday, October 29, 2003
Clawson, Patrick, Department Director, The Washington Institute
for Near East Policy........................................... 18
Schuerch, Hon. William E., Deputy Assistant Secretary, Department
of the Treasury................................................ 6
Takeyh, Ray, Professor of National Security Studies and Director
of Studies, Near East and South Asia Center, National Defense
University..................................................... 16
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 30
Emanuel, Hon. Rahm........................................... 31
Clawson, Patrick............................................. 33
Schuerch, Hon. William E..................................... 37
Takeyh, Ray.................................................. 41
WORLD BANK LENDING TO IRAN
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Wednesday, October 29, 2003
U.S. House of Representatives,
Subcommittee on Domestic and
International Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2128, Rayburn House Office Building, Hon. Judy Biggert
[chairwoman of the subcommittee] presiding.
Present: Representatives Biggert, Maloney, Sherman, Hooley,
Gutierrez, Frank (ex officio) and Emanuel.
Chairwoman Biggert. [Presiding.] This hearing of the
Subcommittee on Domestic and International Monetary Policy,
Trade and Technology will come to order.
Without objection, all Members' opening statements will be
made a part of the record. The policy is that the subcommittee
Chair and Ranking Minority Member are recognized for 5 minutes
each. All of the Members are recognized for 3 minutes each and
we will alternate between the majority and the minority.
Mr. Frank. I ask unanimous consent to switch time
allotments with the gentleman from California.
Chairwoman Biggert. Without objection.
Mrs. Maloney. Madam Chairman, also I would like to give my
remaining time to the gentleman from California, since he
worked so hard to secure this hearing. I will probably just be
talking 3 minutes.
Chairwoman Biggert. Without objection.
Good morning. We meet here today to discuss the World
Bank's lending to Iran. In particular, we will take a look at
whether U.S. objectives and priorities are best served through
the current policy of opposing World Bank loans to Iran. The
issue is somewhat complicated by the fact that while the United
States holds the largest voting bloc on the board of Directors
of the World Bank, we do not hold the majority of the shares.
So the first point to keep in mind is that we cannot alone
direct or dictate the bank's lending decisions with respect to
Iran or any nation.
The second key point is that the World Bank's charter
requires that lending decisions be based solely on economic
considerations and not on political factors. Views also differ
on whether the World Bank is the appropriate venue or effective
mechanism for the conduct of U.S. foreign policy. This is
especially questionable with respect to Iran, where the
proportion of World Bank lending in relation to the country's
economy is minimal; $42 million in funds disbursed to a country
with a GDP of $115 billion.
Beyond these complications are the more important issues
related to our national security. There is no question that
Iran is the leading state sponsor of terrorism in the world.
Since 1996, the United States Executive Director to the World
Bank has been required to vote against any lending to any
terrorist states, including Iran. But despite our ``no'' votes,
four loans have been approved for Iran since 2000. Some Members
of Congress believe it would be useful to augment the political
voting restriction with economic consequences whenever the U.S.
loses a vote on lending to Iran. Mr. Sherman on our committee
has proposed legislation that would in fact reduce funding to
the World Bank by the amount of money that the World Bank
provides to Iran. The funding would instead go to the U.S.
Agency for International Development.
We will this morning explore how the U.S. works within the
World Bank to discourage lending to Iran pursuant to its
statutory direction. We also will explore whether elimination
of U.S. funding to the World Bank, tied to the World Bank's
activities in Iran, would be successful in discouraging the
World Bank to lend to Iran.
We also will hear testimony from expert witnesses on
whether it is wise to attempt to further ostracize Iran from
the international community by restricting its access to World
Bank funding and personnel.
At this time, I would like to yield to Ranking Member
Maloney for her opening statement.
Mrs. Maloney. I thank the gentlelady for yielding.
Today, U.S. forces are stationed in Afghanistan where they
fight the war on terror. A few hundred miles away, our military
is under daily attack working to establish a functioning
democracy in Iraq. Geographically between these two nations
lies Iran, a country of extreme strategic important with which
the United States government has only the most remote
diplomatic contacts.
This morning, the subcommittee considers the question of
whether the U.S. should support World Bank projects in Iran.
This is a profoundly important period in Iran's history and
many Iran watchers, especially in Europe, argue that the World
Bank engagement in the country will yield positive long-term
results. In fact, there is an article in the international
section of the New York Times today, which I would like to
place in the record, entitled ``A Change of Heart in Teheran.''
Chairwoman Biggert. Without objection.
Mrs. Maloney. Reform President Mohammad Khatami was
reelected in 2001 with 77 percent of the vote. Despite the
large margin of victory, Khatami has disappointed many of his
supporters by failing to successfully enact major reforms and
the hardline mullahs remain a powerful political force in the
country.
The country's energy-based economy also faces major
challenges as the post-Islamic revolution baby-boomers reach
employment age and require jobs. The World Bank activities with
Iran are proposals aimed at alleviating poverty and building up
the public infrastructure. The bank also offers much-needed
technical assistance to the country, which must pursue ways to
diversify its economy. These projects remain highly
controversial because Iran continues to support some of the
most evil terror organizations the world has ever known. Iran
provides assistance to Hezbollah in Lebanon and to terror
groups that oppose the Israeli-Palestinian peace process,
including Hamas and Islamic Jihad.
The country is also thought to harbor al Qaeda, and
President Bush has included it in the so-called ``axis of
evil.'' Iran remains subject to sanctions passed by Congress
and support by past and present administrations because of its
numerous human rights violations. Most frightening, Iran has
actively worked to develop nuclear weapons and only signed an
agreement backing away from additional development on October
21 of this year.
No matter how Members feel about individual projects in
Iran, there is also the U.S. credibility at the World Bank and
in multinational organizations in general. The U.S. is the only
world superpower, but we do not hold a veto on the bank.
Despite U.S. opposition, these programs are moving forward at
the World Bank because of the overwhelming support of the
Europeans.
While I support the current U.S. position, I look forward
to hearing the panelists today. Specifically, I look forward to
a discussion of whether our resistance to projects that fund
public works and poverty alleviation plays into the hands of
Iranians hardliners who benefit by stoking anti-Americanism.
I look very much forward to this hearing and I especially
want to thank Representative Brad Sherman from California for
all of his work on this issue, for his amendments and his
projects and for suggesting the topic today.
I yield my remaining time to Mr. Sherman.
Chairwoman Biggert. Would you like to hold that until we
hear from the Ranking Member and then include that?
Mrs. Maloney. Yes.
Chairwoman Biggert. Okay. The Ranking Member?
Mr. Frank. Thank you, Madam Chair. I have another meeting
that I have to go to, but I did want to take my 3 minutes and
yield the rest of my time to the gentleman from California, who
as the gentlelady from New York has mentioned is really the
main reason we are here today. I appreciate the majority
agreeing to this hearing, the chairman of both the full
committee and the subcommittee, in response to concerns that
the gentleman from California brought forward.
We worked earlier this year in cooperation with Treasury to
meet our obligations with regard to the International
Development Association and related agencies, and I am very
much for that. I have been a supporter of the work of the World
Bank, although I have pushed for some changes in it. It is
important for the bank to understand, and I would guess that
there might be a person or two here who worked for the bank,
that they are not allowed to testify before us, but they are
perfectly free to sit in the room and listen to us, and I would
think they are probably doing that.
A continuation of this kind of lending to Iran jeopardizes
American support for the bank. I regret that. I think the bank
plays a useful role, and I think partly because of the work
that has been done here in the House of Representatives in
particular, we have improved that role, although it is still
not perfect, but giving money to Iran from several standpoints
seems unwise to many of us. First of all, a country that is
able to pursue a nuclear weapons program hardly ought to be
able to plead poverty when it comes to dealing with the needs
of its people.
Secondly, we have a regime that is violative of human
rights internally and of the requirements of civility between
nations externally. I understand that our votes in the bank
have been against this, but I think we need to do a better job
of lobbying and we need to convey to others that we are putting
things at risk. We are not here talking about the alleviation
of desperate poverty. I am prepared to make some concessions in
that regard. We are talking about a country that has
significant energy resources and I do not think that if we were
to deny these loans we would be plunging Iran into any
significantly worse economic situation.
I believe that as people understand that the United
States's participation in the World Bank is going to this
extent to the benefit of Iran, resistance to that participation
will go up. Let me say this as a supporter of the bank, I think
the bank should consider itself lucky. Treasury should consider
itself lucky that this was not a year that we were being asked
to vote funds directly for the World Bank itself. I think that
would be a very significant problem in the current context and
should be.
So I again want to express my appreciation to the gentleman
from California. This is a very serious warning, not to the
U.S. Treasury, although they could do more, I think, but mainly
to other countries that have votes on the board of the World
Bank. If they continue, they will make the job of American
cooperation with the bank, which I regard as a very desirable
thing, much harder than it is.
Thank you, Madam Chair.
Chairwoman Biggert. Thank you.
The gentleman from California, Mr. Sherman, is recognized
for I think a grand total of 7 minutes.
Mr. Sherman. Thank you, Madam Chair, for having these
hearings, and hopefully they will lead to a markup of the
legislation that I have authored that you have described. I
expected to be here for every minute of these hearings. As you
may know, my new Governor is holding a meeting in light of the
fire situation affecting my own district and our entire state.
I will need to be at part of that meeting, but I will be here
every minute I can be.
Our policy toward Iran can best be described as continuing
schizophrenia. That is to say, the Clinton administration, the
Bush administration before September 11, and the Bush
administration after September 11 have continued a
schizophrenic policy. Part of that schizophrenia is illustrated
by our difference in approach between Iran and Iraq. Iran is
maybe 3 years from a nuclear weapon, and already has other
weapons of mass destruction. Iraq might have been 30 years from
a nuclear weapon, had the U.N. continued to do its job, maybe
longer. Iran is harboring al Qaeda today, including those who
did the bombings in Riyadh that killed Americans and Saudis so
recently. It is the number one state sponsor of terrorism,
Saddam never achieved that title, and as our Ranking Member
indicated, a terrible human rights record as well.
So we have a schizophrenic policy that is illustrated by
our economic policy. On the one hand, we have the Iran-Libya
Sanctions Act. Not only do we prohibit our oil companies from
doing business with Iran, we punish the oil companies of our
allies who choose to invest in Iran, or at least we threaten
to. So we punish others who do business as usual, but we do
business as usual. Clinton announced and Bush continues $150
million of non-energy imports from Iran, for no reason other
than to facilitate that regime's economy. It does nothing for
ours. And even after September 11, this continues. I do not
think that the need to import Iranian caviar is vital to our
national security. Those imports continue.
Then we have elements of the administration hinting that
maybe Iran should be the next invasion target, while other
elements of the administration have pretty much allowed money
to go indirectly from the U.S. Treasury to the terrorists in
Teheran. That has happened through the World Bank. American law
requires us to at least go through the motion of voting no, but
what really happens at the World Bank is with winks and nods
and behind closed doors.
What has the World Bank done? They have approved since May
2000 some $432 million, but fortunately they have only
disbursed $38 million. Immediate strong action from this
administration could prevent further disbursements. In
addition, they are considering projects of $150 million,
another $240 million, $70 million and $84 million projects
totaling $540 million. The administration could take strong
action and prevent those. We have a $1 billion question between
that which has been authorized or is likely to be authorized in
the World Bank, and that which has been disbursed, at least a
difference of roughly $950 million.
Now, one thing that the apologists for the World Bank do is
make what I call the ``separate fingers'' argument. They argue
that IDA, one finger of the bank, is separate from IBRD,
another finger of the bank. But what does the World Bank say on
its Web site? IBRD, the entity that is giving the money to
Teheran, and IDA, the entity that we give money to, what does
it say? IBRD and IDA are run on the same lines. They share the
same staff, the same headquarters, report to the same
President, and use the same standards when evaluating projects.
IDA simply takes its money from a different drawer. I think
when they make the ``separate finger'' argument, they are
giving us the finger.
Now, money is fungible. The government in Teheran must make
some domestic expenditures in order to obtain power. That
regime spends the minimum necessary to show its people it is
doing a little something for them, and takes every additional
penny that they can get their hands on to kill as many
Americans as possible. Every extra penny is an extra bullet
aimed at us.
This committee and this Congress contain many people who
support foreign aid. When we give that foreign aid to
bureaucrats who believe in helping those in Teheran meet their
financial needs, we endanger American support for foreign aid.
Money is fungible. The government in Teheran must make some
domestic expenditures, and then they can spend our money
instead of theirs. They can use their money for terrorism.
Today, we hopefully will learn what the administration will
do to stop these disbursements and how that fits into an
overall policy to economically isolate this regime until such
time as it changes its policies. I realize $1 billion is not
the be-all and end-all, but what does it do when the World Bank
sends subsidies to the terrorists in Teheran? It puts the stamp
of approval of the most prestigious economic institution in the
world on doing business as usual with that government. How
could anybody doubt that you should do business as usual with
that government? The World Bank subsidizes them.
So hopefully we will learn that an administration that can
invade one country can at least stop loans to a country that is
a far greater threat to American security. I know it has been
pointed out that the World Bank charter does not explicitly say
that there should be political considerations, but I would note
that if the World Bank had made loans to Hitler had it existed
at that time, the United States would not have just rolled
over. We would not continue to participate, and we certainly
would not have given those same bureaucrats more funds. It is
time for us to realize that the regime in Iran is developing
nuclear weapons aimed at us, and the American people will pay
for foreign aid only if it is treated carefully.
I yield back.
Chairwoman Biggert. The gentleman's time has expired.
At this time, I would like to introduce our first panelist,
beginning with the Honorable William Schuerch, Deputy Assistant
Secretary for International Development of the U.S. Department
of the Treasury. Welcome. Deputy Assistant Secretary Schuerch
was named Deputy Assistant Secretary of the Treasury for
International Development, Debt and Environment Policy on March
15, 1998, after acting in that capacity since September 16,
1996. He serves as policy adviser to both the Assistant and
Under Secretaries of International Affairs. Mr. Schuerch has
responsibility for formulation of international debt policy and
of a wide range of economic, financial and environmental policy
issues pertaining to U.S. participation in the MDBs.
Welcome, Mr. Schuerch. Without objection, your written
statement will be made part of the record, as will the other
panelists on the second panel. You will be recognized for a 5-
minute summary of your testimony. After that, we will have
questions and our Members will keep their questions to a limit
of 5 minutes also. If you would care to begin? Thank you.
STATEMENT OF HON. WILLIAM E. SCHUERCH, DEPUTY ASSISTANT
SECRETARY, DEPARTMENT OF THE TREASURY
Mr. Schuerch. Thank you, Vice Chairman Biggert and Ranking
Member Maloney, and distinguished Members of the subcommittee.
We welcome the opportunity to testify today on the
implementation of U.S. policy on multilateral bank lending to
Iran.
As you know, it is not a new policy and this administration
agrees with the Congress that Iran should not have access to
MDB lending. I want to assure you that the Treasury Department
and the U.S. Executive Director at the World Bank, while not
fully successful, have consistently and actively sought to
block all proposals of assistance for Iran.
I want to make points about the bank itself, however. The
bank plays a critical role in helping the United States achieve
its efforts to increase world economic growth, reduce poverty,
build open-market economies, and encourage the growth of civil
society through most of the world. Second, the bank is an
important foreign policy tool for the United States and is a
vehicle for leveraging our foreign assistance resources
throughout the globe. The bank has played critical roles in
responding to democratic and market openings in central and
eastern Europe and in what we used to call the newly
independent states of the former Soviet Union, in Bosnia and
Afghanistan, and in combating terrorist financing. Concerning
Iraq, it has completed a needs assessment. It will manage a
trust fund for other donors, and it has recently pledged
significant resources for rebuilding.
Now, as concerned bank lending to Iran and U.S. policy, our
efforts to block these resources is consistent with
congressional intent for both terrorism and human rights. We
share congressional concerns that have been clearly
demonstrated this morning. We are deeply concerned about the
weapons of mass destruction programs in Iran, particularly a
nuclear program, and we have a quite active interaction at the
moment with the International Atomic Energy Agency that is
going on. We also believe Iran needs to make very substantial
economic reforms.
U.S. efforts to block World Bank assistance to Iran were
fully successful for seven years, from July 1993 to May 2000.
During this time, there was a consensus among G-7 nations
blocking all lending to Iran. Unfortunately, in May 2000 the
coalition split. Other Members began supporting re-engagement
in Iran due to their expressed views that engaging with Iran's
reformers would support their efforts against Iran's
hardliners. This view is still evident as negotiations go on
over Iran's nuclear program.
In addition, commercial opportunities in Iran for U.S.
companies which could not compete due to U.S. sanctions, have
been enticing many partners. Thus, despite the U.S. no votes
and abstentions from France and Canada, the rest of the World
Bank's executive board approved two loans, a $145 million
sewerage project and an $87 million primary health care and
nutrition project. Later, in May 2001, the executive board
discussed an interim strategy for Iran. It proposed low-income
housing, sewerage, urban upgrading and community-based
infrastructure and employment creation projects. We opposed
that strategy and raised our concerns about the bank's
engagement with Iran.
Since then, despite ongoing efforts with other shareholders
not to support lending, a $20 million loan for environmental
management and an $180 million loan for earthquake recovery
occurred in 2003. Additionally, the IFC approved in December
2002 a $5 million investment on a joint venture with a private
Iranian bank, a major French bank and the IFC. This was the
IFC's first investment in 25 years. The U.S. voted no and
lobbied against it with other shareholders.
This is the full picture of MDB lending, but as others have
said already, there is a pipeline that I will not describe in
detail, I think it has been reasonably described, of additional
projects. The numbers that line up are substantial in terms of
totals of millions of dollars. It is a four-project long list.
In summary, from July 1993 to May 2000, U.S. efforts to block
World Bank and MDB assistance to Iran were completely
successful. Colleagues shared our views that it was
inappropriate for the bank to engage with Iran. Since that
time, as colleagues have changed their views and decided that
engagement had some benefits or potential benefits, the bank
has ended up approving $432 million, primarily for basic human
needs-type activities.
I want to emphasize that the lending that has occurred from
the World Bank is from its hard-loan window and from its
private sector window. It is not from the International
Development Agency. As such, lending to Iran is provided at
market rates, not concessional rates and maturities. The IFC
funding, while supporting investments in Iran, is not providing
assistance to the government of Iran itself, but to private
companies. The World Bank is an organization of 183 member
countries. The U.S. is its largest shareholder. We have a 16.4
percent interest. That share is not controlling, nor do we have
rights to veto individual lending decisions. This is
fundamentally a weighted democracy structure, weighted by
contribution levels primarily.
Blocking MDB support for a country is difficult.
Occasionally, it has been possible when substantial
international outrage exists over specific events. There are a
few examples. In 1989 after the Tiananmen Square incidents in
China, it was possible to block lending to China for
approximately 1 3/4 years. After that point, the coalition
would no longer support that action and the U.S. has been
voting in opposition to China in the bank ever since, while
others have been supporting. Nuclear testing by Pakistan and
India in 1998 led to concerted efforts. Those efforts held the
coalition together for 2 years and held up non-basic human
needs lending. Beginning in 1987, in the case of Burma, there
has been a much more successful effort due to the repression of
opposition leaders by the military junta. That effort continues
and has continued in its success.
Basically, I think the facts indicate it is extremely
difficult to hold together an international consensus in
response to specific events and even to continuing events.
These are the extreme exceptions in the history of the bank,
and I would say even if one looks at bank projects and votes on
the bank board, there are only one or two instances where they
have been turned down once offered in the board. So there is
much discussion behind the scenes before things are brought
forward.
Finally, Madam Chairman, I would like to emphasize this
administration's consistent voting record against MDB
assistance to Iran and our continued efforts to discourage
World Bank engagement. The administration will continue to
oppose bank lending until meaningful political, economic and
human rights reforms have taken place. We will also continue
our efforts to marshal support from other donor countries, bank
management and other shareholders in order to stop lending to
Iran.
Thank you.
[The prepared statement of Hon. William E. Schuerch can be
found on page 37 in the appendix.]
Chairwoman Biggert. Thank you, Mr. Schuerch.
I will now recognize Members for 5 minutes each to ask
questions, and would recognize myself first of all.
Mr. Schuerch, could you give us more specifics? What is the
Treasury Department doing really to convince other members of
the World Bank to limit the amount of monies that they would
give to Iran?
Mr. Schuerch. The Treasury does a range of activities. It
meets with other shareholders. The U.S. Executive Director has
discussions with the Executive Directors of other
constituencies in the institution; makes very clear the U.S.
position in opposition to lending. The U.S. has been
particularly strong on the matter. I know in the Congress it is
less focused on the difference between being opposed and being
against lending, but in fact U.S. law requires opposition. It
does not require us to vote no in the World Bank on these
loans, and yet we have chosen, because of how serious we take
the issue, to vote no in every instance in the case of Iran.
I also directly interface with senior officials in these
institutions, managing Directors, vice Presidents, and also in
the case of the IFC, with the head of the IFC, and directly
express the U.S. position on membership issues and on votes
issues when we think that is important enough, and that has
certainly been done on Iran on a number of occasions. Sometimes
we have meetings where the G-7 Executive Directors get together
and usually that is the case when we have coalitions of this
sort. They are very candid discussions and push as well. We
also have relationships and use the State Department's contacts
through diplomatic channels.
Chairwoman Biggert. Thank you. What would happen for the
U.S. Executive Directors of the World Bank to support
development loans for Iran? What would have to happen that they
would vote yes for those?
Mr. Schuerch. To get other shareholders?
Chairwoman Biggert. No, for the U.S. to vote for the funds.
Mr. Schuerch. I do not think I am prepared to lay out a
specific line of individual actions. There is a broad, complex
relationship with Iran. There are very strong feelings. Mr.
Sherman has been quite eloquent on concerns about terrorism,
and others have also, weapons of mass destruction and nuclear
issues, human rights issues, Middle East-related terrorism
issues. I think we have enough flexibility that if one were
looking at questions of responsiveness, there is flexibility to
shift between an abstention and a no within the law. We have
not chosen to do that.
Chairwoman Biggert. If Mr. Sherman's language became law,
would it affect the World Bank's commitments to countries other
than Iran by lowering the overall amount of funds the bank
could commit?
Mr. Schuerch. Mr. Sherman's characterization of the non-
severability between IDA, the International Development
Association, and funds going to the World Bank, I would like to
respond to because these are very different institutions. They
have different charters. He is accurate in saying they have the
same staff and the same chairman of the board, but the fact is
they have different corporate structures. They are legally
different corporations and they have totally different
financing mechanisms. The World Bank, we provide paid-in
capital and callable capital. We go to markets to borrow
private sector money and those loans go at market rates.
If you look at IDA, it is a direct appropriation from the
Congress. It is provided to countries with incomes a little
over half the wealth of Iran. Consequently, any cut in IDA
dollars in fact impacts a whole different set of countries, and
in fact the poorest of the countries, the ones that have been
receiving HIPC resources for example, and not the Iran-type
countries.
Chairwoman Biggert. Would H.R. 2466 restrict future
emergency earthquake funds or other humanitarian aid from the
World Bank to Iran?
Mr. Schuerch. I should be clear that we are actively
opposed to that piece of legislation. We do not believe it will
have a direct affect on decisions in the bank of other
shareholders on lending to Iran, or certainly not on loans that
have already been approved by the board. It would reduce
resources available for the poorest countries in the world.
Chairwoman Biggert. Thank you. My time has expired. The
gentlewoman from New York, and Ranking Member?
Mrs. Maloney. I thank the Chairlady for yielding.
I really would like to follow up on the eloquent statement
of my colleague, Brad Sherman, when he mentioned in his opening
statement that money is fungible. Critics of the World Bank
projects in Iran have argued, as he did today in his opening
statement, that funding going to these projects frees up
funding for the country's government to possibly spend money on
arms and potential weapons. Do you agree with this statement?
Could you elaborate on what precautions are being taken to
prevent the bank from inadvertently boosting Iran's ability to
spend more money on odious items such as weapons and support of
terrorist activities?
Mr. Schuerch. The fungibility argument is one that I have
been dealing with in foreign aid matters for over 20 years. It
comes up repeatedly. It comes up related to our own bilateral
aid programs with the USAID. It is an argument that says if we
give a country a dollar, we can pick the most odious thing it
is doing and claim our dollar is funding that, rather than the
best thing a country is doing, and claim our dollar is funding
that. So it is an interesting rhetorical exercise.
But let me talk to the bank itself. The bank actually
provides money for specific purposes. It audits the use of
those resources and makes appropriate assurances that its
resources are going for the purposes they have been approved
for. There is an external evaluation. There is a group that
looks at corruption issues and so forth. So it is also true the
bank has different types of funding mechanisms. It can give
balance of payments resources. It can give cash transfers for
sector policy issues. It can give programmatic lending, which
is direct support to budgets.
I think it is worth noting that none of the loans that have
come to the bank board propose any of that sort of activity or
support for Iran. They are all project-specific loans, sewerage
projects, health projects and so forth. The bank will take
appropriate actions to ensure that the resources go for those
purposes.
Mrs. Maloney. In how many countries is the World Bank
participating in which the United States is opposed to funding
any projects? Is Iran by itself, or are there other countries
in the same status?
Mr. Schuerch. There are many countries that are caught in
legislative provisions that have been put in. I think it is
fair to tell you we have, and I do not know if the count is
perfectly accurate, I suppose there are perceptions on that,
but we have 38 different pieces of legislation that direct
voice and vote of the United States in the World Bank and in
the other institutions.
I would say the most parallel ones in this particular case
probably is the China vote. We have been voting no on all
lending in China, except basic human needs lending in China,
since 1989, since Tiananmen Square. As I said earlier, it was
an effective approach in terms of other shareholders and
holding coalitions together for approximately 2 years. We are
alone voting no in those instances. Burma has been more
successful, but the others are more complex. We vote against
Iraq lending. It is on a terrorism list. There are others on
the human rights list. So Iran is not alone in this
circumstance and it is not alone in the circumstance that loans
move forward over U.S. objections to these voice and vote
principles.
Mrs. Maloney. Currently, when the World Bank considers
funding a project in Iran, does the U.S. participate in the
discussions about the scope of the project, or do our
representatives just simply assert a no vote? Are we part of
the negotiations? Do we try to structure to make sure that it
is not spent for an odious reason, or do we simply say no? How
does it work?
Mr. Schuerch. It is a sensitive question. It works
differently on different matters at different times. I want to
address the question of the charter of the bank, to give you a
little perception, because there are sensitivities about public
perceptions about what the U.S. does related to the World Bank
or can do, and the sensitivities of those of other
shareholders. In some respects, any activities that we
undertake that the bank acknowledges and takes part in are
activities that other shareholders also have the right to take
part in.
Mrs. Maloney. How much shareholding do we have in the bank?
Mr. Schuerch. We have 16.4 percent of the World Bank.
Mrs. Maloney. We have 16.4 percent. Are we the largest
shareholder in the bank?
Mr. Schuerch. We are the largest single shareholder. If you
talk to many, they would honestly and accurately characterize
the United States as running the World Bank. It is clearly not
the case, and it is clearly not the case in this instance or in
the China lending instance. But we do have influence and we do
use that influence behind the scenes as much as we can. I think
I am a little reluctant to describe it because I do not want
to, frankly, encourage other countries to complain about this
by putting it in the public record.
I do want to say that the bank's charter is not only, as
Mr. Sherman described, one that does not have politics
explicitly in it. It is exactly the opposite. It explicitly has
statements against politics in decisionmaking. I say this not
to describe U.S. attitudes, but to describe the culture in
which other shareholders, and frankly this charter passed the
United States Senate. Article four, section 10 of the charter
says the banks and its officers shall not interfere in the
political affairs of any member, nor shall they be influenced
in their directions by the political character of the member or
members concerned. Only economic considerations shall be
relevant to their decisions, and these considerations shall be
weighed impartially in order to achieve the purposes stated in
article one.
So it is quite clear on this subject. We get this explained
to us from other shareholders repeatedly. It is a situation
which we live with because certainly the bank was created for
economic purposes. It was also created broadly for political
purposes.
Chairwoman Biggert. The gentlewoman's time has expired.
Mr. Sherman, you are recognized for 5 minutes.
Mr. Sherman. I am flabbergasted that you say that we are
not required by law to vote no against loans to Iran and that
it is somehow a major concession from the administration to
those of us who do not want to see Iran develop nuclear
weapons, that you in fact vote no. I am told that the statute
says that we are supposed to use our voice and our vote to
oppose loans. If you are required by statute to oppose
something, you kind of ought to vote no. I may have that wrong,
but I do not think so.
More importantly, I am quite concerned that much of your
testimony could be viewed as a description of why these loans
are okay. You talk about earthquake aid, but this earthquake
aid, which is like emergency aid getting directly to the
people, isn't this money going to Iran more than 2 years after
the earthquake? Isn't it just kind of free cash to reimburse
them for whatever they have already spent? Could you
characterize this earthquake aid as emergency immediate money
getting there in the weeks following the earthquake?
Mr. Schuerch. Let me first address your comments on the
word ``oppose'' in the legislation. I think we ought to be
clear and we ought to have no misunderstanding on this issue.
There are provisions of law that require the U.S. executive
branch vote against lending in certain circumstances. That use
of legislative language requires us to vote no. There are other
provisions of law that require us to oppose, and those
provisions of the law permit abstentions, which is the most
typical behavior pattern, and no votes.
Mr. Sherman. If I can interrupt, clearly Congress is going
to have to write its language to provide less flexibility to an
administration if you think it is that a statute requiring
opposition allows something other than voting no, but in fact
you do vote no, so that it not the issue.
I have such limited time. I would like you to respond to
the rest of that question for the record, because I want to go
on to another question. You act as if we have no influence with
the Europeans; that all we can do is beg; get down on our knees
and beg again. And then if they vote against us, well, gee,
there is nothing we can do about it. When it came to the issue
of bananas, none of which are grown in the United States, we
turned to the Europeans and threatened retaliatory tariffs.
Have we ever indicated to any government that we would deprive
them or their citizens of a single penny if they voted to in
effect send World Bank, much of it ours originally, to those
who are developing nuclear weapons to smuggle into American
cities? One penny, one nation, one instance?
Mr. Schuerch. I will answer that directly very quickly, but
you should also be aware when you are looking at the no versus
abstain issue that the Congress changed the law as it related
to terrorism in 1994, and switched from a mandatory no vote to
an opposition position. So there is no doubt that the people
writing the legislation understood its meaning.
In terms of the latter question, have we threatened
different sorts of trade sanctions and so forth tied to the
World Bank?
Mr. Sherman. Or anything, maybe like skipping a
Presidential visit; not letting them come to the Fourth of July
party. Have we deprived them of a single hors d'oeuvre? Or have
we basically said, you can vote the way you want to; you can
subsidize the nuclear destruction of American cities, if it
ever comes to that; and you will not lose a single hors
d'oeuvre?
Mr. Schuerch. I think what I would say to you is, in short,
I am not aware of us threatening France or Germany or Japan or
Italy with that kind of behavior over this issue in the World
Bank at any time.
Mr. Sherman. So we were much tougher in defending our
banana exports than in defending the American people from the
terrorism and nuclear weapons programs of Iran.
Mr. Schuerch. We have deep and complex relationships with
our major allies that cover subjects much broader than this
one.
Mr. Sherman. Just to reiterate what I said, this
administration cares more about our banana exports, which we do
not even grow here, than it does defending American security
from this threat. That is kind of what these hearings are all
about.
Mr. Schuerch. I think you better count the number of troops
that we have over in this part of the region, if that is what
you think.
Mr. Sherman. Oh, there is Iraq. How many troops do we have
in Iran?
Mr. Schuerch. This issue is much broader than Treasury and
a few dollars out of an international institution that has a
weighted voting structure. We have Americans next door to this
country day by day by day and dying day by day, so the
characterization is not one we agree with.
Chairwoman Biggert. The gentleman's time has expired.
The gentleman from Illinois is recognized.
Mr. Emanuel. I would like to thank the Chairlady.
As indicated in the papers today, the Iraq Governing
Council is negotiating with Iran a swap deal relating to oil
and electricity, similar to what it is doing with Syria. Are we
beginning to see the changes in how the Administration deals
with countries that are, (A), developing nuclear weapons; and
(B), supporting terrorist groups such as the Hezbollah, al
Qaeda, and the Islamic Jihad? Is there now a shift in the way
the Administration is dealing with on the original list of the
axis of evil?
Mr. Schuerch. I think a broad discussion of American
foreign policy vis-a-vis Iran versus North Korea versus other
countries, whether they are on the axis of evil list or whether
they are behaving in ways we do not support is really an
appropriate role for the State Department, which is in charge
of this. The Deputy Secretary yesterday was in the Senate
Foreign Relations Committee, and there have been other articles
in the New York Times this morning.
Mr. Emanuel. You can appreciate, then, how some of us could
be confused. I read what the Deputy Secretary, Mr. Armitage,
said. We have the issue of the World Bank. We have the issue of
the Iraqi Council. Some of us are left with the job of
connecting dots and trying to explain it. So all I am saying
is, I am not here to have a global discussion of the
administration's foreign policy. But you can understand that
for those members of the great unwashed over here, it is a bit
confusing.
Mr. Schuerch. I think what I would say to you is that there
are a multiplicity of foreign policy tools. One looks at what
is available and one looks at the specific country situation,
and one looks at their relationships with one's allies and one
makes judgments about which tools to use because of their
likelihood of success in different circumstances. It has not
yet been a judgment of the United States government that doing
something different than voting no in international
institutions on lending to Iran and encouraging others to do so
would be more successful than switching to an abstention or to
a yes vote for some specific reason. I am not sure where your
argument leads. I suppose you support a no vote in these
circumstances.
Mr. Emanuel. No. My argument actually is, one, whether you
want to go up to the limit. Look, I think that for 15 years,
three different administrations have tried to communicate to a
moderate element in Iran. The interesting thing is every time
you try to find that, when you really need them, you can't find
them, but we spent 15 years trying to communicate with them. If
one says offering financial incentives to Iran, whether through
the World Bank or through an energy swap, is part of an
emerging strategy, or saying we want to have a dialogue, as the
Deputy Secretary said today in the paper and in testimony
yesterday, I am interested in that as part of an overall
strategy. But there are moments in which we list them on the
axis of evil, say they are developing nuclear weapons, think it
is a high priority to stop it.
We know they are supporting terrorist groups, and yet we
are giving them financial incentives. All I am merely saying,
for me, it is a bit confusing. I am well aware of the nuances
in foreign policy, but to list Iran on the axis of evil and
then offer financial incentives is an interesting strategy. I
am saying, is that part of the overall comprehensive strategy,
or is Treasury going one way and State going another?
Mr. Schuerch. We have not offered them financial
incentives.
Mr. Emanuel. Would you agree that we are funding the Iraqi
National Council, given that the United States is supporting
the reconstruction, some of the funding for Iraq does come from
the American taxpayers, when you do an electricity-for-oil
swap?
Mr. Schuerch. I misunderstood you to suggest we are
actually supporting Iran with finance.
Mr. Emanuel. I do think they are going to probably generate
some economic interest from that, wouldn't you? I do not think
they are going to engage in that economic activity if it is not
in their own self-interest.
Mr. Schuerch. I guess what I would say to you is that when
one gets in circumstances where one is trying to influence
countries, whether they be in the situation in Iraq or Iran or
North Korea, it is often the case that there is a back-and-
forth in relationships. Sometimes there are financial aspects
to it. Sometimes there are financial aspects with other allies
to that process. It is not a process that the Treasury
Department is in the middle of on a day-to-day basis at all.
There are no current plans that I am aware of to revisit the
current policies in lending and votes on lending or
discouraging others from supporting lending to Iran in the
multilateral banks.
Mr. Emanuel. No further questions.
Chairwoman Biggert. Thank you.
Perhaps the basic question that we are skirting around, is
the World Bank the best tool to use to accomplish U.S. foreign
policy goals in Iran. Perhaps you would be willing to address
that in writing, since we do not have the time, or discuss it
briefly.
Mr. Schuerch. I want to comment on it briefly. I think if
one understands the history of the creation of the bank and the
regional banks and the shift in their mission from post-World
War reconstruction to a much more development focus, we need to
understand that a lot of the international economic system
created after World War II was created because of a recognition
of failing of dealing with economic dislocations post-World War
I that in many people's minds were directly relevant to World
War II.
I think when we look at it, the bank is a good tool for
long-term strategy; for encouraging development, which we
believe fundamentally favors democracy and opening of markets
and free-trading systems, and a fair and level playing field,
if you will. When one tries to use it explicitly on a short-
term foreign policy basis or even a medium-term one, it is a
much more difficult tool to either hold other shareholders
together in support of a specific action, or to be successful
influencing the country itself. Cutting off assistance to Iran,
which we certainly have been voting for, one has to look at the
dynamics and the size differentials of what one is talking
about. Iran is a country with an economy of about $106 billion
a year. The amount of resources we are talking about in the
bank, which admittedly for the vast majority have not been
disbursed yet, are a very small sum.
Thank you.
Chairwoman Biggert. Just one last question, then. I notice
that there was a rather sizable amount of money that has not
been disbursed. Could you just give us a reason for that? Is
that because it is programmed to continue over a number of
years? Or do they have to fulfill certain steps of what they
are trying to accomplish to get the money?
Mr. Schuerch. If I were going to be aggressive, I could try
to assert that the United States has been successful behind the
scenes in order to stop the disbursement or slow it down
substantially. There are $390 million or so of undisbursed
resources out of the $432 million that has been approved. If I
were to take that position and argue it, it would have
particular problems with other shareholders. I think if you
were to ask that question of bank management, they would tell
you that Iran is a particularly difficult place to do business
in, and they are having trouble getting started and starting up
programs. So it is an initiation factor in their mind.
Thank you.
Chairwoman Biggert. Thank you very much for appearing
before us this morning.
Mr. Schuerch. Thank you.
Chairwoman Biggert. We will now turn to the second panel,
if they want to come up and take their places. Welcome. Thank
you very much for joining us today. I know that our Members are
in and out. They said that they would be back in a few minutes,
so we will continue on.
First of all, we are going to hear from Dr. Ray Takeyh,
Director of Studies for the Near East and South Asia Center for
Strategic Studies at the National Defense University. Dr.
Takeyh has written widely on Iran, political Islam, and
terrorism, with many of his pieces in scholarly works, having
appeared in the Financial Times, Washington Post, Foreign
Policy and the Middle East Journal. Second will be Dr. Patrick
Clawson, Director for Research at the Washington Institute for
Near East Policy. Dr. Clawson is also a prolific author, having
written more than 30 articles on the Middle East which have
appeared in such scholarly media as Foreign Affairs,
International Economy, Oxford Bulletin of Economics and
Statistics, and the Middle East Journal. Dr. Clawson is
currently senior editor of the Middle East Quarterly.
Welcome both of you. If you would like to begin, Dr.
Takeyh, again, 5 minutes summary of your testimony, and then
there will be questions.
STATEMENT OF RAY TAKEYH, PROFESSOR OF NATIONAL SECURITY STUDIES
AND DIRECTOR OF STUDIES, NEAR EAST AND SOUTH ASIA CENTER,
NATIONAL DEFENSE UNIVERSITY
Mr. Takeyh. Thank you very much for inviting me. I will
spend my 5 minutes, since I have already submitted a statement
for the record, dealing specifically with the three questions
that we were asked to consider, the first question being
whether we believe that restricting U.S. contributions is a
helpful policy.
As I mention in my testimony, I believe the type of
pressure that works on Iran is multilateral pressure
spearheaded by Iran's traditional lending partners, traditional
trading partners, the Europeans and the Japanese. The recent
example of Iran subscribing to IAEA's additional protocol
reveals that theocracy's policies are not immutable, and
confronted with concerted international pressure, Iran will
behave properly.
Should the suppression of the World Bank loans be part of a
larger multilateral strategy of pressure, I believe they will
be effective. But in and of themselves, they are unique and a
single gesture of U.S. dissent is unlikely to be as productive
as Washington intends. Moreover, I believe at a time when the
United States is involved in Iraq, confrontation with another
international organization, given the troubles with the United
Nations in the past year, is not helpful. Moreover, World Bank
is an institution that is necessary for reconstruction of Iraq
and perhaps the politicization of these loans in that
particular sense is unhelpful.
The second question, is the bank lending a significant
factor for Iranian management of its economy? I would suggest
that Iran's economy suffers from structural flaws that prohibit
free market reforms. In the aftermath of the revolution,
Iranian clerics created an economic system that benefits
themselves and a very narrow group of merchants within the
Bazar. This narrow collection of people tend to dominate the
trading sector, the manufacturing sector. Corruption is endemic
in this economic system. Therefore, I believe the level of
corruption now has increasingly reached Iran's oil industry
through a network of ostensibly private companies that have
positioned themselves as compulsory partners for foreign
investors seeking access to Iran's petroleum market.
In this particular economy, the World Bank's loans, which
are a rather paltry sum compared to the level of international
investment that Iran gets, are unlikely to affect Iran's key
military and spending priorities. The fact, as I said, remains
that the sums involved are not large enough to make an
impression on Iran's ruling elite. Again, the type of economic
leverage that may do so would be reduction of trade and
investment by Iran's largest partners, the Europeans, the
Japanese and the East Asian community.
At a time when theocracy requires a substantial amount of
international investments to rejuvenate its economy,
particularly to deal with the problem of youth unemployment,
the investment that is coming from the international community
is absolutely critical. The imposition of trade barriers by
those international actors will make an impression on the
theocracy and compel it to alter its priorities. However,
limited World Bank loans are unlikely to have such a dramatic
impact.
Finally, whether World Bank loans and secession of those
loans are going to make an impact on Iran's nuclear spending,
once more I am not hopeful that suppression of World Bank loans
will have the impact that is ascribed to them. Unfortunately,
nuclear weapons are beginning to emerge as the centerpiece of
Iran's deterrent strategy. Iran lives in a dangerous
neighborhood with instability on all its corners, and a rather
massive of American power on all if its peripheries. Iran's
defense planners are learning some lessons from Operation Iraqi
Freedom, namely that Saddam's purported possession of chemical
weapons did not constitute a deterrent against the United
States, and perhaps the possession of strategic weapons will.
So in that particular sense, given the emerging centrality of
nuclear weapons in Iran's strategic calculus, the World Bank
loans are unlikely to disturb that planning.
However, this is not to suggest that Iran's nuclear
calculations are immune from international pressure, but that
pressure has to be multilateral and sustained. The recent
Iranian acceptance of IAEA's additional protocols came about
only after the European Union suggested that they would not
sign additional trade and cooperation agreements, and the
Japanese similarly suggested that they will not participate in
completion of the oil exploration agreements with Iran. That
essentially pushed Iranians over the threshold.
The combined pressure of the United States and its allies
ultimately can compel important concessions from Iran. I do not
see U.S. attempts to suspend World Bank loans as having the
same type of an impact. A carefully crafted international
consensus that combines American pressure and European
determination, in my view, is the best manner and the only
manner of obstructing Iran's proliferation tendencies.
I would be happy to go into these in the question-answer
time, but I will limit my opening remarks to the 5 minutes.
[The prepared statement of Ray Takeyh can be found on page
41 in the appendix.]
Chairwoman Biggert. Thank you very much.
Dr. Clawson?
STATEMENT OF PATRICK CLAWSON, DEPUTY DIRECTOR, THE WASHINGTON
INSTITUTE FOR NEAR EAST POLICY
Mr. Clawson. Thank you very much for letting me speak here
today. I have submitted a statement that I ask being included
in the record.
There are two important considerations in judging U.S.
reaction to World Bank lending to Iran are, first, how
important is World Bank lending to Iran; and second, how does
lending to Iran fit within World Bank practice. Let me address
these in turn.
First, how important is World Bank lending to Iran? Iran
faces difficult economic times for the next decade because its
baby-boom, born after the 1979 revolution, is entering the
labor market. A recent report from the International Monetary
Fund predicted that Iran would need to mobilize $4 billion a
year in foreign loans and direct investment if it is to achieve
a level of growth which stabilizes unemployment. If Iran does
not have access to that kind of foreign capital, Iran would
suffer further from the loss of expanded oil exports that those
foreign funds would finance. If Iran's oil exports were to
stagnate at the 2002-2003 level, Iran would have $11 billion a
year less in income by 2008-2009. In other words, the foreign
funds and the expansion in oil exports they make possible are
central to Iran's economic plans and could be key to preventing
youth unrest that could threaten the current hardline
government.
Lending by the World Bank would under any circumstances be
a small part of the $4 billion a year Iran needs to raise from
abroad. However, as the World Bank correctly emphasizes, its
lending has a catalytic effect on other lenders and investors.
That is, lenders and investors are more likely to place their
funds in a country where the World Bank has found that the
business climate and economic policies are sufficient to merit
World Bank lending. In other words, World Bank lending could
have a significant impact on Iran's ability to raise
international capital, and therefore on its economic prospects.
That said, it is by no means clear that restricted access
to international capital would lead Iran to reduce its military
spending. It is quite possible Iran would respond to any
shortfall in foreign loans and investment by cinching its belt
in further. An additional complication is that Iran's
international economic situation is highly dependent on the
price of oil. Relatively small swings in world oil prices are
as important to Iran's economic prospects as are its access to
international capital.
In short, World Bank lending will matter much more to Iran
if oil prices declined father than expected. If Iran faces
tough economic times due to low oil prices and lack of access
to international capital, that could strengthen popular
protests against the hardline government. At the same time,
that hardline government could well decide to make whatever
sacrifices are needed to keep the nuclear program on track.
Let me turn briefly to the question of how would lending to
Iran fit with World Bank practice. Iran has a highly distorted
economy which makes it a poor candidate for World Bank funding.
As it does in other countries with such poor economic policies,
World Bank lending to Iran should be confined to social
services and to semi-humanitarian loans. The United States
should press hard to ensure that the World Bank does not bend
its usual procedures, which are to insist on economic reforms
and appropriate policies before the bank can lend to a sector.
It would be entirely consistent with World Bank procedures for
the United States government to vigorously lobby the bank's
management and executive board about the inappropriateness of
lending to a country with as poor economic policies as those of
Iran.
Raising more explicitly political objections is more
problematical, but it could be considered, particularly if Iran
is found in violation of its obligations under the
nonproliferation treaty, where it would be appropriate for the
Security Council of the United Nations to consider actions such
as banning all new loans from international financial
institutions.
I should note that there are many voices which call for
basing bank loans on explicitly political criteria. As Mr.
Schuerch explained, the bank's approval of loans to Iran was
made in large part because of an explicitly political judgment
on the part of European countries that it would be appropriate
to aid Iran's reformers. If decisions about lending to Iran are
to be made in the future as they have been in the past, on such
explicitly political grounds, then bank loans to Iran will
become an international imprimatur for Iran's government. That
would be most unfortunate.
[The prepared statement of Patrick Clawson can be found on
page 33 in the appendix.]
Chairwoman Biggert. Thank you very much. Again, we will
have a question period for 5 minutes each and I will yield
myself 5 minutes.
Dr. Takeyh, I think I will ask the same question that I
asked at the end to Mr. Schuerch. Is the World Bank the best
tool to use to accomplish U.S. foreign policy goals in Iran?
Mr. Takeyh. I think as Patrick was saying, World Bank has
been part of the American international policy objectives. In a
sense, its creation was designed to rehabilitate the European
economies, and then that mission was expanded to include other
nations as well, the idea being that such rehabilitation will
promote democracy and alliance systems not inconsistent with
America's national interest objectives.
However, in this particular case, my concern is that
suspension of those loans, or some sort of American
confrontation with the World Bank, is not appropriate at this
time, given the fact that the World Bank and other
international institutions are going to be utterly critical in
reconstruction of Iraq. Once again, we have to use those
international institutions in a constructive manner.
Also, I do not believe that it will have the salutary
impact that it seems to be suggested, namely that the
suspension of those loans to Iran will have a material impact
on some of its most troublesome decisions regarding its
terrorism portfolio or its weapons of mass destruction. It is
important to recognize that Iran has been under a considerable
degree of economic pressure from the United States, and indeed
the international community, since the inception of theocracy.
For some self-defeating reason, it has maintained its support
for Hezbollah and other such organizations. So closing Iran's
terrorism portfolio will require broader multilateral effort,
as opposed to sort of a contentious argument within yet another
international organization.
Chairwoman Biggert. Going a little bit further, with Iran
agreeing to tougher United Nations inspections, I think at
least, and I just glanced briefly at the article today and I am
not so sure that is going to continue for too long, suspending
its uranium enrichment program and cooperating with the
International Atomic Energy Agency, would action on Congressman
Sherman's legislation be wise at this moment?
Mr. Takeyh. There are a lot of problems with the sort of
agreement that Iran has reached with the IAEA, namely whether
actually Iran will suspend enrichment of uranium. The position
of Iranians is that they reserve the right to suspend when they
want, and resume enrichment of uranium as they wish. It is the
EU position that negotiated this agreement that they have to
stop enrichment facilities.
Would passage of this legislation have a material impact on
those particular deliberations? I suspect not. This is a part
of a larger set of discussions that Iranians are having with
the Europeans, and it has to do with a multiplicity of
interests and concerns that Europeans and other members of the
international community have. There are a lot of problems with
this deal, because under the auspices of IAEA's additional
protocols, Iran can do a lot of research and activity for its
nuclear infrastructure. But in and of itself, this particular
legislation is unlikely to make those IAEA protocols even
tougher. Even the enhanced, tough IAEA protocols are not going
to stop Iran's weapons research program. That is the problem
with IAEA, not World Bank versus IAEA.
Chairwoman Biggert. Thank you.
Dr. Clawson, let me ask you, and you having worked at the
World Bank, do you think it is the best tool to use in
accomplishing U.S. foreign policy goals in Iran?
Mr. Clawson. No. It is certainly not. The question is
whether or not it is one of an appropriate set of tools.
Clearly, the World Bank would be a relatively small portion of
our total toolbox that we use in dealing with Iran. I would
quite agree with Ray that action at the World Bank would be
much more effective if we were able to secure agreement with
our European partners on a joint stance. I think the question
that has to be considered is, how can the United States
government most vigorously and forcefully and effectively lobby
the European governments towards that combined stance at the
World Bank? It may be useful for this committee to decide how
useful it would be to have some kind of congressional push for
the administration in its lobbying efforts.
Mr. Takeyh. The World Bank loans will actually play a
larger role if the issue of Iran's nuclear weapons goes from
IAEA to the U.N. Security Council. If Iran is deemed in
noncompliance with its IAEA nonproliferation commitments, then
potentially this issue can go to the U.N. Security Council, and
under the auspices of the Security Council a range of
multilateral sanctions will be considered. One of them would be
suspension of not just the World Bank loans, but all
international lending organizations. In that particular sense,
World Bank loans do have a role to play, but we are not at that
stage yet.
Chairwoman Biggert. What U.N. sanctions would have the most
affect on the Iranian economy?
Mr. Clawson. On the Iranian economy, that is quite a
different question than on the Iranian nuclear program. On the
Iranian economy, blocking access to international capital would
be a powerful signal that the Security Council regards Iran as
a problematic country, and would frankly scare off the
international oil companies that are talking about large-scale
investments in Iran. It is the additional oil revenue that
would be produced by the investments of those international oil
companies that are really central to Iran's plans for growth.
So scaring off international oil companies is what is going to
have the impact. You probably do not have to ban the
international oil companies in order to have that impact. You
could probably get almost all of that impact by just banning
new loans by international financial institutions to Iran.
Mr. Takeyh. I think there is a paradigm of success enacted
through the U.N., namely that sanctions that were imposed on
Libya as part of the Lockerbie process. I don't think anyone is
going to necessarily stop buying Iranian oil. They did not stop
buying Libyan oil when Libyans were blowing up European
aircraft in the air. Nevertheless, those U.N. sanctions had a
significant and important impact on the Libyan economy in the
sense that they prohibited financial transactions, technology
transactions, travel restrictions, and so on. They did make an
impression on the Libyan regime.
A similar set of sanctions enacted through the U.N. and
adhered to by all the members of the Security Council, and
indeed the international community, can have a similar effect.
I do not necessarily think that it is going to stop
international countries that rely on Iranian oil, that an
increasingly large amount will stop buying this. Nevertheless,
as Patrick said, once the U.N. Security Council makes
prohibitions, it has intangible effects in terms of deterring
foreign investments because Iran becomes a very risky area and
the international investment community is inherently risk-
averse.
Chairwoman Biggert. I think, Dr. Takeyh, that you commented
in September that the U.S. Government should be flexible in its
relations with Libya, since they were beginning to comply with
international standards. You stated that they should be removed
from the terrorist list. Do you feel the same way about Iran?
Mr. Takeyh. No. I do not think Iran is the same say. Libya
is no longer, according to documents by the State Department
itself, engaged in terrorism in the sense that it is no longer
participating and supporting rejectionist Palestinian groups
and so forth. Libya has to remain on the terrorism list
ostensibly because it had failed to come to terms with the
Lockerbie sanctions, with the compensation for the families.
Iran is very much engaged in terrorism. It is an important
supporter for Palestinian rejectionist groups, Hezbollah, and
therefore Iran has earned its place on the terrorism list. I do
think that that classification should be sustained in the case
of Iran. Libya is a different sort of an issue.
Chairwoman Biggert. Thank you. I have run out of time.
The gentleman from California is recognized.
Mr. Sherman. Thank you. I first want to extend an offer to
you gentlemen, but especially to the Deputy Assistant Secretary
who was here earlier, to come to my district and explain why my
taxpayers should be funding foreign aid if even a portion of it
is being administered by bureaucrats who feel it should be sent
to Teheran.
Dr. Clawson, it is said by looking at documents, that the
World Bank does not make any of its decisions based on politics
or the political or military actions of the borrowing country.
Has the World Bank in effect denied loans at some time or
another to China, South Africa, India, Pakistan, and Iran for
political rather than economic reasons?
Mr. Clawson. I would say that in many of those cases, the
political objections we have against a country are also
objections about their economic policies. For instance, I
worked at the International Monetary Fund when there was a very
controversial loan considered for the South African government
that many of us on the staff thought was a scandal because
South Africa's apartheid policies were not just a political
policy, but they had a profound economic impact on the country
by introducing labor market distortions and rigidities. We
thought that it was entirely appropriate for the IMF not to
lend.
Mr. Sherman. But the World Bank's decision not to lend to
China right after Tiananmen Square was not as a result of
Tiananmen Square being a change in Chinese economic policy,
although there was certainly an economic effect of the entire
world scene.
Mr. Clawson. I would argue that after the Tiananmen Square
episode, the Chinese government slammed on the brakes in making
reforms on the state-owned enterprises and reversed direction
on a lot of the efforts to introduce more market-oriented
reform and to respect private property.
Mr. Sherman. Since my time is limited, I will interrupt you
and take another tack. Is it possible that developing nuclear
weapons and perhaps smuggling them into the United States,
funding terrorism, sheltering al Qaeda, could lead to events
that adversely affect the Iranian economy and its credit-
worthiness?
Mr. Clawson. Yes, sir, but I would suggest that we can just
rely upon rather more traditional World Bank considerations.
This is an economy which by most estimates 70 percent of the
economic activity is controlled by these shadowy foundations.
Mr. Sherman. So we have lots of good reasons not to lend
money to Iran from the World Bank.
Mr. Clawson. Exactly.
Mr. Sherman. Okay. There is this idea that if you are
walling off Iran economically, that no one brick is important.
But you have ILSA, you have stopping World Bank loans; you have
eliminating all non-energy exports from Iran to the United
States; you have efforts to stop further trade deals between
Europe and Iran. Are all those bricks of some importance to
building that wall, or are some of them irrelevant?
Mr. Clawson. They all have some importance. Some are great
big huge bricks, and some are relatively small bricks.
Mr. Sherman. But if you are trying to build a wall, you try
to put up all the bricks you can.
Mr. Clawson. And hopefully to have as large bricks as you
can.
Mr. Sherman. Yes. Can you think of any other bricks? What
other ways can we demonstrate to the Iranian people that they
will be better off economically if their government changes its
policies? What other bricks am I missing?
Mr. Clawson. I would think it would also be useful for us
to put forward some of the carrots that would be available. In
other words, a policy that shows that there are carrots that
are available if you were to change your approach would also be
helpful.
Mr. Sherman. I look forward to being an original cosponsor
of the repeal of the ``I'' in ILSA when that government is no
longer developing nuclear weapons and supporting terrorism. I
look forward to finding additional ways to help the Iranian
people.
Have there been times at the World Bank where the United
States has, what should I say?, used all of its force, bare-
knuckles or whatever, or just loud voice to stop a loan from
the World Bank, situations where we have done more than just
vote no, then have tea and crumpets with the people who voted
yes?
Mr. Clawson. Absolutely. As a former bank staff member, I
would rather not go into my experiences as a bank staff member.
Mr. Sherman. Wait a minute. This is not the CIA here.
Mr. Clawson. Fair enough, but I was, after all, an
employee.
Mr. Sherman. Do you guys take some secret handshake loyalty
oath, the hit squads if you violate?
Mr. Clawson. I can say, sir, that there were many occasions
on which the United States----
Mr. Sherman. I am going to ask you to say specifically. You
are not under subpoena here, but this is a congressional
committee. Why should our tax dollars go to an organization
that is more secretive than the CIA? They would answer the
question, at least in closed session.
Mr. Clawson. International organizations, sir, I have to be
concerned about their ability to work with all member
governments. I think part of the great merit that U.S.
membership in these organizations brings is that we can extract
out of these governments information that we might not
otherwise get. It comes in part because of the confidentiality
of the employees.
Mr. Sherman. All I can say is, maybe you could come to my
district and explain why money should go into a process that
the American people who are paying at least 16 percent of the
cost are deprived of finding out what is really going on. And
also, how do you go to African countries and pound the table
about the desirability of transparency when the World Bank
itself gives opaque a new and startling definition?
I see my time has expired, but I look forward to a World
Bank that practices what it preaches.
I yield back.
Chairwoman Biggert. Talking about the transparency of the
World Bank, I was going to ask the question, if you can
attribute the pace of disbursements to projects in Iran to the
World Bank transparency and accountability requirements, which
may be reacting to the level of corruption and mismanagement by
the Iranian officials, it seems to me that it is pretty
transparent. If you could comment on that?
Mr. Clawson. I would quite agree with you, and point out
that Iranian observers also agree. There have been comments
made in the Iranian press that the World Bank is insisting on a
level of honesty in business transactions which is not the norm
in Iranian procedures.
Chairwoman Biggert. Okay. Could you comment, then, just on
the level of corruption within Iran's government and the
business community?
Mr. Clawson. Outrageous, which is yet another reason why
lending to Iran should be approached very carefully, because
the Iranian observers tell us that the degree of corruption in
Iran has grown very substantially over the course of the
Islamic Republic. There have been numerous court cases which
have revealed stunning levels of corruption in Iran.
Chairwoman Biggert. Dr. Takeyh, could you comment on that?
What do you think is the view of the U.S. business community on
economic sanctions and the prohibition against doing business
with Iran?
Mr. Takeyh. I would echo what Patrick said. The level of
corruption has grown since the Islamic Republic, and there was
a fairly high threshold before that. So this is a system that
is rewarding a very narrow collection of people. These
philanthropic organizations, the bonehs, that have
metamorphosed into business conglomerates. The problem with
their conduct is not only they are unaccountable, not only they
do not pay taxes, but because they dominate sectors of industry
and their corruption is profound. Almost any business
transaction that you want to do in Iran today, you require some
sort of a back pay to somebody.
Having said that, I am not involved in the American
business sector, but I suspect that there are those who are
willing to commercially interact with Iran, simply because the
profits are high enough, particularly in terms of the petroleum
sector. They are used to dealing with countries where there is
some degree of financial opacity and corruption as a matter of
course. Iran is a very difficult place to do business, and that
in and of itself is a deterrent to foreign investment. There
has been an attempt to pass foreign investment laws, but they
have not been as successful as they should be.
So I would suggest that if there was an absence of U.S.
sanctions, I suspect many American companies, both in petroleum
and non-petroleum sectors, will actually bear this difficult
business environment and return to Iran.
Chairwoman Biggert. I understand that foundations or quasi-
government entities may be providing the majority of funding
for Iran's nuclear program. Does that affect your analysis of
the role of the World Bank lending in Iran and its possible
impact on the nuclear program?
Mr. Takeyh. No. I think Iran has made a determination as a
nation-state that it will pursue a robust nuclear research
program. I do not believe they have made a decision to cross
the nuclear threshold, but I think they are going to cuddle
awfully close to that line. Bonehs I do not believe are
instrumental in this. I think it is a national governmental
decision made by all the relevant parties, not reformers, not
conservatives. This is one of the few issues that everybody
sort of comes together on. There is a consensus within this
fractious body politic that nuclear weapons potentially could
serve Iran's strategic deterrent interests. It is not a
factional issue. It is a national one.
Chairwoman Biggert. So it does not matter if its
foundations are quasi-government. It is the whole state that
has made that policy.
Mr. Takeyh. Some of the most ardent proponents of nuclear
arms are similarly proponents of democratic transition.
Chairwoman Biggert. Okay. You said that despite some
movement towards reform, the hardliners still maintain
considerable political and economic control in Iran.
Mr. Takeyh. Yes. The reform movement has not succeeded in
dislodging the institutional influence of the hardliners. They
maintain institutional control of the judiciary, key economic
sectors, security services and foreign policy national security
apparatus. The reform movement has power over elected
institutions, but those elected institutions have not been able
to infringe on the fundamentals of the conservatives' power.
This is an evolutionary process. It may do so at some point,
and we are in the beginning stages of democratic transition. It
took many years for European countries and others to reach a
more accountable, decentralized democratic polity. But at this
particular stage, a snapshot would reveal that Iranian
hardliners are in charge of the national security apparatus.
Chairwoman Biggert. So then how effective has the policy of
economic isolation been, since there is no restriction on oil
sales?
Mr. Takeyh. In the absence of that, I am not quite sure it
has been as effective. We have had economic sanctions on Iran
since the inception of theocracy, yet this behavior on
terrorism and weapons of mass destruction and destabilization
of its neighbors has continued. The argument has been made that
by having economic sanctions, whose cost is very difficult to
quantify, but there is undeniable cost, that Iran will be
deprived of revenue to invest in its terrorism portfolio. Yet
at the same time, the terrorism portfolio is rather robust and
intense. So there is a sort of a contradiction in that.
On issues that Iran has made an ideological or strategic
commitment, it has not been deterred by imposition of
unilateral American sanctions. If those sanctions become
multilateralized, if the Japanese and Europeans begin to
disinvest from Iran, that is a different category of issues.
Chairwoman Biggert. My time has expired.
Mr. Sherman?
Mr. Sherman. Thank you.
Dr. Takeyh, you talk about IAEA leading to U.N. Security
Council, perhaps prohibiting further loans. Could this also
prevent the disbursement of funds under loans already made?
Mr. Takeyh. Patrick could speak about the World Bank
procedures better than I can.
Mr. Clawson. Absolutely. I think that would be the normal
thing to do.
Mr. Sherman. Dr. Clawson, what could the United States do
to at least slow and use questions to slow the actual
disbursement of loans already made?
Mr. Clawson. We can carefully examine the procedures that
are being used for the procurement. It would indeed be quite
appropriate, given the history of corruption in Iran and its
track record, for us to look very carefully at the kind of
procurement decisions being made, to make sure that bank rules
are not being bent or twisted.
Mr. Sherman. Dr. Takeyh, we accept imports basically in
three categories, nuts and fruits, carpets and caviar. Which
political-family entities tend to control those three
industries?
Mr. Takeyh. I am betting the answer you probably already
know is the Rafsanjani family. I think we sort of both know how
this dance is going to go.
Mr. Sherman. So the decision by the Clinton administration
continued both before and after September 11 by the Bush
administration, in effect three different decisions, is
basically putting caviar in our mouths and dollars in the
Rafsanjani family pocket.
Mr. Takeyh. It is not putting caviar in our mouths.
Mr. Sherman. In the mouths of certain Americans.
Mr. Clawson. And hurting California pistachio producers.
Mr. Sherman. That would be true as well. I know we don't
have any carpets or caviar in California, though, and I would
be happy to close off any one of those three.
Mr. Takeyh. The robust Rafsanjani financial conglomerate
benefits from those transactions, yes.
Mr. Sherman. And unlike oil where all you need to do is
find one or two customers willing to pay a world price, oil
being fungible and kind of an economic necessity, those luxury-
type items need as many markets as possible. In the absence of
markets, the price available to Iranian producers would
decline.
The bill I have put forward not only would take money away
from the World Bank, but give it to USAID. There are two
arguments for the World Bank, one, maybe it is more efficient
than USAID; makes better decisions. The other is the idea of
leverage. Now, put leverage aside, because we go to donor
conferences where USAID puts some money on the table and
leverages that. And whether it is a donor conference or just
discussions, every dollar USAID gets from Congress is a reason
for parliaments in Europe to provide more money to their
organizations. In terms of efficiency, does USAID spend money
in the countries that need it, as effectively as the World
Bank?
Mr. Takeyh. The procedures and operations of an
international lending organization is not my specialty. Patrick
might know better about it.
Mr. Sherman. Dr. Clawson I think should be addressing that.
Mr. Clawson. Unfortunately, the answer on the whole is no.
Mr. Sherman. The World Bank is somehow smarter at spending
money?
Mr. Clawson. The World Bank is both smarter at spending the
money and subject to less bureaucratic reporting requirements,
which are a significant problem in the efficiency with which
USAID can carry out its operations.
Mr. Sherman. We have to get you over to the I.R. Committee
and try to make USAID more efficient, although reporting
requirements seem to be called for in dealing with countries
with such opaque economic systems.
Dr. Clawson, which members of the World Bank seem to be
pushing forward and arguing for these loans to Iran, and any
idea why?
Mr. Clawson. I am not familiar with the debates going on
there, but I would just point out a very interesting phenomena.
As Mr. Schuerch pointed out, those who opposed the loans to
Iran were the United States, Canada and France. So it is an
interesting situation in which we and the French found
ourselves on the same side, opposing a number of countries that
are traditionally our allies, for instance, the British
government.
Mr. Sherman. Did France do that as a favor to us or out of
agreement with some of the arguments that are being made in
this room?
Mr. Clawson. Agreement with some of the arguments being
made in this room, and they said so explicitly.
Mr. Takeyh. Particularly proliferation. The French are very
aggressive on the Iranian proliferation issue, and they have
the best intelligence on it.
Mr. Sherman. I am done. Thank you very much, gentleman.
Chairwoman Biggert. Thank you.
And thanks to the panel for your insights and your input
today. We really appreciate your being here. Let me just add
that the chair notes that some Members may have additional
questions for this panel which they may wish to submit in
writing. Without objection, the hearing record will be open for
30 days for Members to submit written questions to these
witnesses and to place their responses in the record.
With that, this hearing is adjourned.
[Whereupon, at 11:42 a.m., the subcommittee was adjourned.]
A P P E N D I X
October 29, 2003
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