Examination of Witnesses (Questions 1-19)
MR JEFF
POWELL AND
MS OLIVIA
MCDONALD
19 OCTOBER 2006
Q1 Chairman: Good afternoon to you both.
I am sorry to have kept you waiting but, as you will appreciate,
we are at that stage of the Parliament where we are tidying up
business, running whips and a lot of competing business, which
is one of the reasons why the Committee is not as fully represented
as it would normally be although one or two colleagues may join
us a little later. Thank you for agreeing to come in. You will
not be surprised if I start off by sounding out your views on
the Secretary of State's initiative before Singapore where he
announced the withholding of £50 million of UK contributions
to the World Bank because he was dissatisfied about their progress
on conditionality, which was a slight surprise to some people
because he kind of implied that he was not that dissatisfied in
the past. I would be interested to get your take on what you think
was behind that and what you think he and his Department can do—or
from your point of view should do—to change the way the
World Bank operates to one that is more pro-development and less
pro- what might be called the western or the developed countries'
agenda.
Ms McDonald: We were really pleased
with the announcement that he made on the £50 million; we
thought it sent quite a strong public signal internationally about
how seriously he is taking this issue. There is a divide between
the Bank's policy and practice on this issue and that of the UK
Government and I think it brought this debate out into the open
a bit more so that was really good. My understanding of what lay
behind it was a general concern that the Bank's policy is not
that it was not necessarily being implemented effectively but
that they could not really tell how effectively it was being implemented
because of the way the Bank was reporting it. They were relying
on quite simplistic monitoring to get an assessment of how they
are meeting commitments to countries.
Q2 Chairman: Is it your judgment
that the Bank is still applying unreasonable pressure on developing
countries to liberalise and privatise? Again we have had discussions
with the Secretary of State and he says that there are two sides
to that. Quite often the country itself says they believe that
liberalisation and privatisation is a means of development and
they want advice as to how to do it, which is not the same as
them doing it because the World Bank has asked them. Is it your
judgment that there is still undue pressure?
Ms McDonald: Yes. A partner organisation
of ours called The European Network on Debt and Development
actually did some research on this and they found there were still
privatisation conditions attached to World Bank loans. That is
not to say that a country might not decide to undertake these
projects, but at the end of the day we believe that it is up to
the country to decide whether it wants to privatise or liberalise
and what kind of form it wants to take, but it should not be imposed
through a World Bank condition.
Mr Powell: I would back up Olivia
on that position. There are a number of studies that our colleagues
have done which suggest that both at the Bank and at the Fund
the five good practice principles that the World Bank has adopted
are not being observed, or being observed in a very uneven manner.
There is also quite a gap between what is reasonable good rhetoric
at the centre in the Bank department which is responsible for
this issue and what is actually happening at a country level.
Q3 Chairman: I want to ask you about
Paul Wolfowitz's comment that once the details are published in
November Hilary Benn will have no cause for concern.
Ms McDonald: If you are talking
about one of the good practice principles around ownership, the
Bank has tended to measure it in quite a quantitative way: "We
had this many conditions in 2002 and now we have this many conditions",
whereas to me to really get an assessment of that you need to
have independent monitoring and it needs to be done by speaking
to the countries concerned, asking them if they feel the Bank
is really making progress on this. I do not know how they can
do that in one month.
Q4 Hugh Bayley: Surely the best form
of independent monitoring would be to insist that every major
loan or grant proposal from the Bank that is discussed by the
government of the developing country goes to that country's parliament
for approval as part of a budget process. Is that something you
can make recommendations about?
Ms McDonald: We have been making
recommendations about parliamentary scrutiny. We have been doing
quite a lot of work with the Bretton Wood Project on that. Generally
what we would support is the Bank complying with what the domestic
legislation is. If the country has a law that says that any new
loans must be seen by the parliament and parliament must be able
to reject them because that is part of the democratic scrutiny,
then the Bank has a due diligence obligation to comply with that.
Mr Powell: I would support that.
Q5 Hugh Bayley: In how many countries
is there such a law and are you campaigning with NGOs for such
laws to be introduced?
Mr Powell: We are indeed. I do
not have the number to hand but I will try to get it for you[1].
It is on the books of a very large number of countries, but what
research has shown is that the number of countries where it is
actually observed is in fact very small. We are trying to work
both with those organisations that are doing capacity building
for budget monitoring as a whole as well as organisations that
monitor the work of the international financial institutions to
build the capacity of parliamentarians to understand the loan
negotiation process, what are the key points of intervention and
how they can work together with their local civil society to make
a difference in terms of the kind of oversight that you are suggesting.
Q6 Chairman: The Parliamentary Network
at the World Bank (PNoWB) is a rather ad hoc organisation
designed to help that process. In fact I was invited—but
could not go—to a meeting which was supposed to be taking
place in Nairobi which I see has now been cancelled because of
objections by the Government of Kenya. I completely agree with
what Hugh Bayley is saying; parliamentarians need to know how
to evaluate these projects and need to be trained. Leaving aside
the Parliamentary Network, do you think there is more that could
and should be done much more vigorously to train parliamentarians?
Mr Powell: If I could just make
one point about the Parliamentary Network since you raised it,
there was some talk of establishing a working group on IFI accountability.
I think that would be very healthy in that up until this point
the Parliamentary Network has established working groups which
are somewhat more in the interests of promoting the World Bank's
agenda, so there is a Trade Working Group or an HIV/AIDS Working
Group. That is quite healthy and we encourage that but I think
something like this which would be turning the lens in the other
direction would be quite good. We need to get some MPs both north
and south who are interested in that issue to back that idea.
That would be something that we think could be done very effectively.
Ms McDonald: Just to give one
specific example, an organisation we work closely with called
Afrodad (African Network on Debt and Development) have done a
lot of work for the Southern African Development Community Parliamentary
Network in training them on the whole process about loan decisions
and how they are made, and that has been quite a constructive
dialogue that has been taking place for a couple of years. They
are being supported by Christian Aid and other organisations so
there is definitely a role for strengthening the role of civil
society and parliamentarians working together on these issues.
Mr Powell: There was a ministers'
conference in Namibia last year and they are having a similar
effort for African MPs which is going to be held in Ghana in December.
I think DFID has shown support for these kinds of initiatives
and we would simply want to encourage them—that is very
much a priority—and to continue to support these kinds of
initiatives. Ultimately that is really the best way to ensure
that these kinds of things are happening on the ground as we want
them to happen instead of repeatedly doing evaluations that are
done by Bank staff where they can be interpreted very differently
by different perspectives.
Q7 Richard Burden: Can we just look
at the relationship between the IMF and the World Bank? When they
were set up it was relatively clear what they were each for and
they seem to have transformed quite a lot since then. Both of
your organisations have been fairly critical about the way they
have operated in many ways, but how do you think they should be
developed in terms of what they should be responsible for?
Mr Powell: One is always a bit
reluctant to step first into this question, but I would first
want to preface this by saying that we have some serious concerns
about the process that has been set up to look at this question
officially; we question the independence of the external committee.
It is largely made up of former World Bank/IMF staff; it comes
from a very specific economic perspective and to some extent you
know the answer that such a committee is going to come up with
before they begin their work. It does not have a mandate to go
to the country level and ask the broader stakeholders that would
have an interest in these kinds of issues. Small business and
labour have an interest in what kind of role the World Bank and
the IMF play and these kinds of organisations in the south are
not going to have a voice in this committee. First and foremost
we would want some questioning by the Government of the value
of an external committee set up in this way.
Ms McDonald: Something that we
would want to be coming out of any discussions about looking at
the Bank and the Fund—and we welcome the fact that this
is actually being talked about—is taking the two institutions
separately and asking what role each one should be playing. There
is obviously duplication and that is undermining their effectiveness
in some way, in particular we just do not see that the role that
the IMF is currently playing in low income countries is the best
role it could be playing. It does seem to duplicate a lot of what
the World Bank does and it takes them away from what their purpose
should be which is monitoring every country and providing short
term balance of payment support for countries in financial crisis.
There have been mutterings on this from people in government.
Mr Blair said something similar to this issue; maybe we need to
look at the roles that they play, get the Bank focused on development
and the Fund focused on global financial stability. That was good
but the mutterings do not seem to have led into a policy statement
from government really looking at the fundamental roles of the
institutions.
Q8 Richard Burden: If they were split
roughly in that way, if they came round with a blank sheet of
paper and asked you what they should do, how should they focus
their attention in that way, and what are the mechanisms for coordination
between them that you would actually like to see? I think I understand
the criticisms of what there is and maybe the processes of how
they are going about reviewing them, but if you were given a blank
sheet of paper how would you do it?
Mr Powell: We have always taken
the position that the Fund should be returning to its credit union
role. It is owned by its membership and there is automatic access
to funds up until a certain limit that you can subscribe to; beyond
that then funds get cut off. That is how it was originally envisaged.
Taking it into low income countries clearly takes it into an area
where it is beyond its competency: is the economic view of the
Fund which prioritises stability over growth an appropriate one
in a low income country? Is the kind of staff that is attracted
to the Fund appropriate? Does the country presence which the Fund
lacks in low income countries allow it to operate appropriately
in low income countries? Has the focus on these issues in fact
detracted from the fact that it has not done enough about the
contribution of northern financial systems to global instability?
We have gone around setting up a series of institutions instead
of the Fund—for example the Financial Stability Forum, the
Bank for International Settlements—which are essentially
doing what the Fund should have been doing in the first place.
Thinking about those rules for the Fund, if we had a blank sheet
of paper as you say, would be quite important. If that is what
the Fund is about then there is obviously much less need for coordination
with the World Bank which is much more focussed around long term
development financing.
Q9 Chairman: Is your view in a sense
that the IMF, given its history and its background, does not have
much to contribute to low income countries and that mostly what
it is doing is harmful?
Mr Powell: In brief, yes. There
is some role in that there may be some capacity building around
fiscal management, around debt sustainability frameworks—a
limited role—but I would hope it should be driven by what
country governments and parliamentarians would want to see done
by the Fund in terms of technical assistance and not as it is
right now where it tends to be supply driven. There is a real
concern on our part that with the Fund in such financial difficulties
over the foreseeable future that it will try to increase its role
in terms of capacity building and will probably pass the hat around
to try to get northern donors to fund that. That is a concern
on our part.
Q10 Mr Davies: You obviously want
to see the Fund going back to basics, back to 1944 essentially,
and just deal with a small number of low income countries in the
fields you have mentioned. What are your preferred proposals for
the internal governance of the IMF? Do you have any ideas about
how it should be re-organised or how its governance should be
improved internally?
Ms McDonald: Obviously this is
an issue that was strongly on the agenda at Singapore. My assessment
would be that what came out of Singapore does not go far enough
to get a reform of the governance of the IMF that will make it
a more effective institution. We would like to see a system that
moves it more towards one member, one vote. In the interim, one
of things that we were suggesting is double majority voting which
would be a system where there would be one country, one vote alongside
the current system which at least should give middle income countries
and low income countries much greater influence on this institution
where obviously the ramifications of what it says on domestic
countries and the global economy are quite important.
Mr Powell: I would agree with
a kind of back to basics description of what we want the Fund
to do, but hopefully it would not be just that. We would also
want the Fund to be able to deal with what is increasingly a complex
global financial picture. To give one example, the increasing
volume of derivatives that threaten to swamp southern capital
markets, we would want a Fund that would be able to deal with
that issue which is a very current financial issue and rapidly
evolving. When we say back to basics I would not want to presume
that that just means the Fund as envisaged in 1944.
Q11 Mr Davies: You want the IMF to
take responsibility for the stability of western financial markets.
Mr Powell: It is not taking responsibility
for them but it is understanding how those systems are working
and how they may be contributing to global instability and there
may be a need for regulation of those funds, for example.
Q12 Mr Davies: I believe in that
respect the Fund would be replacing the present responsibilities
of the central banking systems.
Mr Powell: It would not be replacing
the central banking systems; it would be taking some of the role
that is currently being taken by the Financial Stability Forum
and our concern about those kinds of institutions is that they
are even more opaquely governed by a small group of northern countries
than the IMF. These are decisions which have, in some ways, more
implications for small capital southern countries than they do
for northern governments where that capital is coming from. They
should have a voice in setting the rules of the game.
Q13 Mr Davies: There seems to me
to be a contradiction, Mr Powell, in the proposals that Ms McDonald
has put forward and your own. If you are going to give a one man,
one vote in the IMF so that you are going to have, for example,
Malawi with the same vote as the United States, and you are then
going to ask the Fund to take responsibility for or certainly
to get involved in the management and stability of financial markets
which are 99% located in a small number of western countries (actually
as far as their derivative markets are concerned almost entirely
New York, London, Paris, Tokyo, Frankfurt) so there must be a
contradiction there. You are asking people who have no such markets
in their own countries, who have no such expertise at all themselves
to take decisions affecting the stability of these highly technical
markets.
Mr Powell: I would beg to disagree.
Certainly where these funds are located is in northern countries,
but where these funds can often have a most deleterious impact
can be in some of your middle income countries. That is the case
of what we saw, for example, in the Asian financial crisis. Impact
and location of where the funds are are often quite different,
and those who are impacted by these funds I think should have
some voice in the rules.
Chairman: I think we need some clarification
on what exactly you are proposing. The extreme view—the
one that Quentin Davies was articulating—is the one member,
one vote. What you appear to be saying is that what you want is
that there should be more of a voice for the smaller income countries,
particularly on the policy areas that affect them. I just wanted
clarification of which point you are arguing. One is simply saying
they should have more say over the things that matter; the other
one is saying they should have more say over the entire fund.
Q14 Mr Davies: Mr Powell, are you
really saying to the Committee this afternoon that you think that
there are people in Zambia who have a great deal to contribute
to the analysis of counter-party risk in the derivative markets?
Mr Powell: No, I am not. I think
we need to clarify the double majority issue, which is not a one
person, one vote; it is trying to balance the current system—which
is essentially a one dollar, one vote system—with a one
country, one vote (the UN system of sovereign nations). By having
a double majority we are seeking to have a balance between those
two, so we are not having a one person, one vote, allowing a Zambian
farmer to have the same say on international financial flows.
Q15 Mr Davies: Ms McDonald was actually
saying that her ideal scenario was one man, one vote. She put
forward the double majority system as a half way house, an acceptable
half way stage but not the ideal solution. I think there would
be very considerable contradiction between your views about what
the role and responsibilities of the IMF should be and her views,
which you appear to endorse, as to what the government structure
should be.
Ms McDonald: If it came across
as one man, one vote then I apologise about it; I meant one member,
one vote. At the end of the day these are important international
decisions and I strongly believe that in an international world
they should be made in that kind of forum, but I appreciate what
you are saying about the realities of the impact and consequences,
so I think, as Jeff says, it is a good half way house between
the one member, one vote and the one dollar, one vote, and I think
it is a proposal that people who support both should be working
together to try to get it.
Q16 Hugh Bayley: There is another
point in your evidence, Olivia, about which we are not convinced,
which has to do with your statements about corruption. You acknowledge
in your paper that the World Bank has an obligation to ensure
that its resources are going to where they are intended; we know
that in the past that has not always been the case and previously
the Bank has turned a blind eye to corruption (it was a word that
was not allowed in the World Bank vocabulary). That has changed
and now you seem to be saying that you do not think the World
Bank should have a major role in seeking to improve standards
of governance. That is starkly at odds with what the new DFID
White Paper says. Are you sure about this or do you want to retreat?
Ms McDonald: I do not want to
retreat at all but maybe I want to clarify the issue. I think
on corruption what we were trying to guard against is the World
Bank taking the role of being kind of like a global watchdog to
developing countries.
Q17 Hugh Bayley: Surely as the biggest
donor it must be a watchdog in relation to its own decisions.
Ms McDonald: No, I think there
is a difference between the World Bank ensuring that its own resources
are going where they are intended, but then morphing that role
into setting standards that all other donors follow behind on
what is and is not corrupt and setting the parameters for what
a country has to do.
Q18 Hugh Bayley: You have to have
coordination between donors. It would be daft if they had different
rules to combat corruption put forward by DFID and the Bank and
others. You want coordinated rules.
Ms McDonald: I think the Bank
has a role to play; I think the Bank needs to coordinate with
other donors. The Bank has done quite a lot, for instance, on
funding public financial management and it has a role to play
in that. However, for instance, when it comes to working with
parliaments which is a very, very key point in fighting corruption
by their oversight role, I do not think that is the Bank's role.
There are other donors that have had effective engagement with
parliaments of developing countries over the years, so it is about
how they all work together.
Mr Powell: To add to this, partly
what we are trying to prevent is the Bank creating yet another
set of rules around corruption. I think that is what Mr Wolfowitz
would like to see. There is already the UN Convention against
Corruption and there are the OECD/DAC rules against corruption
and we would like to see the Bank playing by those rules, one
important partner amongst an international framework to deal with
corruption. I think that is the emphasis here. In developing this
framework we have had some serious concerns about the process
by which it has been developed. It has been developed in a rush
without going to talk with the various groups who have an interest
in seeing how it has developed. There has been some research done
by our colleagues at CAFOD which showed that the starting point
is problematic. Both the Bank and its leadership lack serious
legitimacy when it comes to talking about the issue of corruption
and this has to do with Bank involvement in the past—there
were some very questionable projects—and of course the personal
reputation of Mr Wolfowitz and his involvement in what can be
called some dubious state rebuilding in Iraq where there has been
an enormous amount of funds that have gone missing. So there is
a real problem of legitimacy there.
Q19 Hugh Bayley: Those were not Bank
funds.
Mr Powell: No, those were not
Bank funds; this is the personal legitimacy of the leader of the
World Bank which is leading those in the south to really question
whether or not the World Bank is the appropriate institution to
play a leadership role in this issue.
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