APPENDIX 3
Second supplementary memorandum submitted
by the Bretton Woods Project
The information contained in this briefing is
based on meetings and conversations with staff at the IMF and
a range of Executive Directors during the Spring and Annual Meetings
and from recent reports published by the IMF and World Bank.
THE POVERTY
REDUCTION AND
GROWTH FACILITY—CAN
ESAF CHANGE ITS
SPOTS?
It was announced at the IMF annual meetings
in September that the Enhanced Structural Adjustment Facility
(ESAF) is to be replaced with the Poverty Reduction and Growth
Facility (PRGF). This change in name signals a change in approach.
At the heart of the new approach is the commitment to poverty
reduction. While the IMF will remain focused on macroeconomic
concerns it will be required to consider the distributional consequences
of its policy advice and advocate stabilisation and growth strategies
that benefit the poorest.
Other elements include:
— a focus on country ownership, ie
participation of parliament, civil society, and the private sector
in developing national poverty reduction plans;
— coordination with the World Bank
to ensure coherence between macroeconomic, social and structural
reforms.
The tool for implementing this new approach
is the Poverty Reduction Strategy Paper (PRSP) which will be a
tripartite document jointly produced by the government, the IMF
and the Bank. The PRSP replaces the IMF's Policy Framework Paper
which was supposed to be a joint Bank-Fund document but which
in effect never was. The government in consultation with civil
society and with advice from the Bank and IMF will produce a PRSP
which must be endorsed by the Boards of the Bank and the Fund.
Based on this document the IMF will draw up a Letter of Intent
and the Bank a Country Assistance Strategy.
While this new approach offers a positive step
forward there remains concern about how and whether it will be
effectively implemented.
1. The Link to Debt Reduction Could Put Pressure
on Governments to Develop Poverty Reduction Strategy Papers Too
Quickly
The PRSP is linked to the HIPC debt initiative.
It is anticipated that as many as 19 countries will reach decision
point in 1999-2000. To reach decision point they must produce
a PRSP; and to reach completion point they must implement several
elements of it. While it is vital that countries receive debt
reduction as soon as possible linking it to implementation of
the PRSP could force them to be produced too quickly: limiting
the opportunity for effective broad-based consultation and input
into the process and giving the IMF grounds to carry on with business
as usual.
This problem has been noted by Clare Short and
Gordon Brown in their communique to the WB-IMF Development Committee,
"Good Poverty Reduction Strategies will, of course, take
time to draw up. It would be wrong to rush the process, or make
it a condition that such a Strategy is in place by the
Decision Point. It should be sufficient that there be a clear
process by which an agreed Strategy will be achieved by the Completion
Point, and that the country has implemented two or three key benchmarks."
Suggested Questions
— What steps is the Executive Director
taking to ensure that countries are not put under undue pressure
to develop and implement a PRSP which would limit the involvement
of civil society?
— Can the Executive Director give examples
of what the "benchmarks" demonstrating adequate implementation
of the PRSP might be?
2. The Tripartite Nature of the Document Implies
Equal Involvement of the IMF and Bank in the Government's Strategy—This
May Not Lead to a Sense of Ownership
A more useful approach maybe to require the
government to develop a national strategy in consultation with
civil society and the private sector. Once this is complete the
IMF and Bank could then develop—in consultation with the
government—a joint funding strategy (still called the PRSP)
based on the truly nationally owned document.
Suggested Questions
— What steps is the Executive Board
taking to ensure that governments lead the process of developing
national poverty reduction plans?
— Does the Executive Director agree
that the PRSP should be made available for comment in the country
(beyond the government) before it is sent to the Board for approval?
3. There Should be no Blueprints for the PRSP
but Should the IMF Judge What is a Good Strategy for Poverty Reduction
and can it be Flexible about the Means of Achieving it?
A PRSP is not necessarily likely to look like
a standard IMF programme (a) because it is focused on poverty
reduction; and (b) because it should be written by the government
not IMF staff. Because each country's circumstances are different
each should be expected to have quite different strategies. This
will require the Executive Board be flexible about what it considers
to be a good programme to fund. If Executive Directors are not
careful to give the right signals demonstrating this flexibility
(to IMF staff and borrower governments), it may be the case that
governments put together programmes which they know the IMF and
Board will accept in order to access the IMF's money even if they
themselves do not fully agree with the strategy laid down. Such
a situation is likely to lead to continued problems with implementation
and is unlikely to address poverty eradication (a recent World
Bank review of the status of poverty found that in Sub-Saharan
Africa—where many countries have been implementing the standard
IMF prescription for many years—poverty is increasing not
falling).
At the moment the signals given by IMF staff
are that the core elements of the economic strategy are not up
for negotiation. As far as they are concerned, these elements
(single digit rates of inflation, low budget deficits, minimal
government involvement) are totally accepted by the economic community
and only "economic luddites" (which presumably includes
the World Bank's Chief Economist, Joseph Stiglitz) would challenge
this. Furthermore, a recent staff review of efforts to implement
the recommendations from the External Evaluation of ESAF overlooked
the recommendation that, to encourage greater ownership, flexibility
should be built into programmes by allowing governments to choose
from a menu of options for achieving programme objectives: suggesting
that staff are unwilling to loosen their grip on programme design.
Suggested Questions
— How will the Executive Board ensure
that flexibility in programme design is encouraged?
— By what criteria will the Board judge
whether a programme should be funded if it does not adhere to
the standard IMF prescription?
GOVERNANCE AND
TRANSPARENCY: THE
IMF MUST PUT
ITS OWN
HOUSE IN
ORDER
The Fund is increasingly talking about governance
in the countries which it lends to yet it has done little to ensure
it is fairly governed and transparent. While the fund has taken
some useful steps to improve its transparency by releasing some
documents it should go further, and other elements such as voting
and evaluation procedures and devleoping country representation
on the IMF Board need to be improved if the institution is to
be responsive and accountable to national democracies.
1. Developing Countries Should be Better Represented
in the Decision Making Processes
There are only 24 Executive Directors (EDs)
on the IMF Board, consequently only a selected few countries (those
that provide the most funds) are represented by their own ED.
Other countries are grouped into constituencies and jointly represented
by an ED. This means that whilst the UK is represented by its
own executive director, 43 Sub-Saharan African countries are represented
by only two EDs. Moreover, these countries only hold a 4.76 per
cent of the total votes on the IMF Board (less than the number
held by the UK), thus not only are they under-represented in the
IMF's decision making bodies they also have insignficiant voting
power. Furthermore, out of a total of 87 countries which have
contributed money to replenish ESAF (now known as the Poverty
Reduction and Growth Facility), 64 are developing and transition
countries. Whilst these countries are contributing to the financing
facilities which other developing countries are borrowing from,
they effectively have no means of directing how that money is
used and for what priorities.
The IMF's quota formula (which determines how
much countries contribute to the IMF and therefore what voting
rights and representation on the Board and Interim Committee they
have) is being reviewed at the moment by a committee of external
consultants. The committee will report its findings to the Board
at the end of the year. While developing countries do not have
as much money to contribute to the IMF as richer countries, they
do represent a very large proportion of the World's population.
The Brazilian Executive Director has suggested that population
size should be incorporated into the quota formula.
Suggested Questions
— Does the UK support better representation
for developing countries on the IMF Board and in the International
Monetary and Finance Committee (previously known as the Interim
Committee)?
— What changes need to be made to IMF
structures to ensure that developing countries are better represented?
— Does the UK Executive Director agree
that the voting system should be changed to include a country's
population size in the formula? What other changes to the formula
does the UK support and is it actively advocating these changes
to other members of the Board?
2. The Avoidance of Formal Voting Procedures
Impedes Transparency
A major impediment to accountability is that
the Executive Board is not required to formally cast votes. Instead,
an informal voting process exists, which is euphemistically referred
to as a consensus approach, which means that the IMF management
and the Executive Board can avoid making the results of votes
known nor how each country voted. There is no good reason why
voting should not be formalised and the results made public. If
voting was formal it would allow each member country to vote as
it saw fit, whereas the current process requires each ED to vote
on the behalf of his/her constituency of countries according to
the majority view point. It would also aid transparency if Board
agendas were made public prior to its meetings and the minutes
published. The UK's experience with publishing the minutes of
Monetary Commitee meetings is that the benefits outweigh the costs.
Suggested Questions
— In the interests of transparency,
does the Executive Director believe that voting procedures should
be formalised and the results made public?
— What is the Executive Director's
view on the publication of Board agendas and minutes?
3. The IMF's Activities are not Systematically
and Independently Evaluated
The trial ad hoc external evaluation
process tested over the past three years is currently about to
be reviewed. A report will be discussed by the Board in the Winter
and a decision on the type of permanent procedure to introduce
will be made by the Spring Meetings in 2000. The current process
is inadequate because it is very slow (one three reviews have
been produced in three years instead of the anticipated three
reviews per year) and it cannot systematically review the IMF's
activities.
The UK claims to support the introduction of
a dedicated monitoring unit which would report to the Board. Whilst
this is encouraging, the UK has done very little to identify how
such a unit would function and to communicate this effectively
to those on the Board who would rather keep with the existing
process.
Suggested Questions
— What steps has the Executive Director
taken to persuade his colleagues that a dedicated, independent
monitoring unit is necessary and what success has he had?
— How should such a unit be structured?
— There has been no external evaluation
of the IMF's role in and response to the financial crises which
affected Asia, Russia and Brazil, does the Executive Director
agree that this should be the subject on the new unit's first
evaluation?
4. Staff Reports Should be Published
While the steps taken to make programme documents
available to the public are very welcome staff reports are still
not released publicly. The G22 recommended that the IMF should
rectify this and the Board discussed the possibility of doing
so earlier this year. However, no decision was made and the Board
simply agreed to return to the issue later.
Suggested Questions
— Has the Board discussed this issue
further? If so, what was the outcome? If not, when will it be
discussed?
— What is the Executive Director's
opinion on whether these documents should be released?
5. There Has Been No Written Report to Parliament
on the Activities of the Executive Director
In its 1996-97 inquiry into the role of the
IMF, the Treasury Select Committee recommended that the Treasury
should produce a report to Parliament on the work of the Executive
Director and his staff at the IMF. This report appears to be as
mythical as DFID's Institutional Strategy Paper (which is still
not available since the Committee interviewed Myles Wickstead
in July). Despite many assurances from Treasury staff that a report
is imminent it still has not been completed.
Suggested Questions
— When will a written report on the
activities of the Executive Director be given to Parliament?
— Will this be an annual report and
when in 2000 can the Committee expect to receive the second report?
THERE IS NO SUBSTANTIAL BODY OF EVIDENCE
LINKING CAPITAL ACCOUNT LIBERALISATION (CAL) TO EQUITABLE GROWTH
AND POVERTY ERADICATION
Given the enormous social devastation caused
by the financial crisis in what are relatively wealthy and strong
economies in South East Asia it is of grave concern that the IMF
continues to advocate capital account liberalisation (CAL) as
the means for achieving growth in the poorest developing countries.
Especially, given its own findings that CAL makes countries particularly
vulnerable to financial crises.
1. The IMF's Mandate Should Not be Extended
to give it Authority to Pursue CAL in Member Countries
During the height of crisis the Executive Board
put on hold the debate about whether to extend the IMF's Articles
of Agreement to allow it to pursue CAL systematically in member
countries. However, Michel Camdessus, IMF Managing Director, is
trying to reopen it. At the Annual Meetings in September he argued
that, "liberal arrangements for capital movements are beneficial
to global economic development . . . I would urge you, Governors,
to lend your personal attention to this important proposal, thereby
bringing to completion the support you gave us in Hong Kong two
years ago for an amendment to the purposes of the Fund and to
extend our jurisdiction, as needed."
Camdessus argues that (1) there is general agreement
that CAL is beneficial for world growth as long as (2) liberalisation
follows an orderly path. Therefore, the IMF should have a remit
to ensure that countries follow orderly paths to full CAL. In
fact there is no strong evidence to suggest that it leads to equitable
growth or poverty reduction in developing countries or that it
leads to higher growth in the global economy. Experience would
suggest that the costs—particulary the social costs which
are borne by many—can substantially outweigh the benefits—which
accrue to a few.
Suggested Questions
— What empirical evidence has the IMF
produced to demonstrate that CAL leads to sustainable economic
growth? Who in developing countries benefits from CAL and what
are the linkages to poverty reduction?
— The IMF has produced evidence to
demonstrate that CAL increases the likelihood of countries experiencing
financial crises, has it been able to demonstrate empirically
that the massive social costs caused by these crises are outweighed
by the benefits of liberalisation in individual countries?
— Does the IMF Board intend to look
again at extending the IMF's Articles of Agreement to give it
a mandate to pursue orderly, carefully sequenced CAL? Does the
UK support this?
2. Good Regulatory Mechanisms are Not Enough
Therefore Capital Controls are Essential to Protect Countries
Mr Camdessus' argument attempts to preserve
the market ideology by suggesting that countries can protect themselves
with sound financial markets and regulatory mechanisms. This is
not so. Even countries with these features and good economic fundamentals,
such as the UK, are susceptible to crises. It may be many years
before developing countries can develop similar institutions as
well as sound social welfare institutions, in their absence, developing
countries should continue to be free to use capital controls as
they see fit; and the IMF should be required to advise governments
on the appropriate use and application of controls and to research
which are the most effective.
Suggested Qestions
— The IMF has recently completed a
report examining various countries' use of controls, this report
is not yet available to the public, when will it be?
— What were its conclusions and does
the Executive Director agree with them?
— Should the IMF advise countries on
the best use of controls?
Bretton Woods Project
October 1999
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