Examination of Witnesses (Questions 60
- 79)
TUESDAY 23 JANUARY 2001
MR GUS
O'DONNELL AND
MR STEPHEN
PICKFORD
60. You are giving the impression that the British
Government is leaning rather more towards dealing with this on
the basis of agreed rules in advance than the Fund as a whole?
(Mr O'Donnell) We are exploring the area of how far
one can go in establishing clearer presumptions.
61. Members of the Committee will have had the
opportunity of seeing the expression on your face there and will
draw their conclusions. That is helpful.
(Mr O'Donnell) It is constructive but it is an issue
where we have to move forward with the other countries and, again,
the US position will be crucial on this.
62. If one takes the example of Russia, there
has been a huge capital outflow from Russia. I do not know whether
one wants to dignify that with the term "private sector"
capital outflow but let's call it that, and there has been a huge
outflow of capital from Russia which has drained and undermined
the Russian economy and weakened its ability to respond to new
situations. Do you think there is a role for a tighter organisation
of international capital flow controls to deter that or to affect
the behaviour of individuals to control rather better what individuals
are doing?
(Mr O'Donnell) You are arguing for external capital
controls.
63. I am asking a question, not making an argument
at this stage.
(Mr O'Donnell) I think as soon as you start to go
down that route you risk damaging flows into the country because
if they feel once they are in they cannot get out then that may
well result in private sector simply staying away from that country
for a longer time, so it is a possibility but it is not something
that I would recommend.
64. Do you think that the proposals that you
have set out to some degree in this report—and this is one
of the very few Parliamentary perspectives on what the Government
is doing in terms of the Financial Stability Forum and the Financial
Action Task Force—and the controls on offshore tax havens,
money laundering, the kinds of private capital flows I have just
referred to in the example of Russia, are at all effective? Do
you think we are moving towards a system in which controls of
these kinds of capital movements (which in themselves can create
a stampede) will be more effective?
(Mr O'Donnell) Certainly on money laundering I think
we are making significant progress.
(Mr Pickford) What all of those initiatives are trying
to do is to improve the rules of the game. They are not directly
imposing controls as such. What they are trying to do is improve
the quality of regulation and supervision of financial centres,
they are trying to strengthen the regulations that all banking
regulators have on money laundering flows, and my suggestion is
that going down that route of improving the use of the system
rather than imposing controls which will catch the good flows
as well as the bad is certainly the route we have been going down
and may well be more effective.
65. Do you not think that the case for international
currency flow controls, either on a national basis or area basis,
has to some degree been made by events in Chile, Malaysia, India,
and so on and so forth?
(Mr Pickford) What I think has happened is that over
the last few years since the Asian crisis struck there has been
a change in sentiment away from a strong presumption that countries
should open up their capital accounts as quickly as possible.
There clearly are benefits for countries in terms of having open
capital markets because they can get access to private capital
which, as we have already explored, is the primary financing for
many of these countries. What I think has happened has been a
much more cautious approach about how far and how fast that process
should happen. It was quite clear in a number of the Asian cases
that having too quick capital account liberalisation was a contributory
factor to the crisis, and there is common understanding I believe
now that you have to have certain preconditions in place before
you start opening up a capital account and that is partly about
the macro framework that the country has and it is partly about
the strengthening of the financial sector in the country. Without
that I think you run into all sorts of problems.
66. Let me be clear about this. What you are
saying is that United Kingdom at the IMF and the IMF as a whole
might be willing to accept that countries move more slowly towards
capital account liberalisation than some economic text book floating
round the average British university might require, but that is
entirely different from saying that you would be prepared to accept
active measures of control introduced in the context in which
some measure of capital account liberalisation already existed.
The implication I am drawing is that you would be hostile to that.
(Mr O'Donnell) Can I expand on this? It is certainly
true that we learned a lot during the Asian crisis and we learned
that sequencing of capital account liberalisation was important.
Korea was a classic example where they deregulated short-run capital
flows but had enormous restrictions on long-term flows so long-term
money came in as short money and when there was a crisis that
all went out and exacerbated issues. Sequencing is very important
and that is what the Fund is talking about now. If in a crisis
situation you are saying, in the armoury of tools the Fund has,
are capital controls one of them, then I think the answer has
to be yes, they are not ruled out for ever and that there are
circumstances in which they may be the least bad option.
67. Thank you. That is helpful. My last question
really relates to the poverty reduction strategy procedure in
which you say there is a high degree of national ownership of
poverty reduction strategies. I must say there is an increasing
amount of evidence that countries subjected to poverty reduction
strategies in fact feel that the whole thing has been carried
out very abruptly and without proper discussion within those societies.
(Mr Pickford) I think there are a range of experiences.
Certainly in some countries we also hear those stories that the
process has been rushed and that comes out at the Board discussion.
To be blunt, that is partly of our own making because we have
required interim PRSPs for decision point and final PRSPs for
completion point, and to the extent to which countries are keen
to get debt relief they are also keen to put their PRSPs in place.
There is a danger in that. There are other countries that have
had very good experiences and they are the cases generally where
(they did not call them PRSPs) they had their own national process
in place for the last few years to try and have a dialogue more
generally within society about what are the goals of the government
and what are the ways in which it can deal with poverty. Uganda,
for instance, had its equivalent. I think it started in about
1997. We invented PRSPs in 1999 so this is not new, it is just
building on what seems to have worked in countries. It is true
that some countries do not have a strong history of participatory
processes and consultative mechanisms and it is hard. We are getting
cases in the Board where staff assessment of the process is less
than glowing, and we have to take a decision as to whether we
accept something that is not up to what we would like to see and
to still go ahead. And the way we have approached this generally
is to say that we do require interim PRSPs at decision point but
rather than penalising the country and holding up on the decision
point and the interim relief that can flow from that, we will
take interim PRSPs that are less than perfect, but what we will
do is have a strong requirement that the full PRSPs, as they are
developed and which are a condition for completion point, are
going to have to be good quality. That is really part of our agenda
for taking the debt relief initiative forward. We have got to
make sure that the quality of PRSPs, as they become the full PRSPs,
really are up to standard because only in that way are you going
to link effectively debt relief to poverty reduction, which is
the whole point of the initiative.
Chairman
68. Before I move to Mr Davey can I get on the
record your position on the Tobin tax. I notice it is mentioned,
you have got a little box on it.
(Mr O'Donnell) We have got a little box on page 13.
We do not believe the Tobin tax would work and the primary problem
is the one about the practicalities imposed in some areas. Flows
would simply move. These are highly mobile flows and they would
go somewhere else. They would probably also go to a market that
was much worse regulated and I think that would increase the volatility
of financial flows around the world. Also, if you impose a tax
on short-term financial flows, I do not think it will do much
to deter speculation because speculative flows happen because
they believe they are going to get a massive gain from a regime
switch in an exchange rate case, and a small tax would not deter
those. However, it would also deter standard economic flows that
are important for market adjustment mechanisms. So for all those
reasons that are set out there we remain opposed to the Tobin
tax.
Mr Cousins
69. If you could close some of the holes of
the poorly regulated financial structures of the world, would
your view be different?
(Mr O'Donnell) For the other reasons I have given,
probably not. I cannot see that it would gain much. In general,
taxes on transactions tend to reduce market efficiency.
Sir Teddy Taylor: Hear, hear!
Mr Cousins
70. Like stamp duty in this country which raises
£32 billion for the Government?
(Mr O'Donnell) That is why I said "in general".
You have to have the trade-off of revenue gains and there may
be some efficiency losses. All taxes create distortions.
71. So there might be some argument, if it could
be delivered in a practical way, for such a thing as a revenue
raiser like stamp duty?
(Mr O'Donnell) All I am saying is like all taxes it
would create certain distortions and you have to weigh up the
costs against the benefits.
Mr Davey
72. Can I bring you back to poverty reduction
strategies and ask about the experience IMF has had in different
countries as they have introduced them. Have you gained the support
of the politicians and wider society for this approach? Do they
think it is better than what has gone before? In general is there
an acceptance that this is the right way forward?
(Mr Pickford) In general, yes. I think the experience
varies from country to country. I will not repeat what I said
in answer to the earlier question, but there are some societies
and some governments that are more ready and willing to embrace
the participatory process than others. We are convinced in the
institutions that getting broad ownership of policies is a good
thing because it is likely on the basis of our experience to improve
the results from these programmes. Time and time again you see
countries where you have very poor ownership, either within the
government or more widely, programmes breaking down because there
is not a degree of broad political consensus behind the programmes
and they fail. So I think we definitely see that the approach
of trying to build up that consensus within a country behind an
adjustment programme is worth the effort, but it is certainly
true that in some countries it is a lot harder process to sell.
73. If you compare them to the structural adjustment
programmes of the past, are you finding that politicians in these
countries are more happy with this approach than the previous
approach of the IMF, or do some politicians in some countries
prefer the old approach?
(Mr Pickford) I guess there will be a few politicians
or political leaders who will prefer to have closed decision-making
processes, but I think in general the experience we have had is
that countries do tend to appreciate the processes once they have
started going down them. Take Kenya, for example, where up until
a couple of years ago you could correctly characterise the political
process as pretty closed. The report and assessment we had on
the process they went through in terms of producing their interim
PRSP has actually been very positive. Both the Fund and the Bank
have got resident representatives in the country and they go along
to the meetings that are organised by the government to discuss
PSRPs. They report back that civil society organisations, faith
groups, and so on, have been pleasantly surprised by the process
and also that the government seems to have been pleased with the
results. You will not get that experience everywhere but nevertheless
there are examples where more closed governments have ended up
seeing the benefits of a more open programme.
74. So people do see the difference between
this approach and the other approach? It is genuine?
(Mr Pickford) Yes.
75. You will be aware, and Mr Cousins touched
on this, that there are some in this country, NGOs and more widely,
who are slightly worried about whether the actuality of these
poverty reduction strategies is meeting the rhetoric. There have
been criticisms, for example, that some of the strategies do not
have an assessment of potential impact before they are agreed
and implemented. Would you like to comment on that criticism?
(Mr Pickford) That criticism is fair in some cases.
I think that reflects the breadth of experience we have had. The
interim PRSPs are variable in quality, as I have said, and a lot
of them do not match up to what we would have liked to have seen.
76. What is the United Kingdom doing at the
IMF to try to put that right?
(Mr Pickford) What we have done within the IMF is
to accept somewhat lower quality in the nature of interim PRSPs
for decision point but to be quite insistent that the quality
has to improve by the time they get to full PRSP. Also bilaterally
DFID has a big programme of support to help countries to initiate
and improve their PRSP processes. It is such a very big priority
for the United Kingdom government (because we are so firmly behind
the PRSP process) that we put in some practical support for countries.
77. That is good to hear. Looking at those countries
who have started receiving some of the debt relief, I think it
is 22 by the end of last year, I am slightly concerned to read
that on average that is still a reduction of under a third in
average—some are a lot higher than that, some a lot less.
This is not near to some of the aspirations that were set particularly
by some of the Drop the Debt campaigns. I have got an average
figure of 30.7 per cent—you may have a different figure—do
you see that increasing significantly in the next few years?
(Mr Pickford) I think that goes back to the original
design of HIPC. What it was designed to do was reduce each country's
level of debt to what we define as sustainable—and you can
argue about what is sustainable and what is not—and the
definition we chose, which is that the value of the debt to export
ratio should be no more than 150 per cent, is lower under HIPC
II than under HIPC I, but of course some countries have only a
little bit more debt than that, others have huge amounts of debt,
so the ones with the huge amounts of debt have seen much bigger
reductions. For example, Mozambique has seen its debt cut by two
thirds. But it will vary from country to country simply because
some countries started off with unsustainable but relatively low
debt and others had huge amounts of debt. That is I think why
you are getting the difference from country to country. As to
what will happen in the future, you need to look at the individual
countries case-by-case.
78. Could I ask then about those countries that
have not yet qualified. How many do you think by the end of this
year will have qualified of those remaining?
(Mr Pickford) It is a good question and I do not think
there is an easy answer. We set the target of 20 and, in fact,
we exceeded that, we got 22 through to decision point by the end
of 2000. If you look at the cases still to come, I have got a
table here which goes through the various countries. Would you
like me to go through numbers? There were 41 HIPCs in the first
instance, of which four were defined to be sustainable. Of the
37, 22 have got through to decision point, so there are another
15 still to go. Two are not seeking debt relief, Ghana and Laos,
and of those 13 remaining, nine of them are actively involved
or affected by conflict, and the other four have other problems.
The other four are Chad, Côte D'Ivoire, Ethiopia and Togo.
Ethiopia has signed a peace accord but is clearly only just emerging
from conflict which is why the cases coming up are likely to be
much more difficult than the cases we have dealt with over the
last year. The problems are very different because a large part
of them are to do with either conflict or governance issues. Conflict
is not something the IMF or World Bank deal with directly although
we have asked them to come up with some proposals on how they
can be more effective in terms of engaging in post-conflict cases.
That is a paper we hope to discuss at the spring meetings. It
is a big issue going forward in how we deal with the conflict
situation and Gus may want to say a little more about the United
Kingdom's attitude to conflict.
(Mr O'Donnell) It has got to be two-fold here. Basically
the thing to remember is that HIPC II has been enormously more
successful than HIPC I. It has been much quicker and there has
been more money. We are now hitting really difficult cases and
they are nearly all conflict cases, as Stephen has pointed out.
What can we do about conflict situations? There are some direct
things about trying to come up with conflict resolution processes.
What we decided as a Government is to say in those cases where
countries are in conflict and they pay us debt repayment, we will
put that aside, and we will give that back to them for use in
reducing poverty for their poverty reduction programmes when they
come to the decision point, so from now on we will put all of
that money aside. And we are trying to encourage others to go
down that route.
(Mr Pickford) Also you have set up a multi-departmental
budget and process.
79. That is the United Kingdom. How flexible
is the IMF going to be in those conflict cases? We all appreciate
how difficult it is and that it is going to require a degree of
imagination and innovation now and possibly flexibility on the
rules that were set up for the first 22 that got through last
year. Can you say a bit more about that? Would you be able to
tie it to conflict resolution negotiations? Would you be able
to do it within regions within a country? What sort of things
are you looking at to make sure that we can move quickly in these
extremely poor countries?
(Mr Pickford) These are precisely the issues we are
trying to work through at the moment and, as I say, staff are
working on a set of proposals which hopefully will come to the
spring meetings to try to see whether we can change the procedures
to make the Fund more flexible and quicker coming in in support
of post-conflict proposals. I cannot say all that much more usefully
at this stage but this is actively on the agenda and we should
be getting a paper within the next month or two.
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