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?
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
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
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
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
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 doesthat 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
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 pieall
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
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
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 demandreduction in America and expansion in Asiaand
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
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
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 thingswe
can think of n different possibilities and the Fund has
thought of most of themfor 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 aboutmoney
laundering or simply illegal capital flight or hidden capital
flightand 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 sortin terms of preventing people moving
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
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
Professor Portes: Maybe the IMF
should be telling the US what should happen to the dollar.