Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)


31 JANUARY 2006

  Q1 Chairman: Good morning and welcome to this our first inquiry into globalisation and the role of the IMF. Could you introduce yourselves, please?

Professor Portes: I am Richard Portes, Professor of Economics at the London Business School and President of the Centre for Economic Policy Research.

  Mr Woodward: I am David Woodward, Head of the New Global Economy Programme at the New Economics Foundation.

  Professor Miller: I am Marcus Miller, Professor of Economics at the University of Warwick and Associate Director of the Centre for the Study of Globalisation and Regionalisation.

  Q2  Chairman: Thank you for giving us this opportunity to question you on the IMF. The Fund itself acknowledges that its scope has widened in recent years. For example, the Managing Director's Report on the Fund's Medium Term Strategy of 15 September 2005, made that point. Do you believe that this widening has been a positive development, or has it detracted from the Fund's original goals? If it were starting from scratch and the Fund did not exist, would there be strong arguments for creating it in its current form?

  Professor Portes: Chairman, I believe that that has been a mistake. It is quite understandable. The Fund historically has gone through cycles. It loses a role and then it finds another. It lost a role when the Bretton Woods exchange rate system broke up; it found one in dealing with recycling of petro-dollars and then the 1980s debt crisis. That was resolved and the IMF got into the economics of transition in eastern Europe and the former Soviet Union. That was sorted out and of course they had to get into something else, and that was poverty. I think that was a mistake. It has been a mistake to widen the range of activities of the Fund, both in terms of poverty-reduction programmes in various countries and, to the extent that we have seen with its involvement over a huge range of ROSCs (Reports on Standards and Codes).

  Q3 Chairman: The IMF Managing Director suggested also that globalisation can be thought of, as he says, as an "organising principle" of the IMF's work. One central tenet of this work will be to help countries meet the challenge of globalisation. How well equipped is the IMF to perform this role?

  Professor Miller: It has an extremely well trained staff. They pride themselves on the kind of talent they attract from all over the world; and they have a very good database. I think the idea of looking at global imbalances and things like debt sustainability is something the IMF could push further than it does—that is its role as a source of information, not just of money.

  Mr Woodward: If I may return to the first question, I would like to agree with Professor Portes. I think the widening of the Fund's role has been very unhelpful, both in terms of being a distraction from its core role but also in terms of its failure to adapt effectively to a global environment which has changed quite fundamentally since it was established in 1944. In particular, the Fund has, for me, been quite spectacularly unsuccessful in its core role of dealing with debt and financial crises, and we are still looking at the effects of the crisis in low income countries, particularly in sub-Saharan Africa, which started nearly a quarter of a century ago. That can only be regarded as a spectacular failure. It prioritised the crisis in the middle income countries over that in the low income countries in the 1980s, which was largely a reflection not of the values of its membership as a whole but of the priorities of the developed country governments which constitute a majority of its membership. I think those failures are fundamentally linked to the issue of the Fund's governance structure, which was established in the 1940s during the colonial era when perhaps it seemed acceptable to give a single country a blocking minority and a majority to the developed countries. In answer to your question "would we establish the IMF in its present form if we were starting from scratch?" the answer is very clearly "no".

  Q4  Ms Keeble: The Governor of the Bank of England has called for an international meeting to help agree a co-operative response to global economic imbalances. To what extent do you think that the IMF should be helping to co-ordinate this work? Professor Portes, would you like to start with that?

  Professor Portes: That is part of its core function. Its core function is international financial stability. We see out there, with those major global imbalances, serious threats to international financial stability. Yes, I believe that in a better world the IMF would be co-ordinating those efforts. It does not now have the status, or stature if you like, to do so.

  Q5  Ms Keeble: From the description which you and David Woodward gave, and you talked about the core function which was largely defined in a completely different era, was it not, the circumstances around it have changed since then. Do you think that it would still be capable of recasting itself and meeting the new challenges and re-defining perhaps its role?

  Professor Portes: I rather differ: I do not think the big issues have changed, but I think, in terms of your overall inquiry, globalisation is not such a new thing that we need to change the major orientations and objectives of the Fund as it was set up at Bretton Woods. The big issues of financial crises, sovereign debt and exchange rate misalignments are longstanding; they go back a long way. I do not think that in those respects the Fund's mandate need be changed.

  Q6  Ms Keeble: To what extent do you think the IMF's recent review of its strategy addressed concerns that it is not doing enough to address the global economic imbalances?

  Professor Portes: The Strategic Review seemed to me to be fairly much motherhood and apple pie—all very well; nothing terribly controversial there; and, although talk at the beginning, no serious effort to limit the Fund's activities to focus them on those core functions. I do not think that the Strategic Review has taken us very much further.

  Q7  Ms Keeble: David Woodward, would you agree with the comments that Professor Portes has made? In particular, your analysis seems to suggest that the current circumstances are very much different from those that gave rise originally to the establishment of the IMF.

  Mr Woodward: I think I would make a distinction between the core objectives of the Fund and the context in which it is having to fulfil those objectives. The objective of international financial stability clearly is a continuing one. Where I might perhaps differ with Professor Portes is that the context and the nature of international financial flows are very different. That gives rise to forms of financial crisis which would have been unthinkable at the time when the Fund was established. I am thinking particularly of the crises in Asia and Latin America and elsewhere during the 1990s. Those arose from types of financial transactions which just did not happen and were pretty much unthinkable in the mid-1940s. I think that is perhaps where the difference between us lies.

  Professor Portes: I think that is dead wrong. If you look at the international lending of the 1920s, it was very similar to the international lending of the 1990s. If you look at the financial crises, crashes and contagion that occurred in the period 1930-33, it looks in some ways, several ways, very similar to what we saw in 1997-98. I just think that is wrong.

  Q8  Ms Keeble: It is an analysis about a different interpretation of globalisation. Professor, you are saying it is the same and David Woodward is saying it is qualitatively different.

  Professor Miller: As mentioned in my submitted paper, the big change has been the liberalisation of capital that has taken place since the early 1970s, which led to the breakdown of Bretton Woods. So there has been, as Richard Portes earlier pointed out, a shift in what the IMF has been doing. It has largely been coping with capital account crises of middle income countries. I think it is getting much better at doing that. There is a political problem of handling the really big global imbalances, things like telling the United States what it should do with the dollar. I think this is a big political problem, given the weight of the United States in the organisation. Nevertheless, in analysing the situation and saying that there has to be a shift of demand—reduction in America and expansion in Asia—and that there has to be an adjustment of exchange rates, say 20% or 30%, I think in that kind of analysis, which actually is in their World Economic Outlook, they do look at these things and talk about them. I think they should be getting more into this game; but it is politically much more difficult.

  Q9  Ms Keeble: You mentioned Asia in particular. What do you think the IMF should be doing to encourage Asian countries, in particular obviously China, to promote more balanced trade flows?

  Professor Miller: Asia may discover that it has inflation if it keeps the exchange rate down. It may learn that it should change the exchange rate. If it does raise the exchange rate, it may find it has to expand demand to keep the jobs coming forward; so there is a sort of learning by doing that one would hope would operate. It has also been argued that China wants secure property rights. The Chinese people may be going into the international market to get assets which are secure, in which case the generation of property stability and ownership rights in China may help solve that problem.

  Q10  Kerry McCarthy: There has been, I think it is fair to say, considerable criticism of some of the conditions that have been attached to IMF lending. How well do you think the current conditions work, and do you think there is any room for improvement?

  Mr Woodward: There have been fundamental problems with the whole process of conditionality right through from the 1980s. Again, I think the governance issue is a key one here. What we have is an institution which is being run by the developed countries, through their majority of the votes, to impose economic policies exclusively in the last 20 years on developing countries. I think there is a fundamental issue there. The policy of conditionality raises a lot of issues around sovereignty and democracy. In the case of Korea, for example, ahead of an election when the Korean crisis happened, the IMF and the World Bank went in and required not only the government to sign up to conditions but also the opposition. Similarly, fairly fundamental issues are raised in Latin America where governments have been elected on a clearly anti-structural adjustment programme in the 1980s and early Nineties and they have then been required to change that position, having been elected on that mandate, in Argentina and Ecuador for example.

  Q11  Kerry McCarthy: Generally speaking, the conditions are focused on achieving targets of restricting inflation and fiscal deficit. How does that square with what you were saying about the role of the IMF and it being a mistake for it to focus on tackling poverty? Obviously the critics of those conditions would say that the countries ought to be allowed maybe to have higher inflation rates so that they can look for greater economic growth rates. How does that square with your saying that the role of the IMF should not be able to look at those and then give development goals or goals on poverty reduction?

  Mr Woodward: I would not say that the IMF should be given responsibility for poverty reduction, but I think it is clearly something it must take into account and take into account much, much better than it has done in recent years. In terms of inflation, I think they have been unduly obsessed with inflation in terms of the policies they have recommended. Personally, I think there would be a very strong argument for incorporating into the Articles of Agreement an obligation to respect and promote the economic and social rights which are established under international conventions, which would include the right to health, the right to an adequate standard of living, the right to education, and so on.

  Professor Portes: You might as well give up the IMF then. It is not going to happen and any effort to amend the Articles of Agreement now would threaten having the United States simply not continue to play ball. Whatever one may say about the dominance or excessive importance of the US in the governance of the Fund, with which I would strongly agree, nevertheless, if the US Congress were to decide that the United States should pull out of the Fund, it could not function properly. Amending the Articles is just not the way forward; really it is not.

  Professor Miller: If I may add something on governance issues, the IMF has been criticised for intervening in the sovereignty of the state but this can, on occasions, be beneficial. In the case of Brazil, for example, the fact that the presidential candidates signed up to the IMF's plan was very helpful for Brazil in the crisis of 2002, and so there can be occasions when it calms the markets down. More particularly, I would like to mention that there are often governance problems in the countries themselves. In many less developed countries, there is an elite that runs the country and the poor suffer. The problem with just giving money to the country is that the elite will collect the money. One need in such circumstances, as argued in the paper I submitted, is for conditionality on the money to try to make sure that it is not just the elite that pocket the money but that the poor benefit. This might mean, for example, putting a limit on taxes on the poor; promoting spending on health and education; and limiting the borrowing by the existing government. I think there are cases, particularly in Africa, where some of these issues can be addressed in terms of conditionality, and should be.

  Q12  Jim Cousins: The British Government has encouraged the International Monetary Fund to become involved in issues like the countering of terrorist finance and opposition to money laundering. Was that a suitable role for the IMF?

  Professor Miller: In one sense, I think it is a really good move because it means there is a lot more information coming forward about the economic system. One of the problems in Africa and in Latin America, for example, is the rich, the elite, moving their funds overseas. It is notorious that in many poor African countries the rich people have moved the money out of the country. One of the side-effects or one of the good aspects of the terrorism investigation will be more knowledge about where the money is going and the capacity of sovereign states to tax their own citizens. I look for something positive from this. I guess you have to have some global institution doing the investigation.

  Mr Woodward: Again, this comes to the core of the issue that the developed countries are setting the priorities for what should be an international global institution. The US has now found a major concern with terrorist finance and therefore the IMF, even in the Medium Term Strategy, names that as the priority for recruitment. We are hoping that dealing with issues of capital flight will come about as a side-effect of that. I think that demonstrates the point that the Fund's governance structure is preventing it from doing what it should be doing.

  Professor Portes: I do not think the Fund should be a money laundering policeman. I do not think the Fund should be a ratings agency. There are all sorts of things—we can think of n different possibilities and the Fund has thought of most of them—for Fund activities. I reiterate that I think it should be concentrating on its core functions. There are plenty of other international agencies, some of them better governed, if you like, that could deal with money laundering. Professor Miller is absolutely right that the one big lacuna in the whole private dealing with global financial issues is the inadequacy of our data on international capital flows. Part of that, especially for a certain subset of countries, is exactly due to the sorts of movements that we are talking about—money laundering or simply illegal capital flight or hidden capital flight—and should the Fund be involved in that? I just do not see it. It is another way of employing people, but they could be employed elsewhere with a little structural adjustment!

  Q13  Jim Cousins: Without going on about football with you, and we would all like to know where Chelsea got their money from, I would like to declare my interest, Chairman, as a season ticket holder in Newcastle United! I would not necessarily stop anyone from having access to Russian gold. Professor Miller, do you not think there is a distinction to be drawn between the IMF's work on codes and standards, on which people perhaps should report or in some sense be tested, and the IMF being a regulatory or surveillance or investigatory agency? Do you not think there is an important distinction there?

  Professor Miller: As a regulatory agency of what sort—in terms of preventing people moving money?

  Q14  Jim Cousins: Yes?

  Professor Miller: Yes, I guess that is right, that they should not be in the business of being a policeman in the way that Richard Woodward described it. I was encouraging the idea of them being a database and this becoming public knowledge. The reason for doing this was again the problem of governance inside countries. There is a lot of focus here obviously on the IMF but there are also problems inside countries. One of the problems is people moving money out of poor countries. In that context, it seems to me that the informational role of the IMF could be important, but I am not suggesting the IMF should become the world's policeman.

  Q15  Jim Cousins: Professor Portes, would that distinction have any attractions for you?

  Professor Portes: I think as far as it goes it is absolutely right. To the extent that the Fund can help to identify where capital movements appear to be abnormal and so forth, that seems to me perfectly reasonable, but to push it further than that and to get the Fund involved in actually investigating money laundering would be misguided.

  Q16  Susan Kramer: Could I go back to conditionality, conditions attached to IMF lending and assessment? The most common criticism that I hear of the IMF is that it goes way beyond its necessary remit in order to promote and impose a particular economic philosophy. That is largely, in simple words, being Thatcherite or Reaganite. Do you agree with that and that it is in fact stepping beyond its powers if that is so, reflecting more, if you like, the governance structure of who has weight within the organisation rather than the core remit of the IMF?

  Mr Woodward: Yes, I would certainly agree with that contention. There has been a very clear and particular economic model or ideology underlying the policies which have been advanced by the IMF throughout the last 25 years. I think that does clearly reflect an ideological shift and also partly the commercial interests of the developed countries. There is certainly a very strong case to be made for that.

  Q17  Susan Kramer: If no one else has any comment on that, can you propose any kind of mechanism that would shift that approach?

  Mr Woodward: That is something that is very difficult. Within the IMF, as with any institution, there is a very deeply ingrained institutional culture and set of values. The issue of reforming an existing institution, even if one were to change the governance structure, is quite a difficult one. The transition from the GATT (General Agreement on Tariffs and Trade) into the WTO, which again was in principle a very fundamental restructuring, demonstrates that, even if you have that sort of restructuring, that sort of inertia persists and in many respects not all that much has changed. I think the same would apply to the IMF. In terms of where we need to get to in the long term, it requires a more even-handed approach as between the developed and developing countries. If we are serious about eradicating poverty, improving health and securing the right to education, then we need to start off from what needs to be done to achieve those goals at the country level with a blank slate and then shift up from that to a system of global economic governance which would accommodate, foster and promote those policies. At the moment, we have a top-down approach where the broad policy lines are formulated at the global level and imposed on the country on the basis essentially of ideology in the hope that poverty reduction will somehow come about as a result, and that clearly has not worked.

  Professor Portes: It will not surprise you to hear that I substantially disagree with that analysis. It suggests, for example, that the Fund has not changed its views and its modus operandi and its underlying economic models and so forth over the past 25 years. That is just not correct. All you have to do is read the output of the Fund carefully and you can observe many changes. People in the Fund have acknowledged that the Washington Consensus that was so touted in the early Nineties was not adequate and that things have changed. Yes, of course it is a strong organisation and it has a strong organisational culture and that has great virtues. You do not want to destroy organisations just because they have a strong organisational culture; quite the opposite. What you want to do is adapt them. I believe that there has been some substantial adaptation in the Fund and in the nature of conditionality. It is not as detailed as it used to be, for example. You get exactly into the trap of excessively detailed conditionality if you want to start from the bottom up and look first at what is going to promote poverty and what is going to promote this or that and then try to go to overall fiscal and financial policy. Monetary and fiscal policy is actually relatively straightforward. It is a straightforward set of issues; whether it is politically implementable or the right policy is another matter. I think is fundamentally misguided to try to base it on poverty reduction strategies or whatever.

  Q18  Angela Eagle: I think the Washington Consensus clearly does not have the same hold over the IMF's approach as it used to have. Perhaps that is because it did so much damage when it was applied in an ideological way. Hopefully, even international organisations can learn from that. Going back to money laundering and offshoring, it seems to me that when the IMF was first set up, Maynard Keynes certainly wanted there to be the potential to override banking secrecy so that the issue of the offshoring and storing of vast amounts of capital could actually be in the public domain and people could be aware of it, and this was not agreed. In the meantime, according to the latest figures, there is US$ 11.5 trillion of offshore money swilling around the system somewhere, which is US$ 255 billion of tax revenue foregone. It is also increasingly financing narcotics and globalised criminality. Do you think that there is now a case for going back to the issue of banking secrecy and not necessarily having the IMF as the policing organisation but at least the transparency organisation to find out what is going on with this kind of offshoring, simply because, as a source of global imbalance and potential crises, it is obviously immense?

  Professor Miller: Clearly I would support what you have just said and the point you made about the missing taxes is crucial in the context of the elite versus the non-elite. The people who are not paying these taxes are the people rich enough to have Swiss bank accounts. My feeling is that they should not be allowed to have secret bank accounts, so I would look for more transparency in this area. In general, I think the notion of information and providing advice is something of which the IMF could do more. There are challenges of ideological purity and so on. I agree with Richard Woodward on this that there are a lot of fairly straightforward points that could be made about policy as well. The IMF's role in this area of information and policy advice is one which I encourage.

  Q19  Angela Eagle: Professor Portes, you said, I thought probably with absolute accuracy, that the idea of amending the articles of agreement in a way that had been suggested earlier was probably not practically on the cards. Do you think that there might be potential in trying to create more space for this kind of international transparency in capital offshoring? Whilst the IMF is not going to be allowed to run the US's economic policy for it or tell it what it ought to be doing with the dollar, is there not an argument for having a move now towards greater transparency internationally?

  Professor Portes: Maybe the IMF should be telling the US what should happen to the dollar.

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