Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 20-39)



  20. I understand that, but they have targets and they have specific objectives. I am looking for some sign that you have broken down the objectives per country and those strategies being discussed to get those countries where they should be, but I do not get that impression. I get the impression that if it happens, it would be very good, but if it does not, c'est la vie.
  (Mr Pickford) Let me give you again an example, if I may, because I think you need to take each of these goals individually. The World Bank in April produced an action plan for education and it basically went through 80 odd countries and worked out what would be required for each of those to get to the goal of universal primary education. It came up with a global cost, but it identified certain countries that were likely to get to the goals through their own efforts, another group which would require significant donor input and collateral and a third group who frankly were pretty unlikely to get there unless something substantially different happened. As a result of that, the Bank are now in the process of putting together a very concrete action plan to fast-track ten or so countries in order to put in a lot of resources and a lot of effort to try to jump-start those into meeting the goals. I think the same process is going to have to happen, for example, with the health Millennium Development Goals.

  21. The High-Level Panel on Financing For Development said an extra $50 billion would be needed and the World Bank said it would probably be higher. If you are playing a part in that strategy with other organisations, does your future budget see increased contributions coming in to make that $50 billion realisable and, therefore, the objectives met?
  (Mr Pickford) I think the figure that you quote is one prepared by Mr Zedillo in the lead-up to the Monterrey Conference. I think one of the successes of the Monterrey Conference was a realisation amongst the international community that to achieve the Millennium Development Goals would require a step increase in resources, roughly a doubling of total development aid.

  22. What are the IMF doing about that as one of the partners?
  (Mr Scholar) Well, just before coming to that specific point, can I take a step back. As I understand it, your question is that we have these Millennium Development Goals, we have countries drawing up their own policies, how do we know the whole thing is consistent. Certainly I would say—

  23. I had moved on actually just to put a straightforward question. Fine words, but if we are going to meet these objectives, $50 billion was put on the table and everybody said, "That is not enough", so what indication have you within the IMF that increased resources are going to come through that organisation as well as others, but through that organisation?
  (Mr Pickford) Actually, in practice the sums are so large that most, if not all, of the resources will have to come from the richer countries. The Fund itself has very little spare resources on its own account and, similarly, the World Bank has relatively little resources that it can put into the pot in terms of concessional flows. One of the successes of Monterrey, I think, was that we made a start towards that $50 billion with pledges from the EU for what would amount to an extra $7 billion a year in its aid flows from 2006 and also the US pledge of an extra $5 billion a year again from the same date of 2006. That is substantial progress. Now, $12 billion is not $50 billion, but it is a start. The Chancellor has recognised this as a real issue and has said that we really do need to think of innovative ways of trying to bridge that gap. He has suggested one possible mechanism, such as a trust fund which would take the contributions from the richer countries and then leverage it up by borrowing from the capital markets. That is one way of doing it, but I think there is now a realisation that (a) it is going to cost a lot of money, and (b) we can make substantial inroads into achieving that.

Dr Palmer

  24. There have been substantial discussions about the GATT agreements and one of the important points which ought to be stressed is that GATT is purely voluntary and developing countries only need to sign up to the extent that they think it would be helpful. In Oxfam's evidence to the Committee, they say that there is a weight of evidence showing countries are accepting trade liberalisation conditions written into their PRSPs as a prerequisite to obtaining aid and debt relief. My question is: can you assure us that developing countries will not be pressed to accept GATT as part of the package as that would of course make the voluntary aspect of GATT somewhat academic?
  (Mr Scholar) The policy, as I have said, is that countries draw up their poverty reduction strategies, and that the IMF and the World Bank and other donors then come in behind those to help them implement them. It would be quite contrary to that to try to push countries into liberalising where they do not want to or before they want to. Of course there needs to be a good dialogue between the Fund and countries and it is perfectly reasonable, I think, for the Fund to say to countries, "You would benefit from liberalising in this area", and if they want to say that, they should do the proper preparatory work to show they have a case and to demonstrate the impact on poverty and the social impacts. But, as I said, it is entirely contrary to the spirit of the approach to force countries when they do not want to do that.


  25. On the issue of trade liberalisation policies, following up Nick's point, Oxfam did produce a memorandum to us which seemed eminently sensible. They said that developing countries should not be rushed "to reduce their tariffs without recognising the effect it could have on both government revenues and on the livelihoods of people..." They mentioned Peru. In the 1990s I was in Peru on a number of occasions and I know that the IMF and the World Bank approach to liberalisation there ensured that their tariffs were reduced in 1990 from 56 per cent to 15 per cent in 1996, I think, and even lower after that, but it did result in the impoverishment of millions of people in Peru and I witnessed that aspect for myself. We have the IMF calling Peru in the 1990s one of the world's most open economies, yet the people are in dire poverty. I think there is a real lesson to be learned there in trade liberalisation which the IMF and the World Bank have not learned. Can we have your views?
  (Mr Scholar) Again, we need to look very much case-by-case at trade policy. In principle, a free trading system is to the benefit of all because it encourages the most efficient allocation of resources, greater productivity, growth and so on and so forth. In particular for developing countries free access for their products to industrial countries' markets is absolutely essential and there is a great deal more that needs to be done there. I think there is a lot of recognition of that. As for trade liberalisation in a particular country, you would have to look case-by-case and you would have to look at what the poverty and social impact would be. When the IMF is in a country such as Peru looking at this issue there is a new approach to the conditions it attaches to its lending. The procedure now is to streamline conditions to make sure only those conditions that are really critical to the success of the programme are incorporated. Both this streamlining of conditionality and this wider look at impact, including the social impact, of all of the policies should over the next years address that.
  (Mr Pickford) I think what we are trying to say is that actually with the move of the Fund to the PRGF facility, it is fundamentally different to the approach it took in the past. A number of the criticisms you are making are fair in terms of the way the Fund operated several years ago. In practice, I would not pretend everything is perfect, but I think the Fund has made substantial improvements in the way it deals with poor countries and in particular, as Tom said, it is now trying very much to focus the structural conditions that it puts on a country in a PRGF context on the essential things. In many cases I suspect trade liberalisation is not an essential structural component, at least in the early years of a development strategy.

  Chairman: The IMF and the World Bank have a long way to go to change perceptions. Andrew Tyrie is going to ask some questions on financing issues and representation at the IMF.

Mr Tyrie

  26. I might come on to financing issues in a moment. I just wanted to ask a very general question which leads on to the point made a moment ago about perception of the IMF and the World Bank. Has the Board of the IMF met to discuss as a Board why it thinks people have been rioting outside its windows and trying to have a go at the IMF every time it holds a meeting?
  (Mr Scholar) The Board meets NGOs from time to time, and in fact we are due to have a meeting some time in the next month or so with NGOs to discuss trade policy, and in Stephen's time at the Fund he hosted a meeting of the Board with various NGOs.

  27. Do you think the NGOs are organising the riots?
  (Mr Scholar) No, I was coming on to an explanation of the way in which the IMF Board does interact with the world outside the board room. There is a long way further to go in terms of the transparency of the IMF as an institution. The IMF management is increasingly transparent. This is something that has changed in the last few years, something to which Horst Ko­hler has made a huge commitment and put at the top of his agenda. If I am honest it would be a good thing for the IMF Board to follow that lead and to try to adopt the same standards.

  28. Was the answer yes or no to the question has the Board discussed why it thinks people are rioting?
  (Mr Pickford) Certainly in my time the Board did discuss what was going on in the streets outside. There was a fair degree of soul searching about why it was that the Fund were so much a target of demonstrations. To be fair, things like the PRGF and the PRSP process are to some extent responses to those concerns. The Fund did not have a good press. I can remember one particular occasion when Oxfam produced boxes of mints which said on them, "Beware, the IMF kills babies", or words to that effect. I do not think the IMF should pretend that it has a good press. What I do also perceive though is that there has over the last few years been a change in attitude. To some extent those perceptions are not borne out in reality.

  29. So one of the reasons why the Board think they are rioting is a lack of transparency?
  (Mr Pickford) Yes.

  30. Is that the only reason? And that if only people knew what the IMF were doing they would not be rioting? I am sorry to put it so simplistically, but I think this goes to the heart of what is becoming a major political issue in developed countries.
  (Mr Pickford) To be fair—and Tom may have a different perception—in my view the Fund is never going to be totally loved by the world because in many cases it is the instrument for putting across some sometimes rather difficult messages, so that if a country's fiscal situation is totally out of control then the Fund has to say this is unsustainable. It can help in terms of the adjustment process and it can certainly advise, but it will not always be liked for giving that honest advice.
  (Mr Scholar) In the time I have been there there have been a lot of discussions in the Board about the effectiveness of the Fund. There is probably consensus on the objectives of the Fund, being to promote stability and prosperity in the global economy, the question is how is that achieved. A very important question for the Board of the IMF is how effective is the IMF in its surveillance activities, in the advice it gives countries, and how persuasive is it? Is it able to explain why it is doing what it is doing? It is giving the right advice? Is it making the global economy more or less stable? There has been a great deal of attention given to that. We have had a big review of surveillance. One of the main discussions we had out of that was, firstly, how to make sure we are giving the right advice and, secondly, how can we persuade the world at large we are giving the right advice. That is partly a question of transparency, but it is also a question of taking a long hard look at what we are doing in each country and saying to ourselves is this the right thing to do? This is one of the reasons why we have suggested there needs to be greater independence of the surveillance function of the IMF, and that is now being looked at. That would give the Fund an opportunity to step back from what it is doing in a particular country and say we know there is a programme in place and we are asking this, this and this and this is the right thing to do, are we going in the right direction. There is a lot of soul searching, and it is a constant challenge to improve effectiveness, but that is what we are trying to do.

  31. One explanation has been lack of transparency. Another might be frustration at the lack of progress in the formal programmes and a major reason for that might be nothing to do with the IMF, but something you have never said or, at best have had difficulty in saying as an institution, which is that you are thwarted by the domestic political structures in many of the countries in which you are trying to operate, particularly in sub-Saharan Africa. Have the Board ever given consideration to encouraging Member States, your own shareholders, to be much more forthright in saying the truth of the extent to which IMF programmes are thwarted by political interference and corruption in the states in which you are expecting progress?
  (Mr Scholar) First of all, governance is a very big issue in many programmes and one of the things which is right at the heart of the Monterrey Compact on the approach to development policy is that responsibility for achieving progress is shared between developing countries, developed countries and international institutions, and it is only possible to have sustainable development taking place in an environment where there is good governance and the rule of law. I think that is part of the consensus. In some cases there are governance conditions attached to IMF lending. One current example is Kenya where there have been very big corruption problems and the IMF has halted lending as a result of that; and the government is now passing new legislation in order to demonstrate that it has the problem under control. Once that has happened then lending can resume again. It is not something that is in any sense ignored by the IMF. On the contrary it is a very important part of its approach to many countries.

  Chairman: You do not want to go on to financing issues?

Mr Tyrie

  32. There is an element of recondite investigation in all this. There is one question I might ask since the Chairman wants this area covered. I think you need a degree in international economics to understand the financing structure of the IMF and transparency has only taken us as far as saying, "Come and have a look and see how our space rocket works." For the ordinary soul transparency has not been a very enlightening experience. Is there a mechanism by which more clarity can be brought to these by structural changes, by maybe getting rid of the SDR enumerator and saying, "Okay, we will talk in a number people understand like dollars and we will have equal treatment of all tranches so that they all earn an interest rate." I am just throwing out a few thoughts.
  (Mr Pickford) I think what you suggest is rather sensible since I have the same problem understanding the intricacies of the Fund's finances. To explain why the situation is as it is, I think it has evolved over time.

  33. It is history.
  (Mr Pickford) It is history. In a situation where you require consensus or near consensus to make changes it is in some sense easier to build on what is already there rather than to perhaps be more radical and start from scratch. I do not defend the way the system has evolved, but I think there is an explanation as to why it has and why it will be rather difficult to change it again.

  Chairman: Maybe David Laws has a degree in international economics!

Mr Laws

  34. I do not think I covered that. Mr Scholar, do you regard the IMF as being a democratic body?
  (Mr Scholar) It is a body in which all of its members are represented and which combines universality of membership and representation with a decision-making body which is sufficiently small to enable effective decisions to be taken. It has been successful over the years in taking forward its work with a broad degree of consensus. That said, I think there are problems over the consensus that it can command within its membership where in particular the developing countries feel their voices are not sufficiently well heard. We agree with them and it is part of the Government's policy to help strengthen representation and the voice of developing countries in institutions including the IMF, and that is something we need to look at.

  35. At the moment from the figures we have got here there are 182 member countries. 36 of those have roughly 82 per cent of the vote between them and 146 have 18 per cent of the vote. It is almost the type of figures that we hear when we think about the distribution of wealth throughout the world, and that in a sense is what it is. Is it satisfactory that the voting power should be decided in that way?
  (Mr Scholar) As you say, on the voting power, the votes are closely linked to quotas and quotas in turn reflect the financial strength of the country. That is why you have the distribution that you have.

  36. Why not have one country one vote?
  (Mr Scholar) When the IMF was set up it was set up as a financial institution. It is quite different from the UN, for example, in that sense.

  37. Would the British Government be in favour of one member one vote?
  (Mr Scholar) The situation we have got is that quotas are tied first and foremost to ability to pay. I think it is important to remember that the IMF is an institution one of whose major activities is to lend quite large amounts of money to large numbers of countries and the money that they are lending is the money provided by the shareholders, and it is not unreasonable that the shareholders that contribute the most should have that reflected to a degree in their voting.

  38. So you would not be in favour even in principle from scratch of a wholly democratic system where one country had one vote?
  (Mr Scholar) What we are in favour of is strengthening the voice of developing countries.

  39. We have one end of the spectrum of unfairness and you want to shift along a little bit more in the direction of full fairness but not the whole way?
  (Mr Scholar) I do not think the issue of the complete restructuring of the entire decision-making process is an issue which is on the table at the moment.

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