Select Committee on Treasury Minutes of Evidence

Examination of Witness(Questions 142-159)




  142. Good morning, Mr Ko­hler. May I open this meeting by welcoming you here today. This is a historic occasion: the first time a managing director of the International Monetary Fund has met with a select committee of the House of Commons. You have kindly agreed to meet with us today in order to clarify the work of the IMF, which is of particular interest to this Committee. While we understand that you cannot disclose confidential information pertaining to the Fund's ongoing discussions with its members, we are eager for you to shed light on relevant aspects of IMF policies and operations. Thank you, again, for agreeing to be with us today. I understand that you wish to make a short opening statement.

  (Mr Ko­hler) Thank you, Chairman, ladies and gentlemen. Let me first say that it is a pleasure for me to be with you here today. We met in Washington—I recall a very nice luncheon and the interesting debate—and I felt it quite natural to continue this discussion. I am here also because the UK, as you certainly know, was a founding father of the Bretton Woods Institution, and that means also of the IMF, and I feel this is not only an obligation for me to be with you here and to discuss matters but it should also be of some pride to the UK that this institution is still there and tries to do a good job. I have prepared a statement, Chairman. I do not propose to read it, though I will give it to the records, but, if you do not mind, I will make some introductory remarks and then I am here to answer questions as well as I can. I think this meeting certainly takes place at a difficult time for the global economy. In the global economy, broadly, the recovery is on track but uncertainties and risks are still there. However, we should, on the other hand, not exaggerate and only talk about the uncertainties, the down-side risks, but also look to the better side. This better side is clearly that there is a recovery under way, not least in the United States but also in Asia, and I do think that, on the whole, also a recovery is on track in Europe. Uncertainties have risen in the last weeks, particularly, because of developments in advanced countries—not just emerging market countries or poor countries but advanced countries—the risk coming from the stock exchanges, equity prices, and of course the shaking of confidence through cases like Enron, WorldCom and so on. Chairman, as you may have seen from the reports coming from the institution, I do think that the IMF is in a process of change and reform. The major points of this process of change are the following: first, we are in a process of a kind of revolution, getting more transparency in the institution and into our member states. It has happened already, but it is a continuing process of a more transparent, and in this way also more accountable, IMF. Secondly, we are in the process of developing further our surveillance mandate as the major vehicle and instrument for crisis prevention—because crisis prevention is the lesson—to give it more attention after a lot of crises in the past. Thirdly, we are also reviewing our, what you could call, "concept of conditionality". As you know, we are also an institution which is prepared, committed to lend to our members. In this context I stick to the point that we need to have conditionality but our conditionality was overstretched in the past, particularly in the 1990s, and we have to streamline and focus this conditionality, mainly also in order to strengthen the ownership of reform processes in our member countries or programme countries. Fourthly, we are in a very ambitious but of course also time-consuming process to define and implement rules of the game for the global economy; that is, shortly said, standards and codes for good monetary, fiscal policy, and, regarding Enron and WorldCom events, also, of course, corporate governance. We are in the process of working on standards and codes as rules of the game for the global economy. Fifthly, we are actively and comprehensively working to review financial sectors in our member countries, because, as you know, for instance, the Asian crisis had one of its causes in the weaknesses of the financial sector, therefore we are, together with the World Bank, working on a comprehensive programme to examine the strengths and weaknesses of the financial sectors in our member countries. This includes also work with offshore financial centres and this includes work against money laundering and against financing of terrorism. Last, but not least, I personally do think that world poverty is a major challenge in this 21st century and, therefore, the IMF has to have a well targeted role—I underline, a well-targeted role, but it has to have a role—in the fight against poverty, and we are engaged in that. I think also I should tell you that it is my own philosophy, my approach to my own understanding of my job, that the Fund has proved that it is a valuable institution, that it has made a good difference, but it is not perfect. It made also mistakes in the past and we have to draw lessons out of these experiences. There are two lessons, at least in these introductory remarks, that I would underline. First, we need to draw firmer conclusions in our approach to our countries about the role of sound institutions. "Sound institutions" means a fiscal policy and a budgetary process which is accountable, transparent, reliable, or a judicial system, where people know that the task of a court is to speak for justice and not to be involved in corruption. The importance of the role of institutions I am also underlining because I am a strong believer that it is good to have free markets, but markets need also a framework of sound institutions. This is not least demonstrated through the developments in Latin America. South America in particular is in a difficult situation, not least Argentina. I think, if you look to Argentina and the difficulties in South America, it has a short-term problem but it has also some underlying problems. What are the most underlying problems? First, there is the weakness of the institutions. This is also a particular: in Argentina, a very bold approach, for instance, in the first half of the 1990s for market-based reforms was not continued in the second half of the 1990s, but also there was not a consistency in reforms. For instance, privatisation, if it is not embedded in a policy for competition or to safeguard competition, is not giving the full benefit to the people. Or, what is a core problem in Argentina, the central government tried to define a reasonable fiscal policy but the provinces had not been involved in that and therefore we are now in this difficulty. Another problem in South America is that at least five/six countries moved through a deliberate decision or indirectly through the decisions of their people to a kind of dollarised economy, but a dollarised economy means that the political system constrains its room for manoeuvre in terms of economic policy. For instance, I had a talk with the president of a South American country, where he said, "We, two or three years ago, took a decision to dollarise." I said, "Mr President, that was your decision"—it was before my time. But then he said, "But now we need to raise wages for our people"—they wanted to raise it 30 to 40 per cent—and I had to tell him, "Mr President, that does not fit to a dollarised economy, because a dollarised economy means something for competitiveness regarding external markets." The response was, "That is an academic question." It is, indeed, no academic question; it is a question of good economics and it is also a question of how the IMF, the international community, is educating, is communicating its advice or how it is engaged in dialogue, where the people are not just lectured as to what is right but where there is also a debate about the options, the down-sides and the up-sides of certain options. Another problem in South America is that there is a lag between the opening of the capital account and the opening of the trade account. So they opened up their economy, their society, for inflows of capitals but the trade integration of these countries often lagged behind the integration in capital markets and this imbalance is now a problem because they cannot earn their revenues to service their debt because trade opening was too slow. Last point: of course we have, all of us, the international community, underestimated the importance, particularly in South America, of social safety nets, because structural change mostly is also combined with some kind of dislocation of people, lay-offs of workers. This is the kind of price we have to pay in order to gain the advantages of structural change, but you should not do it without a kind of minimum social safety net. We had not been too clear with that and therefore we are behind the curve. And, not least, regarding Enron and WorldCom events, it makes clear that risks and vulnerabilities for the global economy are not only located in emerging market countries or in poor countries; they are as well located in the advanced countries. This is why we, for instance, decided to establish within the Fund an international capital markets department. We also, Chairman, are active to review our ability to manage crisis, and in this context, as you know, the IMF management has proposed a new mechanism for how to restructure unsustainable sovereign debt in case it is really unsustainable, and this is, not least, coming out of the experience within Argentina. My last remark relates to poverty: I have said already that I do think it is possibly the biggest challenge for the international community, how to deal with that and how to give the people in the poor countries hope, and a process for improvement. I do think that the conference Financing for Development in Monterrey, Mexico, made a huge step forward, to define, at least, a consensus on what is needed or what is the right approach or how to fight poverty. I call it a two-pillar approach. The first pillar is—and this is very important—that no-one could and should take over the responsibilities that the countries, the nations, the people have themselves. The primary responsibility to deal with a difficult situation lies with the countries themselves. I have a good feeling that this is understood. Based on that, the second pillar: rightly so, poor countries ask for faster, more comprehensive support from the international community, and this is what we are in the process of doing. My strongest point regarding more support, more honest support for poor countries, is that the advanced countries have to change their trade policy, they have to accept and have to recognise that there is a need for faster structural change within their own societies, because trade is not just an issue for, say, the trade policy, it is also an issue for trade unions, for the people, what they are going to buy, and I think, in particular, Europe is too slow with its opening up of markets and also that the subsidies for agricultural products in the advanced countries are too high. I have been three times since I joined the Fund in Africa—I was particularly in Burkina Faso and Mali—and then you know, have to know, have to learn how dependent they are there, for instance, on cotton or maize and such things and how the subsidies in the advanced countries make their lives so miserable, then I think you need to take a conclusion that it is really urgent that there is a change in the trade policy of the international community. Chairman, that is it. I hope I have not spoken for too long. I look forward to your questions.

  143. Thank you very much. I believe you are with us until shortly before 11.30, when you are going to see the Chancellor of the Exchequer himself. The Chancellor is the Chairman of the International Monetary and Financial Committee, which is the main committee of the Board of Governors. How significant has been the contribution of the UK to the IMF during your time as Managing Director?
  (Mr Ko­hler) Certainly significant. First, Gordon Brown is Chairman of the IMFC, in a way he is my boss, so I have to be able to cooperate with him, and there is quite a good situation because, as I see it, my own thinking is not too far apart from Gordon Brown's thinking. This means, two-fold, that the IMF is an important institution or has to play an important role in what I call the obligation to make globalization work for all. I am saying this because I am a deep believer that the further integration of economies could create a kind of win-win situation for all of us, the advanced countries but also for the poor, and, therefore, they should be open to the critical debate about globalization. I myself am heavily engaged in this because I think we are in a kind of search process, a political search process, for the right concept how to work with globalization and how to make globalization work for the benefit of all, but we need to discuss it also with NGOs, with civil society. I am not saying that the answer, the solution, will come from civil society but we should listen carefully, we should talk to them and define what it is worth to pursue, and what is also needed is to tell them, "That is not right." Gordon Brown, the IMFC Chairman, I think is also on this kind of line. Secondly, he strongly supports our efforts for increasing the ability to prevent crisis. Thirdly, he is particularly ambitious to fight against poverty, and, in this sense, I do think that we try to do a good job.

  Chairman: Thank you very much. We have quite a number of questions from our colleagues, ranging through the IMF as an institution, to governance, to poverty reduction, to sovereign debt, to the HIPC initiative, to crisis prevention and others. I will start off by asking my colleague, Michael Fallon to ask the first question.

Mr Fallon

  144. You have mentioned ambition this morning. The IMF was set up, I think 50 years ago, essentially to manage the fixed exchange rate system. Now you are in charge of the overall financial system. You are also in charge of overall macroeconomic policy. You have spoken this morning about fighting poverty; creating sound institutions; influencing fiscal policy; the relationship between central government and its regional provinces; trade policy; and, indeed, are now putting yourself in charge of some search for solutions to globalization. The IMF was not, surely, intended as some kind of world government. Are you not being over-ambitious here? You have said you have to have a well-targeted role. Does the Fund have a well-targeted role? Is it your mission to fight world poverty? I thought that was for the World Bank.
  (Mr Ko­hler) I would like to answer, Mr Fallon. First, we should not forget, Bretton Woods Institutions had been founded after a wave of nationalism, protectionism and world wars and this spirit I think we should never forget. Because there is now a kind of debate: "Is all this integration, all this international approach right? Should we not pull back? Everything should be national," and so on. I am a strong believer that globalization means you need to strengthen the local level of politics, of economics, and so on. You need to strengthen it, but you need also to recognise that there is a level of problems and a level for institutions to care about these problems which is global. The Breton Woods Institutions have been defined for this kind of level, and if we want really to gain the full benefits of further integration we need to work also at this global level. That is the first remark. The second remark: things are interlinked, interconnected. That is globalization. Therefore there is always a need to be aware of this interconnectiveness. For me, for instance, you cannot any more advocate further integration in the world economy without being aware that markets need to have a kind of framework for guidance, because corruption, bad governance, bad state governance, is an issue that growth is not strong and that poverty is high. Therefore, even if the Fund would concentrate what we do on macroeconomics, if we are not aware that you need to have a parliament, a judicial system which provides, for instance, predictability for investors, then it does not work. So then I come to our own role. I may be overambitious, Mr Fallon—and that is not because of personal ambition—but I think that it is rightly so to define objectives and not just let it go. The IMF should have its objectives. I think—and I may not have made it quite clear—there is a good division of labour between the IMF and the World Bank. I do think for instance, that trade issues should be mainly located in the WTO but there are possible interconnectiveness with us and, therefore, we are discussing with the WTO, with the World Bank, with the ILO, with the United Nation system how we can define a good division of labour where our approaches are complementary, not competitive—not that we are dominating but that we work together. That is our approach. If I would have been understood that I am over-ambitious, I am not the master for all but I think I should have an awareness of the interconnectiveness.

  145. The evidence we took last week on this from some of the academics was—to quote Professor Vines—that, "The institution is not well enough focused . . . At the moment, it goes much too widely into a wide range of countries and . . . its interests often . . . seem as wide as possible . . . [giving] detailed intervention of the management of their policy." You have described, in essence, a situation where you would like, in the end, to have a full IMF programme for every country in the world monitored by the IMF. That is getting very close to world government, is it not?
  (Mr Ko­hler) I think we have not the ambition to be a world government. But you should also be aware that, if something goes wrong in the world, all of a sudden the IMF is the scapegoat for everything. So we seem to be the scapegoat for everything when it goes wrong but we should not be ambitious for, say, our own objectives. I myself started a process of refocusing the Fund and the refocus is indeed to concentrate on macroeconomics, on the financial sector, exchange rate policy—which is part, still, of the difficulties. Also, when I came in May 2000, I had a kind of retreat with Jim Wolfensohn where we defined this well-targeted division of labour between the World Bank and us, and that is that the World Bank is concentrating on the direct, long-term approach to fight poverty and we are caring about the macroeconomics in poor countries. I do think this is the right approach. I do think the Poverty Reduction Strategy process, where we are concentrating on macroeconomics and the financial sector and the World Bank is concentrating on the big environment of education, health, institution building, is the right approach. So we are in the process of focused work. We are streamlining our conditionality, as you may have been informed, I said already that I stick to some focused priority-based conditionality, but we are not ambitious to have the full universe of structural reform policies in our agenda.

Mr Mudie

  146. Mr Ko­hler, I was slightly disappointed when you made your opening statement, because the one aspect that spoke about governance suggested, in your terms, revolutionary, the change would be more transparency. You lecture other countries and in your speeches you always refer to good government as being a necessity. Is good government not legitimate government? And that raises questions of democracy—for example, voting powers; for example, constituencies. Have I just caught you at a bad moment in terms of you putting these things at the top of the agenda. Should these things not be at the top of the agenda for good governance of the IMF?
  (Mr Ko­hler) Yes, and it is so. The IMF is more transparent and we encourage our members to be more transparent.

  147. I think you miss the point. You suggested in your revolutionary programme that transparency was at the top of your agenda as the priority for good governance. I am putting to you that at the top of the agenda should surely be democracy.
  (Mr Ko­hler) I think transparency is very good to promote democracy.

  148. It is usually the other way round, it is not?
  (Mr Ko­hler) Of course, I have nothing against it. The IMF is no world government. We are hopefully supporting democracies. We have, as I said before, decided, since I am there to review our conditionality, that means that we are not going there to lecture them, to dominate them.

  149. No, Mr Ko­hler, you are missing my question. It is not the democracy in other countries, it is the democracy of the IMF, the governance of the IMF.
  (Mr Ko­hler) OK, then I missed the point.

  150. When we have voting rights tied to quotas, when we have most of Africa having two executive directors, when we have the United States with more voting power than the whole of Africa, the whole of South America, when are you going to stop being a rich man's club, lecturing to poor countries and actually allow them on board and make your organisation more sensitive and more representative?
  (Mr Ko­hler) I think, Mr Mudie, first, we are not lecturing our members; we are in a dialogue. We are in a candid dialogue. We are trying to listen. I am meeting and I am encouraging our staff to meet with parliaments and so on. Regarding our own governance—that was your question—I think still it is a democratic system, because the executive director for the UK is appointed by a government which is, say, appointed by elections here in the UK. We need to have a kind of representation to work with global issues' operation and therefore we need to have a representational system. I do think that, despite some down-sides, this system worked up to now. It works, not least, because the culture in the IMF is a culture of consensus and not just of taking a decision by adding up the voting rights of the membership. So since several years and, not least, since I am there, I am promoting this cooperative nature of the institution. For instance, in 2000 we had a very critical debate on reviewing the facilities of the IMF, and there was a big debate between the G7, because the G7 had set up quite a detailed programme how to reshape the facilities, and the emerging markets' and the poor countries' representatives did not like it. It was a lengthy debate, but at the end we came to a conclusion on a consensus, so that the poor countries, these two African chairs, fully joined the consensus. So there is a spirit of cooperation, of consensus-building which I feel is good. Secondly, I would also like to underline that still we are a financial institution, and a financial institution means you need also to have someone who provides capital, and I think there is a healthy element in the fact that the provision of capital and voting rights is, in a way, combined, because this is also an element of efficiency, of accountability. We are discussing for the moment a review of, say, representation. There are various suggestions: reviewing the quotas—that means, the voting shares; reviewing the, say, ability or equipment of chairs to do their job—for instance, it is a tough job for an African executive director to represent 20 or 21 countries in comparison with the UK chair/executive director, who has just to represent one country. Here there is improvement possible and I hope that we come to a conclusion. If you would ask me, Mr Mudie, "One country, one vote?" I would not advise, at least for the foreseeable future, to go to this kind of scheme—because, again, capital is needed and someone must be prepared to provide this capital. Until we have a world government—and I am not advising to rush to a world government and I am not sure we are well advised to try to achieve a world government—we need to work on the basis of representation and, on the whole, I think, the existing representation in the IMF did work but it can be improved.

  151. So you will lecture developing countries that they should, as you said in your speech, respect the rule of law, have good judicial practices but (if I translate your management of the governance of the IMF to a country) that they have to respect and obey people who have the money, and the voting rights should be with them because they have the money. It is not very 21st century. We threw that out in 1832: votes tied to property and money and "rotten boroughs", as we called them, in representation. I am very surprised that a European individual can head a world body and be so complacent about the lack of democracy in representation.
  (Mr Ko­hler) I think we have a system of representation which is based on democracies. You may differ, Mr Mudie, in, say, appreciating this kind of system and there should be a discussion how to change it, how to improve it, but I want to be clear that I feel it works. It can be improved, but it works. Because we have no global democracy in the sense that there is a global parliament, unless we have not decided on that in the world, I think we should work with the existing and working representation.

  Chairman: On policy assessment and conditionality, David Laws.

Mr Laws

  152. Mr Ko­hler, you are now bringing in the new Poverty and Social Impact Assessments, to see what the impact of your policies and policy advice is on poverty before they take place. Do you see that as being quite a radical move for the IMF? Does that reflect, in some part, recognition that you may have made a mistake in the past as an organisation in not giving enough attention to poverty reduction?
  (Mr Ko­hler) Yes. We did not give enough attention to the social dimension of structural change and often dislocations in the case of reform policies. But I also would like to underline that structural change is always accompanied by some kind of dislocation, change of attitudes. You need to move from one place to another and, therefore, we need to develop a kind of approach where we live with a kind of permanent change in order to reap the possibilities for better growth, job creation, not least in the poor countries. But this poverty and social impact analysis I think should be now a permanent feature in our programmes.

  153. How many of those have been carried out so far?
  (Mr Ko­hler) That is mainly a task to be organised conceptually and being in charge by the World Bank, because that is what Mr Fallon said, really rightly so, the main—

  154. Are there any that have been completed so far?
  (Mr Ko­hler) I think there are. We have the PRSP process and the poverty reduction and growth process. Within these processes there is more and more the involvement of social impact analysis. I think we have started with 6/8 of these.

  155. None of them has been finished so far then?
  (Mr Ko­hler) Not fully because it is a process of learning by doing.

  156. Do you know in which countries you are presently carrying out Poverty and Social Impact Assessments?
  (Mr Ko­hler) We are doing it in Tanzania. We are doing it, I think, in Mozambique. But I am not in detail now informed about the countries.

  157. Do you think there could be any criticism made of the organisation's slowness in proceeding down this route? Oxfam said to us that the progress in this area has been slow to date and that there has only recently been sent out a consultation document about this to inform people about how to carry out these assessments.
  (Mr Ko­hler) I think this has to be a question mainly to the World Bank about speed and content, but you should not forget that the PRSP process is still only in place since three years, even less than three years, and we had a global outreach (meaning we had conferences everywhere, including our full membership) about what is the advantage, what are the strengths, of the PRSP process, including the social impact and poverty analysis. The outcome of this big review was, first, that it is a promising approach, the PRSP process; that the social impact and poverty analysis should be an integral part of this; and, you can be assured—at least what I know from Jim Wolfenson and so on—he and the World Bank are ambitious to bring it through, but these people also need to cope with the realities of their constraints/resources. It is also a matter of the countries being prepared. You need statistics for social impact analysis. It cannot be done overnight. I have an experience of working in governments and private sector of some decades, and I must say I am admiring the ambition, say the tough work, of the World Bank people and the IMF staff people to bring this forward.

  158. May I ask you about another area where the IMF policies may have had an impact on deprivation, poverty and so forth? This is the situation in Malawi that we have had over the last couple of years. You will be aware, obviously, that in the early part of 2000 the IMF advised the government in Malawi to reduce quite significantly the grain reserve from something like 165,000 tonnes to between 30,000 and 60,000 tonnes. I think that was implemented and then, of course, there turned out to be a problem with the harvest in 2002 and the government in Malawi found that they did not have enough food. There was a famine and, as we understand it, quite a few people died. Do you think the advice that the IMF gave over that reduction in grain stock was a mistake?
  (Mr Ko­hler) Mr Laws, the IMF is not the scapegoat for everything. In this context I must tell you that the advice or the concept for this maize stock was given and is given by the World Bank and the European Union Commission, so it is just plain wrong to accuse the Fund that it advised and made even a conditionality out of this. I am able, I would appreciate if you would accept, to give you better in depth information about this in a note.[1]

  159. Was it the IMF advice to reduce the food stock by that amount?

  (Mr Ko­hler) The kind of advice was given by the World Bank and the EU and I would argue that you should ask the World Bank and the EU what they did.

1   Evidence not reported. Back

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