Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 120-139)



  120. It has pretty thin resources set against what is available to the IMF, has it not?
  (Mr Wilks) That could be an issue, yes. It will not be able to conduct a lot of primary field research on the ground-level impacts of what the IMF has been recommending. It will fall back on desk reviews and going to one or two capital cities. That is an issue. It has a quite ambitious work programme, as you say, to set against the resources at its disposal. I think we will really have to see.

  121. Do you have a basic feeling? Is it going to have a real impact?
  (Mr Wilks) I think it is very helpful to have that there, and the World Bank's Operations Evaluation Department, which is somewhat analogous, has been helpful in doing some quite hard-hitting reports on where the Bank has fallen short. It is fairly independent mostly and it is certainly very welcome, and I think to be promoted rather than having cold water poured on it at the moment.

  122. You sound quite hopeful. Is that view shared?
  (Professor Vines) Yes. I think the three things that they have in their first work programme are three very good things on which there has been internal review of the Fund, certainly on the financial crisis question, and to have review by this office rather than internally within the Fund on these questions seems an important step forward, but, as I say, we will have to look at what the outcomes are like.


  123. Could I turn to the surveillance and standards and codes. Article IV of the IMF states that "The Fund shall oversee the international monetary system in order to ensure its effective operation" and "The Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies." In a report on the external evaluation of IMF surveillance by the Chairman of the Executive Board of the IMF in September 1999 it was stated that a number of directors felt that "Fund surveillance had moved inappropriately beyond the original core issues, including into areas such as labour markets, pensions reform, social policy and governance." Given that the original remit was surveillance over the exchange rate policies of members, how much legitimacy does the IMF have in undertaking wider surveillance on issues such as pension reform or social policy?
  (Professor Miller) This comes back to an issue that came up earlier, namely the interventionism of some of the IMF's policy recommendations. One suggestion I wanted to make then, and I can make it now, is that maybe there should be more lawyers as well as economists on the teams they send. They do have an excellent legal department, but I gather that the legal department are not really a large part of the missions they send, and therefore issues of whether or not things are constitutional just go by the board. That is one practical point. Secondly, I would say that I think there probably is a big distinction between what happens to emerging market countries in trouble in intervention there and what happens with OECD countries, for which the surveillance is pretty much just pro forma; it is almost a waste of time; there is very little intervention there. But I agree with some of the concerns. One has to ask, is this really the business of the IMF, for example, in Korea, you may remember that they required presidential candidates to sign a declaration to accept various conditionalities. There is a margin there which one can cross, and my feeling would be that getting better lawyers on the scene at the time might help.

  124. The Japanese Government earlier on this year accused the IMF of meddling in their domestic affairs. The Japanese Finance Minister called the IMF remarks "unexpected" and said it was unreasonable to urge more spending when Japan already had very high public debt levels. Does the IMF run the risk of creating a political backlash in a country due to its scrutiny of domestic economies and financial systems?
  (Mr Wallis) The Japan case is difficult for me to quote on, but if you go back to the East Asia crisis, there the fundamental problem had been lack of investor confidence, rapid devaluation, spiralling debts, and what was needed then was a debt restructuring, expansionary economic policy and some strategies for supporting the poor. The problem was in many cases, Thailand and Indonesia, for example, that the IMF basically instructed them to run budget surpluses. How would we in this country look at that move when we are in recession, in low inflation, to then be pushed towards a budget surplus? In macro-economic terms it does not make sense, let alone in poverty terms. So that intervention on public spending, which is what we see so often, on either public spending or trade liberalisation, is not looking at poverty, but in some cases is not even looking at the right medicine for the situation in macro-economic stabilisation terms. We think fundamentally it was not the IMF that caused the East Asia crisis, but they provided the wrong medicine in our view at that time in terms of pushing countries to put up public expenditure and you ended up with 20 million more people in poverty partly as a result of the IMF actions in Indonesia. You ended up with 1.3 million kids dropping out of school because of those public sector cuts. It is the wrong medicine in macro-economic terms, and it was absolutely the wrong medicine in poverty terms. We are concerned that sometimes the IMF is not looking systemically at what is needed in the global situation; it is looking down a very narrow macro-economic stability lens which is not even economically correct, and it certainly is not looking at the poverty effects. The area I want to go on to is still the conditionalities around liberalisation. I am not arguing that trade liberalisation cannot be an engine for poverty reduction; in some situations it can, and there are some situations where it has led to considerable export growth for people in certain sectors, and there has been bad protectionism of monopolies in some countries. There is no question of those things, but, as a general policy prescription, to push for trade liberalisation to reduce poverty, there is not strong evidence. You can go right back to how this country grew, which was within some levels of trade protection, to how America grew—you had Ulysses Grant, the American President in the 1870s saying, "We are standing up to Britain," and calling for America to drop its protectionism and saying, "We will drop it in a couple of hundred years and then we will push free trade, but let us get our economy sorted first." Now there is a lot of evidence from some places like South Korea. I worked as an economist for the Bank on South Korea in the late Seventies/early Eighties. That was not a situation of trade liberalisation; that was a massive investment in education and land reform, backed by initial protectionism while industries grew; export promotion and subsidisation and then opening up markets. This idea that you can just open markets and that that will help poverty is absolute rubbish in the wider context. The wider context at the minute is still massive subsidisation of rich country markets, farmers particularly. We are talking about $1 billion a day, and we are talking about the average subsidy to a US farmer being around $22,000 per farmer, which is some 50 times the average income of farmers in the poorest countries. How do you compete in the open market with that degree of subsidisation, let alone the fact that those industries and farms are far more sophisticated and have all the technical input, etc? It does not make sense. Then when you add the barriers to many developing countries' products getting into developed countries still—there have been some moves in the EU for the poorest countries but it is limited and not covering sugar and crucial areas like that—when you add those together and you add the massive fall in commodity prices—coffee prices down 70 per cent over the last five to seven years—you have a crisis in the agricultural sector, which is not helped at all by IMF and World Bank conditionality to open up economies. Haiti, for example, was an economy where there was a massive push for liberalisation. It is now far more open than the US or Canadian economy. The rice sector has been devastated. Tariffs were reduced and you have massive malnutrition among children in the rice growing sector. There is a serious problem. Tariffs came down in one year from 33 per cent to 3 per cent under IMF pressure, and you have tens of thousands of people facing malnutrition because of that economy being flooded by cheap rice imports. This idea of pushing liberalisation in the interests of poverty reduction and in the interests of growth is one that has to be handled very carefully, and has to be done in a phased way and has to look case by case at what the poverty impacts are. Too many of the PRSPs and too many of the IMF conditions have trade conditions attached. We looked at 12 interim PRSPs with trade liberalisation conditions attached. Only four of them have any mention of the poverty effects of that, and only two out of that 12 had any measures to counter that. Similarly, in Cambodia, a major rice grower, poor areas have not grown as fast as the economy as a whole. The PRSP on Cambodia had no mention at all of the poverty impacts. There is some of the right rhetoric going on about PRSPs but the practice is not happening in any fundamental way, and certainly there is a lot of what I call macro-economic claptrap being talked about trade liberalisation without really understanding where it is necessary and where it is not. I do think there is a serious issue there.

  125. Does anyone else share those views?
  (Professor Vines) The reason that surveillance is under scrutiny is because it was so badly done in the run-up to the Asia crisis. What was wrong there was that there was too guarded an investigation of a very narrow range of macro-economic questions without regard to longer term stability and solvency of financial institutions, their regulation and their reform, and in particular the encouragement of capital flows in a world that was not adequately equipped to deal with them. But in improving surveillance we have to be very careful not to want it to go too far. In what you were saying a moment ago, it is easy to see surveillance becoming a generalised discussion of the overall structure of the overall development policy of a country, which is important to have discussion about and engagement with, but it is not clear that that is an object of IMF surveillance. The surveillance needs to ensure macro-economic stability and financial appropriateness for the macro economics being conducted. I think a surveillance which focuses on these two things is important. To go too wide in the surveillance is to encourage the move of the Fund in its actual policies in trying to push countries to do things which will not necessarily be agreed with on trade liberalisation, on market reform, on the way social security and social nets work. All of these things are crucial issues, but I am not sure that they are core surveillance issues or in the end things about which Fund conditionality should apply.

  126. Let me ask a very simple question. Here we have the IMF with surveillance in Article IV, asking countries to do certain things in the macro-economic field. The reality on the ground is that in areas where they import certain commodities they are poorer as a result. The ordinary person would say that is absurd. We cannot give legitimacy to the IMF and its proposals for countries when those countries are becoming poorer. That is the big issue politically. If we dress it up in complicated language that is no good. We need to have a simple answer to something like that. I am not saying the solution is simple.
  (Mr Wallis) We have the worst of all worlds at the minute. We have under the surveillance—I do not mind what kind of areas it is coming under—real interference in macro-economic, public policy and public spending decisions of developing countries and policy decisions around liberalisation but not taking the poverty effects into account. Either one goes down the route Professor Vines was talking about of the IMF getting out of that but being aware of the issues, or, if they are getting into it, they are going to have to take the poverty and other long-term effects into account much more effectively than they do at the minute. One needs either one way or the other.

  127. How do we counter the protests against globalisation? Quite a lot of people say there is something worthwhile happening, so why is it that the big institutions are not the recipients of all this anger and frustration? We must find a way forward there and I am looking for a simple way.
  (Mr Wilks) I think, to re-frame your previous question, some people see that the IMF is doing the job more of a rating agency for private investors to understand whether their money will be safe here there or elsewhere, and not really fulfilling a public mandate, and this is at the core of it. Therefore, there is a political backlash phenomenon in specific countries. You can think of Ecuador last January, when a lot of people came out on the streets, the whole country was shut down for a number of days to do with some IMF-mandated price rises. In Washington obviously there are other protests, but I am thinking more of the World Development Movement, which has tabled about 100 instances last year alone of protests because of IMF conditions. There are some specific and simple things on the governance side, for example, which will not solve it immediately. I would suggest you might want to ask Mr Ko­hler how his successor will be appointed. At the moment the President of the World Bank is appointed by the US administration, the Managing Director of the IMF is somehow appointed by the Europeans with a de facto veto by the US. Mr Ko­hler was second choice. It is not meritocratic and it is not open. The World Trade Organisation—again, not everyone's favourite organisation by any means—at least are more sensitive to this point and now a Thai head of that institution will take over from the current New Zealand head in September. So that is a slightly symbolic thing, but it is a specific thing that I would suggest can be dealt with. There was big bun-fight in appointing Mr Ko­hler. It was not the normal meritocratic and open procedure that you might hope for for the Head of a very important public institution.

  128. We are looking at the effects on countries now. I take that point. We will look at that issue. I want to focus on the effects on countries. If you have any questions for us to put to Mr Ko­hler, that would be very helpful.
  (Professor Miller) Ravi Kanbur, who worked for a while for the World Bank, planned to have a poverty audit on the programme. I do not think this is done formally, but it was picking up on the poverty impact on programmes. Is this a formal part of what is done?
  (Mr Wallis) It has not happened. Our sense is that there has been a lot of talk about it, the IMF and World Bank have made a commitment to do ex ante and ongoing poverty social and environmental impact studies, but in practice it is not happening in many cases.I think it is a crucial issue, but the resources are lacking; there is not money for that activity. Whether it is under the aegis of the Fund, depending where one goes on future roles, or the Bank doing that work in the context of poverty reduction strategy papers, it is crucial, as it is crucial to make the PRSP process work better. The more marginalised poor people's voices are still not being heard. The fact that many of the poverty impacts of trade liberalisation measures are not being looked at means that we need a more open process that says whose voices have been heard, what comments they have made, whether they were accepted or not and what happened. That degree of transparency about who was involved, what they said, and what was then agreed would be very helpful, but the impact assessment needs some serious funding, because we are living with old economics still, I would submit, because we are not taking into account what is needed to protect industries. It is not a blanket thing. There are many monopolies in developing countries held by limited numbers of people where you do not want to protect them, but those places where there is a high degree of food sufficiency in a particular country and those are held by large numbers of small farmers are the areas where one needs some form of protection and some form of plan to phase liberalisation in. It is really looking at the poverty effects of what is right for a particular country.

  129. If I can give you an example of my own experience, less than two years ago I visited Bolivia, and I was told the poverty reduction strategy was working very well and they were in the vanguard of eliminating the cocoa crop. To show us what good work was being done, they took us to a growing region. We went by military plane to an air base, which was probably just as well because there were 40,000 peasants demonstrating outside, because there was nothing on the ground for them to do. They had destroyed the cocoa crop but there was nothing for the population. It is that vacuum, that hiatus that is here. It is no good the UN or others saying, "We have made fantastic progress in terms of eliminating cocoa crops" when the population is starving and in penury.
  (Professor Vines) There is much anger in many places at the Fund's role in sustaining and continuing poverty and in the difficult effects of globalisation on countries. I think a Fund which aims to do too much asks for this anger. If it puts itself into the position of an institution which is dealing with a solution to a wide range of development problems, then when development delivers its slow progress and disappointing achievements, the Fund will come front in criticism. A Fund which is careful about what it sets out to be responsible for, helping to prevent financial crises, helping to manage them when they happen and helping countries to run good macro-economic policies in the interim is an institution which is playing its part, but only a limited part in this overall process of development and poverty reduction. To ask a Fund to do too much and then become entangled in a Fund which as a result is too unpopular, so unpopular as to make its work difficult, is to push in the wrong direction.
  (Mr Wallis) While I might share that as a medium-term goal, my concern is that there is a short term. The Fund is involved in PRGFs in working with the Bank on poverty issues. Until that wider mandate might change, it is crucial that the poverty effects are taken into account, the impact assessments happen and that that is well-funded, that there is greater involvement in those PRSPs, and particularly, that this issue of trade liberalisation is really addressed in poverty terms, what is right and what is not. It is crucial. My worry would be that what we do not want to see is that these issues are not addressed over the next few years while the Fund is involved in those issues.
  (Professor Vines) If the Fund is taking these things on and the measures are not evaluated, that is not a good outcome.

  130. The trade issue is going to be the big issue for campaigning groups in this country. It has already started. The opportunity for more disaffection is going to occur.
  (Mr Wilks) It might be helpful in your preparations for Mr Ko­hler coming next week to focus for a couple of minutes on the case of Malawi, where there is a food crisis, as you are probably aware. There are a lot of people trying to work out where to apportion the blame for this. I think the blame is mixed; it is not solely an IMF problem. There are a number of issues about the way in which different government departments and state agencies have responded. The Malawi President said about one month ago, "The IMF is to blame for the biting food crisis. They insisted that the government sell maize from its strategic grain reserve and requested that the government abandon its starter pack agricultural subsidy programme." The IMF riposted, "We have no expertise in food security policy and did not instruct the Malawi government or the National Food Reserve Agency to dispose of its reserves." There is a lengthy report by Action Aid, Malawi, published this month looking into the issues. We do not have the time to go into it now, but it is interesting that the statement of the May 2002 mission of the IMF which flew to Malawi made on the basis of that mission was condemned by Action Aid for displaying "remarkable insensitivity and ideological narrow-mindedness". They were pointing out that the IMF mission statement failed to mention that hundreds if not thousands of people had died from starvation in the previous months. It was the point that you are making. They are not looking at the impact on people on the ground. It was looking just from the fiscal side of things. You are talking in general, generic, typical IMF terms. "The parastatal sector will continue to pose risks to the budget." "Government intervention in the food and other agricultural markets . . ." "Taking heavy recourse to budgetary financing, crowding out more productive spending." It did appear like an academic deliberation on the finer points of fiscal targets, etc, not an agency which is concerned about impacts on the ground. This type of insensitivity and apparent narrow-mindedness does feed the perceptions that the IMF has not changed nearly as much as the announcements that you hear at the annual meetings.

Kali Mountford

  131. Does this not take us back to Professor Miller's opening remarks, about the appropriate work for the appropriate agency? Is the IMF the right agency to deliver some of this work? Professor Vines just said some interesting things about the macro-economic focus. I would like to know, if we were to take a sequential approach to this, what would be the sequence that each of you would follow? We have here agencies that have sometimes too tight a focus and sometimes too loose, not appropriate for each set of circumstances. How do we get from this apparent chaos, as it seems from your descriptions today, to something which is actually practically applied in each situation?
  (Professor Miller) My inclination would be to ask how do we do it inside the nation state? There are problems of poverty, problems of balancing budget, and the Treasury is well known always to be looking at numbers and taxes, but we have other agencies that balance that out. That would be my instinct. I am ashamed to say I have not done this, but how do you do it nationally and then how do you replicate this at a global level? We need to have some counter-balance to the pure budgetary instincts of the IMF.
  (Mr Wallis) I think the issue, whatever the roles are, is that there does need to be not working in separate boxes. Part of the reason there was a lot of pressure for the IMF to get into more poverty issues was because its policies were working in a very different way to the other side of 18th Street in Washington, the World Bank. That was part of the reason; they were pulling in different directions. What I think is crucial is that we do not get to an unjoined-up approach to policy, where the Fund is looking for massive public spending cuts at the same time as the Bank is trying to reduce poverty or other people are trying to reduce poverty. Given that, I think the starting point is the discussion about each country's economic situation, which starts not from just the macro-economic stability—which is terribly important, and I am not denying that—but starts actually from what are those millennium poverty goals, what are we actually trying to do in terms of education and health in this country, and what is necessary then in economic terms to give a stable economic policy to get us there. It starts from the wrong place; it still starts from "How do we get a balanced budget?" and then how we make sure there are enough safety nets, not from the point of what is actually economically needed for this country to reach its development goals, which in itself will lead to much greater economic activity and potential for greater economic stability. The idea that growth and poverty are in opposition to each other is not necessarily correct. They are not. There is clear evidence that fostering the right kind of growth strategy, with more redistribution of resources to bring poor people into it actually reduces poverty and gives more sustainable growth. There is lots of evidence about the right types of models out there. The problem is people are thinking very short-term, the Fund particularly is pushing short-term thinking on a very narrow definition of macro-economic stability, not working with the Bank and other governments to think about what is needed to meet the millennium goals. I think that is where one should start, not from a narrow definition of responsibilities only. It is going to be crucial; even more important than who does what, is what you are aiming at and what the policies are. That is the bit I think that is going wrong at the minute.
  (Professor Vines) I do not know the Malawi story in detail, but enough of it to know that, as you have suggested, it points to this real conflict. To ask that the Fund essentially disregard the other concerns and set about doing what you describe is not right, and the Fund says in reply, "But to present this set of problems to us and ask us to override our concerns with macro-economic and financial stability to deal with them is not the solution to the problem either." We seem to have at the moment therefore the requirement that the Fund becomes responsible for a very wide range of things in order to prevent it making these decisions which compromise its core responsibility. The alternative is to keep working with the Bank and others in saying, "This is a crisis, it is going to need particular action, we have our financial objectives and we have the crisis to deal with and they have to be done together." As you describe it, it is right way to go forward, and it involves both together, rather than either the Fund overriding these other objectives or being responsible for everything.
  (Mr Wilks) I think it can be clearly phrased. We do not want the IMF to be responsible for all these issues, but we want them to be responsive to all these issues. A government should evidently be concerned with feeding people first and sorting out the budget numbers at the same time, but certainly not as a first order priority. Mr Ko­hler has done something useful in this streamlining and conditionality review that he conducted with the IMF last year, and now supposedly the IMF is to concentrate its conditionality on three areas: exchange system, financial sector and fiscal policy. So conditions should not be imposed on labour reform or many of these other issues. There is the question of whether the conditionality is being imposed by the World Bank or somebody else. There is no net reduction in conditionality. This is why some kind of matrix of who is responsible for what in these countries is being proposed in terms of donor coordination and transparency. At the same time, I think we need to think about reinforcing the UN specialised agencies. On labour, for example, there has been the International Labour Organisation, which is a tripartite place where some of these issues are dealt with. Why not reinforce that at the same time as carving off some of the responsibilities from the IMF?


  132. Professor Vines, in your paper you mentioned the need for clarity in the roles, the issue of liquidity crises in emerging economies which you mentioned earlier. We have the situation of Brazil, where they have followed all the rules, but it is still a huge issue and a huge problem. I mentioned Mr Soros. He was with us the other day and he expressed deep concern about the situation in Brazil. So here is a situation not with developing countries but with emerging markets and we are still getting things spectacularly wrong. What is the advice there?
  (Professor Miller) The answer is to help Brazil. There was a piece in yesterday's Financial Times from Ted Truman, who used to work in the Federal Reserve, saying that the IMF should really back Brazil. There seems to be a panic about some possible future election that is holding the market. As you have said, they have done a lot right. Debt is quite high. The debt/GDP ratio is actually higher than one would have hoped for, which is part of the problem, but the other problem is that the interest rates suddenly spiralled and this gives a picture of unsustainability, because if you push interest rates up to 18 per cent and debt is over 50 per cent of GNP, you suddenly get an extra charge on the budget and everyone begins to think the country is falling apart. Hopefully that is panic, and when things get sorted out, that need not be a permanent charge on the budget. They have obviously devalued; the real has gone down enormously against the dollar, which was of course not true in the case of Argentina. So in a sense you feel this is a panic and this is where Brazil needs support. It may, oddly enough, be a case where you do want to get some reassurance that there is not going to be some government that repudiates all Brazil's commitments. There is a political factor in there as well, one has to concede, but I take the view that it is a panic and it is a case where the IMF has to be seen to be helping, and presumably other countries as well.
  (Professor Vines) To have the Fund walk away, as some commentators have suggested it might, and some from the US have suggested, is exactly the wrong solution to problems of this kind. That is where the Fund needs to be, not helping just in fundamental solvency crises, but in liquidity panics of this kind, and it does mean that there may need to be some—we are a way from this yet—lending from the Fund into a position where the Brazilians have been unable to maintain all their current debt repayments. I think asking a question about that is an important thing, if the Fund has the commitment to do this.
  (Mr Wallis) This is an area Oxfam has wanted to do quite a lot more work in, but we come back to the comment Keynes made at the original Bretton Woods Foundation. When the amount of money going round the world reflects like a casino and is not related to trade, there are going to be major problems. I think we are now facing that to some extent, and there is a fundamental issue of not managing financing for trade or foreign direct investment but managing speculative capital flows, and I do not think there are any easy solutions. That seems an issue of global management that we need to grapple with in a rather more systemic way than just what we have been talking about, much as I agree with it. As Professor Miller said earlier, if you think of many of these global problems in the context of how we deal with them in a national economy, some of the answers longer term might become apparent, because we have means of controlling money supply, inflation target rates, etc, but at the global level we lack some of those mechanisms. I think that is the fundamental problem. The solutions are not easy though.

Kali Mountford

  133. That is George Soros's main point, particularly about rates. Brazil is paying 17Ö per cent above base—it is down to 16 now. He is suggesting we could look at global rates, and particularly in this case he suggested 3 per cent, because at a single stroke, if they wanted to do one thing, that would help. I do not know what you think the response to such a suggestion might be.
  (Mr Wallis) It is outside my area of competence, but certainly we would need at some point to find some way of managing these issues. We used to manage them locally within the economy, we have moved to managing them at national economy level, and we have to manage them at the global level, and it sees to me that this whole question of speculative capital flows and interest rates we have not got right. Similarly, we have a redistributive tax system in this country. We talk still about foreign aid on a global level. We have not even got some of those mechanisms past first base. We have to do a lot more thinking. I am afraid I have no easy answers on that. It is an area that we want to explore as an organisation, because it is a major poverty issue.
  (Professor Vines) There are no easy answers to this. To have the Fund or some other international agency stepping into markets like this where rates are at 17 per cent and lending at 3 per cent is unimaginably expensive. We do not have the international commitment to make that possible. In the end, we have to countenance, much as Mr Tyrie did not like the suggestion, the possibility that there is a standstill in these circumstances, and people do not pay when interest rates do this, or they suspend payment, and that there are international institutions that manage the suspension whilst it is clear what the adjustment policies are, and then the markets re-open when the panic has been dealt with.
  (Professor Miller) I should have said that in Ted Truman's comments he did look for some guarantees down the line that there would be some fiscal stability to deal with the feeling that the market is worried that the debt may not be paid, which is why some of these interest rates are so high. It is a two-part strategy. You give some fiscal reassurance on the one hand, so Brazil accepts those. You then give some short-term money and you may have some re-profiling of the debt. If the fiscal stability is guaranteed, there is no need to take a write-down, but it may be that you cannot pay everything right now. I see it as a multiple strategy. Debt reassurance in the longer run, money in the short run, possibly some debt restructuring, and once these things can be done, the problem disappears, and interest rates come down to base rate plus 5 per cent rather than plus 16.

  134. As long as it does not build in debt problems for a longer term than had previously been anticipated.
  (Professor Vines) That is why fiscal reassurance is central. Read Argentina into that.
  (Mr Wallis) Could I raise the other issue of debt? This is back to the HIPC questions and the highly indebted countries. The IMF conditionality has meant that countries like Guyana, Senegal or Honduras have stalled because they have not met IMF conditionality, and basically it has meant they have not got the HIPC relief that they should do. There really does need to be a challenge to Mr Ko­hler about the fundamental purpose of the HIPC process.


  135. You said in your paper that HIPC is in crisis. Can you pursue that.
  (Mr Wallis) Very quickly, to give you one example that would position it, a country like Uganda, with a good record, etc, their coffee exports, a major export crop for Uganda, were worth $433 million in 1994-95. Because of the decline in coffee prices, in 2000-01 when they exported the same amount of coffee—tonnage had not gone down, volume had not gone down—that was worth $110 million. In other words, Uganda's exports had gone down from $400 million in real terms to $100 million, so a quarter of what it was in value. That is because of the decline in coffee prices. That $300 million gap is three times what they got out of the HIPC process. Even for those really good countries that have done everything right, you have debt relief giving them $100 million, you have them losing $300 million a year on falling commodity prices, and that is repeated right across the board and is even more of a crisis for those countries that are being stalled in meeting their conditionality. There are too many steps on the way. The export projections that the IMF is making in judging what amount of debt relief people will get, because it is a debt to export ratio, so the export projections are far too optimistic, and have been proved wrong time and time again, have meant that that debt relief that has come through has been too little. So there is a problem round not having realistic export projections, there is a problem of falling commodity prices where in effect debt relief is coming in too little too late, and the amounts are unrealistic anyway, and there is a crucial need for topping up HIPC. That is being addressed, I hope, by the G8 at the minute, but there is a need if it does not happen for that $1 billion extra to be on the table to top up HIPC. But it is both more money but also much more speed in a number of cases, and taking some of those conditionalities out of the case, and much more realistic projection of exports, so the amount of debt relief people need is greater. I think there is a fundamental longer term problem that while it is important to look at debt to export ratios in terms of sustainability, one also needs to look at what money countries need to meet their health and education targets, and that will be a different way of looking at it than asking how the debt as a percentage of the budget affects that. You still have big examples where very poor countries are paying out far more in debt than they are spending on their health and education budgets, through no fault of their own. There are, of course, cases where it is through fault of their own but there are many cases where it is not through fault of their own.

Kali Mountford

  136. I wanted to ask about the poverty reduction strategy. Considering what you said earlier and what you have just said, I think it links nicely into that and how you get greater input from the developing nations into their own poverty reduction strategies and what we ought to be taking more account of perhaps.
  (Mr Wallis) There are three or four major issues. One, that one does start from the position of what is needed to meet those millennium goals. That should be the starting point, and then that one has macro-economic stability to meet it, rather than the current starting point, which is macro-economic stability plus whether we need bigger safety nets to do these things. That is the wrong way round. Two, what we have already said, really taking seriously the ex ante impact assessments on poverty that are not happening. Three, removing the trade liberalisation conditionality that is being linked to PRSPs. Four, much greater participation by particularly marginalised communities, particularly rural marginalised communities; they are the ones whose voices quite often do not get heard. There are some good cases where people have made attempts to try and do that, but in some cases then it is not clear or transparent how much account has been taken of those interests. The PRSP, like everything else, has different interests inside the country, and we know whose interests are heard; it tends to be the bigger farmers or the urban communities, not the poor rural communities, and there needs therefore to be transparency over who has said what and what has been taken into account. It is a political process.

  137. It is not an easy one, is it? The last two of those, the trade liberalisation and the internal pressures in a country making their own representations, I would have thought might have been perhaps potentially the most difficult of the two. I am thinking right now, of course, of industrialised nations and their current positions and self-interest. What prospects do we have of dealing with the interests of the industrial nations versus the developing nations? While they might mean well, they sometimes contradict each other—in fact, they often contradict each other.
  (Mr Wallis) But even when you have something like the Common Agricultural Policy, who is actually being protected? We know a lot of the money is going to a relatively small number of rich farmers, so there is an interim question of whose interests in those industrialised countries are being served. I think there might be more of a win-win than we realise.


  138. On the issue of grants and loans, that was a hot topic a number of months ago. The Committee has visited America, we have received representations from a number of NGOs, and there is a feeling this may be not as divisive an issue now, but the issue is, if we are going to go to the grants regime, there has to be a medium/long-term future for it. Does that sum it up?
  (Mr Wilks) Yes, I think that broadly sums it up. Obviously the IDA is moving to become self-financing because of its re-flow, so it would not need to come back to the donors every three years cap in hand. There is guaranteed finance available looking forward. There is that dimension. There is also the political dimension. Some people are concerned that the US and some of the other donor countries did not want it to become self-financing. They want every three years to have the opportunity to set new issues. One other dimension is the question of the balance of financing mix for different agencies. I come back to the UN agencies. Many of them already have grants at their disposal, and so do bilaterals. Do we want the World Bank to be doing everything? There is a question of duplicating and possibly competing with other places. If grants are to be given from London and Washington, can they not be channelled through existing mechanisms rather than through the World Bank, which was originally set up to provide loans? I think there are a number of aspects to it.

Kali Mountford

  139. I am quite interested in the point you just made. I am concerned at some of the statements by President Bush that we might end up with a situation where grants can be given direct from Washington and perhaps sidelining the millennium development goals and missing the point altogether, while at the same time not having a regard for building up the Fund. Do you share those concerns?
  (Mr Wilks) We will have to look into the details of the Millennium Challenge Account another time, I guess, but there are issues about how the US would use it. In principle, we would favour the money being channelled multilaterally, but if it is grant, they can go through some of the UN institutions; they do not necessarily have to go through the World Bank.

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