House Financial Services Committee Hearing: The World Bank and Iran

October 29, 2003

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BIGGERT: 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 chairs and ranking minority member is recognized for five minutes each. All of the members are recognized for three minutes each and we will alternate between the majority and the minority. FRANK: I ask unanimous consent to switch time allotments with the gentleman from California.

BIGGERT: Without objection.

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 three minutes.



A Representative from Illinois, and
Vice Chairman, Subcommittee on Domestic
and International Monetary Policy, Trade and Technology
House Financial Services Committee


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.

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."

BIGGERT: Without objection.

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, quote, "axis of evil," unquote. 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.

BIGGERT: Would you like to hold that until we hear from the ranking member and then include that?


BIGGERT: OK. The ranking member?



A Representative from Massachusettes, and
Ranking Member, Subcommittee on Domestic
and International Monetary Policy, Trade and Technology
House Financial Services Committee


FRANK: Thank you, madam chair. I have another meeting that I have to go to, but I did want to take my three 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' 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.

BIGGERT: Thank you.

The gentleman from California, Mr. Sherman, is recognized for I think a grand total of seven minutes.

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 three 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 UN 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, 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.

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 five-minute summary of your testimony. After that, we will have questions and our members will keep their questions to a limit of five minutes also. If you would care to begin? Thank you.



Deputy Assistant Secretary for International Development,
U.S. Department of the Treasury


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 one-and-three-quarters 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 two 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.

BIGGERT: Thank you, Mr. Schuerch.

I will now recognize members for five 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?

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.

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?

SCHUERCH: To get other shareholders?

BIGGERT: No, for the U.S. to vote for the funds.

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.

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?

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 the countries, the ones that have been receiving HIPC resources for example, and not the Iran-type countries.

BIGGERT: Would H.R. 2466 restrict future emergency earthquake funds or other humanitarian aid from the World Bank to Iran?

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.

BIGGERT: Thank you. My time has expired. The gentlewoman from New York, and ranking member?

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?

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.

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?

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 two 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.

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?

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.

MALONEY: How much shareholding do we have in the bank?

SCHUERCH: We have 16.4 percent of the World Bank.

MALONEY: We have 16.4 percent. Are we the largest shareholder in the bank?

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.

BIGGERT: The gentlewoman's time has expired.

Mr. Sherman, you are recognized for five minutes.

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 OK. 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 two 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?

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.

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?

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?

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?

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.

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.

SCHUERCH: We have deep and complex relationships with our major allies that cover subjects much broader than this one.

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.

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.

SHERMAN: Oh, there is Iraq. How many troops do we have in Iran?

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.

BIGGERT: The gentleman's time has expired.

The gentleman from Illinois is recognized.

EMANUEL: I would like to thank the chairlady.

I apologize to the witness testifying because I was not here for your opening remarks. I will obviously read them. But given that Iran is part of the axis of evil, is this strategy not only to the World Bank, but the Iraq Council today, as indicated in the papers today, is negotiating with Iran a swap deal as it relates to oil and electricity, similar to what it is doing with Syria. Are we beginning to see the changes in how it deals with countries that are, (A), developing nuclear weapons; and (B), supporting, and we know that, terrorist groups such as the Hezbollah, al Qaeda, and the Islamic Jihad? So is this a different tactic from an incentive side, versus what we did in Iraq? Is it contrasting how we deal with some of the countries that deal with or are on the original list of the axis of evil?

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.

EMANUEL: You can appreciate, then, how some of us could be confused. I understand you got the short straw here so you are here. Sorry about it, but this is the only chance we get to ask, and I don't mean to cut you off. I read what the under 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. I would love to do it. I don't think that you and are, at least I know I am not qualified to do it, but you can understand that for those members of the great unwashed over here, it is a bit confusing.

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.

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 to them. If one says offering financial incentives to Iran, whether it is through the World Bank, through an energy swap, is part of an emerging strategy, or saying we want to have a dialogue, as the under secretary has 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 and pleased at the notions of nuances in foreign policy, as how you try to communicate, but to list them on the axis of evil and 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?

SCHUERCH: We have not offered them financial incentives.

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 that Iraq is talking about in relation to Iran does come from the American taxpayers, when you do an electricity-for-oil swap?

SCHUERCH: I misunderstood you to suggest we are actually supporting Iran with finance.

EMANUEL: I do think they are going to probably generate some economic interest from that, wouldn't you? I don't think they are going to engage in that economic activity if it is not in their own self-interest.

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.

EMANUEL: No further questions.

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.

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 disbursed yet, are a very small sum.

Thank you.

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?

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 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.

BIGGERT: Thank you very much for appearing before us this morning.

SCHUERCH: Thank you.

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, five minutes summary of your testimony, and then there will be questions.



Director of Studies,
Near East and South Asian Center for Strategic Studies,
National Defense University


TAKEYH: Thank you very much for inviting me. I will spend my five 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 UN 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 Bazaar. 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 five minutes.

BIGGERT: Thank you very much.

Dr. Clawson?



Deputy Director,
Washington Institute for Near East Policy


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.

BIGGERT: Thank you very much. Again, we will have a question period for five minutes each and I will yield myself five 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?

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.

BIGGERT: Going a little bit further, with Iran agreeing to tougher UN inspections, I think at least, and I just glanced briefly at the article today and I am not so sure that 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?

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.

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?

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.

TAKEYH: The World Bank loans will actually play a larger role if the issue of Iran's nuclear weapons goes from IAEA to the UN Security Council. If Iran is deemed in noncompliance with its IAEA nonproliferation commitments, then potentially this issue can go to the UN 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.

BIGGERT: What UN sanctions would have the most affect on the Iranian economy?

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.

TAKEYH: I think there is a paradigm of success enacted through the UN, 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 UN 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 UN 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 UN 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.

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?

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.

BIGGERT: Thank you. I have run out of time.

The gentleman from California is recognized.

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?

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.

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.

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.

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?

CLAWSON: Yes, sir, but I would suggest that we can just rely upon rather more traditional bank considerations. This is an economy which by most estimates 70 percent of the economic activity is controlled by these shadowy foundations.

SHERMAN: So we have lots of good reasons not to lend money to Iran from the World Bank.

CLAWSON: Exactly.

SHERMAN: OK. 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?

CLAWSON: They all have some importance. Some are great big huge bricks, and some are relatively small bricks.

SHERMAN: But if you are trying to build a wall, you try to put up all the bricks you can.

CLAWSON: And hopefully to have as large bricks as you can.

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?

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.

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?

CLAWSON: Absolutely. As a former bank staff member, I would rather not go into my experiences as a bank staff member.

SHERMAN: Wait a minute. This is not the CIA here.

CLAWSON: Fair enough, but I was, after all, an employee.

SHERMAN: Do you guys take some secret handshake loyalty oath, the hit squads if you violate?

CLAWSON: I can say, sir, that there were many occasions on which the United States...

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.

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.

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.

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?

CLAWSON: I would quite agree with you, and point out that Iranian observers are also great. 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.

BIGGERT: OK. Could you comment, then, just on the level of corruption within Iran's government and the business community?

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.

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?

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.

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?

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.

BIGGERT: So it does not matter if its foundations are quasi- government. It is the whole state that has made that policy.

TAKEYH: Some of the most ardent proponents of nuclear arms are similarly proponents of democratic transition.

BIGGERT: OK. You said that despite some movement towards reform, the hardliners still maintain considerable political and economic control in Iran.

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.

BIGGERT: So then how effective has the policy of economic isolation been, since there is no restriction on oil sales?

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.

BIGGERT: My time has expired.

Mr. Sherman?

SHERMAN: Thank you.

Dr. Takeyh, you talk about IAEA leading to UN Security Council, perhaps prohibiting further loans. Could this also prevent the disbursement of funds under loans already made?

TAKEYH: Patrick could speak about the World Bank procedures better than I can.

CLAWSON: Absolutely. I think that would be the normal thing to do.

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?

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.

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?

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.

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.

TAKEYH: It is not putting caviar in our mouths.

SHERMAN: In the mouths of certain Americans.

CLAWSON: And hurting California pistachio producers.

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.

TAKEYH: The robust Rafsanjani financial conglomerate benefits from those transactions, yes.

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?

TAKEYH: The procedures and operations of an international lending organization is not my specialty. Patrick might know better about it.

SHERMAN: Dr. Clawson I think should be addressing that.

CLAWSON: Unfortunately, the answer on the whole is no.

SHERMAN: The World Bank is somehow smarter at spending money?

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.

SHERMAN: We have to get you over to the IR 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?

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 has historically, although I do not know about this particular case.

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?

CLAWSON: Agreement with some of the arguments being made in this room, and they said so explicitly.

TAKEYH: Particularly proliferation. The French are very aggressive on the Iranian proliferation issue, and they have the best intelligence on it.

SHERMAN: I am done. Thank you very much, gentleman.

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.