Examination of Witnesses (Questions 20-39)
PROFESSOR MARCUS
MILLER, MR
DAVID WOODWARD
AND PROFESSOR
RICHARD PORTES
31 JANUARY 2006
Q20 Angela Eagle: I doubt the US
would listen.
Professor Portes: We should perhaps
get into that question of how the IMF deals with its major shareholders.
I would point out one thing in respect of your basic question
and that is that we have made progress on some of these issues,
some of that led by the United Kingdom, and that is in particular
in the European Union where the negotiations, which took a long
time, actually got to the point of agreeing the cross-border transfer
of information about bank accounts, in particular, to avoid tax
evasion. It is just a very hard slog. You cannot impose that from
some international organisation. It is a matter of national negotiation
and we got there on that one. Also, the OECD has been involved
in identifying tax havens and so forth. There is a range of international
fora for dealing with these issues. I think a major problem with
the Fund is that it has been drawn into too many things. One does
not want to get too deeply into this one.
Q21 Angela Eagle: The banking secrecy
question did feature at its birth in terms of what Keynes wanted
it to do, so it is not something new?
Professor Portes: That is a very
interesting and important point but it does remind us, too, that
at its birth we had a world of capital controls, which Keynes
of course strongly supported. That box is open now and it is not
going to be closed up.
Q22 Angela Eagle: Does not banking
secrecy become even more important in a world without capital
controls? That would be my view.
Professor Portes: I quite agree,
yes, but I think, as I say, that there are ways of going at that
that do not necessarily involve the Fund trying to act as policeman.
Q23 Mr Fallon: I want to come back
to this issue of IMF reform. When the previous Managing Director,
Horst Köhler, gave evidence to this committee back in July
2002, he identified as the fourth area for reform setting more
of the rules for the macro-economic game, if you like, the reassessing
of what can be done at the centre of our macro-economic systems.
Is that reform really happening?
Professor Portes: No, not really.
You are correct to identify that as a major issue. What is the
Fund's role in dealing—and Marcus Miller stressed this before
too—with the global imbalances? We have seen very little.
You can try to take this too far. Some people have called for
the Fund to establish a set of reference exchange rates that would
then be a standard by which you would evaluate whether countries
are over-valued or under-valued and what policies they are to
take, and so forth, to deal with that. I think that is a chimera
as well, but for reasons that would take me a little more time
to elaborate than I think you have. On the other hand, multilateral
surveillance in accordance with some fairly basic economic principles
is one of the core functions of the Fund, which it has not effectively
pursued.
Q24 Mr Fallon: I understand the surveillance,
the kind of coastguard role and the lifeboat role. It is about
whether it is possible for the Fund actually to develop and operate
rules for the macroeconomic system without altering the articles.
Is it possible for the IMF to do that?
Professor Portes: Yes, I think
so. I do not think there is any conflict or difficulty at all
with the Articles on that account.
Q25 Mr Fallon: Apart from improving
surveillance, is it moving successfully in that direction in any
way? Is the Medium Term Strategy taking us there?
Professor Portes: It is not obvious
to me.
Professor Miller: I think your
distinction between the surveillance role and the lifeboat role
is very useful. The question arises: is there something in the
middle? Richard Woodward I think is fairly sceptical. I think
there is more they could be doing. For example, on the dollar,
there is a very important paper by Obstfeld and Rogoff recently
re-circulated which computes that there needs to be a 30% adjustment
in the dollar and a big shift of demand from America to the Far
East to correct the imbalances. These are two busy academics writing
a paper. It seems to me there is a good case for the IMF to do
this on a more regular basis and let us all know the numbers.
What kind of exchange rates would be operative in a world of balance?
Richard does not want them to do this. I would be quite interested
if they did compute what are often known as fundamental equilibrium
exchange rates. I think it would be a useful informational role.
I differ from Richard on this and feel: why not have these expert
economists they employ providing some calculations that we could
all use? They do, of course, discuss these issues in their World
Economic Outlook, so it is not as if they are doing nothing, but
I feel they could do more on a more regular basis between surveillance
and the lifeboats.
Professor Portes: This is a longstanding
difference between Marcus Miller and myself, you will not perhaps
be surprised to know.
Professor Miller: The person who
is most keen on the fundamental equilibrium exchange rates is
John Williamson. From time to time, he computes these numbers
and they have often turned out to be quite useful in seeing whether
countries are way out of the correct range. For example, in 1985,
he was saying the dollar was far too high, and it came down. He
is saying the same again now.
Q26 Chairman: In October the Governor
of the Bank of England mentioned that the big currency blocks
should stop passing the buck and he called for international meetings
to help agree a proper response to global economic imbalances.
To what extent is the IMF the appropriate body for that?
Professor Miller: I think that
is exactly what we are talking about.
Q27 Chairman: Should that be another
function of the IMF now?
Professor Miller: Yes, but it
is largely about getting them to talk and co-operate. I do not
think it is about setting rules.
Q28 Chairman: You do not need another
body for that.
Mr Woodward: Again, the governance
structure of the IMF raises real questions about that. If we are
going to have those sorts of global discussions, can we have the
terms of reference for those discussions being set by a body which
is run by the developed countries which form one-sixth of the
world's population and yet have 60% of the votes in the IMF?
Q29 Chairman: In its present form
it is not the appropriate body. Would you agree with that, Richard?
Professor Portes: No, I would
not agree. I fully accept that the current governance of the Fund
is unbalanced, that the power relationships are unbalanced, and
therefore that if the Fund is going to play its role properly,
it has to be more equal. Given those constraints, for the time
being, it has to be cognisant of that, but that does not mean
that if the Fund convenes a meeting to discuss global imbalances,
it should not have Brazil and China there. Obviously, it would
simply not be fulfilling its role if it were to do that, and I
do not believe that it would. The question is whether the major
countries are willing to enter into those discussions seriously
under the aegis of a relatively impartial, I think, body that
also has a great deal of expertise to contribute to precisely
this set of issues. May I go back for one second to the exchange
rate question, because it is quite important? After all, this
is one of the Fund's core defining issues. There the work that
Marcus Miller was referring to is good work and it is generally
right. There is a problem in trying to set up reference rates.
We have FEERs, the Fundamental Equilibrium Exchange Rates; we
have GS DEERs, the Goldman Sachs Dynamic Equilibrium Exchange
Rates. There are all sorts of exercises like that. The issue is
how fast you get to what you might define as a long-run equilibrium
exchange rate. There we really have very little knowledge. We
have conflicting views right now about whether the adjustment
which Marcus referred to as necessary—with which I totally
agree—is going to occur in the space of six months or at
some point in what Paul Krugman calls "a Wile E Coyote moment".
You will remember the Roadrunner cartoons: Wile E keeps running
off the edge of the cliff and then suddenly he realises that there
is nothing underneath him. That is one scenario, and I think that
is a serious possible scenario. Another is that we have gradual
adjustment, as some of our other economics models would suggest.
Q30 Mr Love: I am not clear yet whether
what is being suggested by our experts is a different role for
the IMF in the sense of moving away from helping countries with
adjustments where they have imbalances or suggesting exchange
rates but not having a direct involvement. I want to pursue that
a little. I was interested in Professor Miller's contribution
to the committee when he talked about the changes over the last
10 years where quota lending has gone up significantly, 10 or
15 times, and of course that led the IMF into talking about debt
restructuring and countries talking about the appropriate exchange
rates. Of course what we have also seen during that period is
countries like China pursuing very specifically a low exchange
rate policy which has built up enormous balances for them. Some
people suggest that those balances have been built up as a protection
against having to go to the IMF. For all these countries building
up balances so that they can, frankly, ignore what the IMF is
saying to them about restructuring and their exchange rate, is
there a continuing role for the IMF in that area?
Professor Miller: As you say,
there has been a lot of do-it-yourself insurance by countries,
especially in east Asia. To that extent, they are finding a substitute
for the IMF. It is pretty expensive. They have to save and buy
American dollars and give resources to America, so it does not
seem a very socially efficient mechanism. One feels it is better
to have all this done centrally, as the IMF initially was set
up to do. Another possibility is an east Asian mechanism. One
of the papers I sent in was about the emerging of these swap agreements
in the Far East that may achieve the same kind of result. I think
there is panoply of different things one can do to try to cope
with capital account shifts. The IMF has been meeting some competition.
Frankly, I think competition is good. If the conditionality is
inappropriate, as you say, get your own reserves; forget the IMF.
It may be expensive but at least it is a challenge to the IMF,
a challenge that may mean they change their conditionality. In
general, I believe it is good to have competition. But I think
it is silly for the Far East to be accumulating quite as many
reserves as they are doing. I feel it is a challenge to the IMF
to be more attractive as a global lender than it was a few years
ago. I hope that that is what they are trying to do. There are,
as you probably know, moves afoot or discussion of moves for a
Country Insurance Facility to provide quick money to countries
that look safe to lend to quickly. That would be, in my view,
an improvement on existing resources and might economise on what
we see going on in the Far East.
Q31 Mr Love: I want to ask the question
slightly differently to Professor Portes. If we assume, since
the Chinese seem to have an inexhaustible supply of cheap labour
coming from the country into the city, that therefore they can
sustain this low exchange rate policy, assuming that the Americans
will go along with it in the longer term—and of course we
will get India coming along and they have not even started this
process properly—does the IMF have any role with those countries,
the larger countries that make come to dominate the world economy,
or will it be with the smaller countries it has a continuing role?
Professor Portes: Of course the
IMF should, in principle, have a role. Marcus is absolutely right
that the kinds of self-insurance that Asian countries, including
India by the way which now has 100 million plus of reserves, are
building up and the moves being taken, with some discussion of
an Asian Monetary Fund and so on, are good for the Fund. It is
good to have potential competition out there. But the Asian countries
have what a distinguished Asian economist, who was in the Japanese
Ministry of Finance for a brief period, said to me the other day:
they have a fear of floating exchange rates and a fear of the
IMF. If you put those two together, you get a build-up of reserves.
I do not think it is easy to stop that. Marcus and I were discussing
some recent work before we came in here that suggests that this
is cost-effective for these countries. I do not buy that work
entirely, but many of the Asian countries know all too well the
costs of exposing yourself to the risks of financial crisis. The
Chinese observed it in 1997 and 1998, and remember at about that
time everybody was calling on the Chinese not to devalue.
I do not think that they are doing things that are totally stupid.
Q32 Mr Love: Short of waiting until
there is going to be an abrupt adjustment where I suspect the
IMF would undoubtedly have to have a role, are we talking about
the IMF softening the conditions under which it wants to stop
the fear of the IMF that relates back to the Asian crisis of whatever
number of years ago? Is that what we are talking about or is there
a negotiation that can be carried on here to get them to recognise
the need?
Professor Miller: An analogy here
might be house prices. What should the Bank of England do about
house prices? It does not really want to tell everyone to sell
houses now because the prices are too high. It holds back and
then at some stage finally Mervyn King has begun to warn people.
I think house prices and the dollar are not too dissimilar. In
fact, some people say that when the housing market crashes in
America, the dollar will crash as well.
Professor Portes: And conversely.
Professor Miller: I think that
is the sort of way to think about it. What would you do if you
were the Governor of the Bank of England? Would you feel you knew
enough about house prices to call the market exactly? or do you
think you would wait until you thought it was really over-bought
and then start dropping hints? I feel it may be the role of the
IMF to orchestrate conferences in which people discuss the issues
and maybe come to the conclusion that the dollar ought to adjust.
I think the big issue is that it requires spending changes. America
has to absorb less goods. A lot of the deficit is the counterpart
of the US Government deficit. That is real politics and so there
has to be some political realisation of the non-sustainability.
Again, the IMF cannot tell America what to do but it can put the
cards on the table. It is a very delicate issue. I do not think
there is any magic solution.
Q33 Mr Love: Finally, can I put Professor
Portes on the spot in the sense that we know that Mr Woodward
wants fairly radical restructuring of the IMF. You have accepted
that there is an imbalance, that it is all the developed countries
that currently have control of the IMF. What sort of restructuring
do you think would be, if I can put it crudely, acceptable to
the US that will sustain all of the developed countries in the
IMF but give a much greater voice to the other parts of the world?
Do you think there is a sustainable change?
Professor Portes: Yes, I think
the United States would be perfectly happy to accept a rebalancing
of Europe as against other countries, in particular the so-called
systemically important countries like Brazil, India, China and
so forth. It is quite clear, if you are talking about real imbalances,
that European representation is much too great in the Executive
Board and very hard to justify now, especially when you have the
euro and a joint monetary policy. For a number of those countries
to be separately represented on the Board of the Fund does not
make sense. Europe is hugely over-weighted. The US is not going
to give up its blocking veto, and that is clear. That is just
not on the table. We cannot expect that. I think there is a fair
degree of agreement in Washington, and it goes across party lines,
that a restructuring of governance along the lines I have suggested
would be a good thing.
Q34 Mr Todd: One of the core functions
of the IMF is surveillance work and analyses of economic risk.
Do you think that that is deployed effectively? We see reports
for example on the UK by the IMF. Those of us old enough can remember
that there was a time when active engagement with the IMF was
a real political issue in this country, but nevertheless some
time back. Are the resources deployed sensibly towards areas of
highest risk or do people really just cover the ground?
Professor Portes: That is a very
good question. By the way, I once wrote a monograph entitled Crisis?
What Crisis? You may remember that phrase.
Q35 Mr Todd: I am old enough to remember.
Professor Portes: Exactly, and
the title was drawn directly from the 1976 remark.
Q36 Mr Todd: A misquote, apparently.
Professor Portes: I think you
pose an extremely difficult question: how to rebalance, if you
like, the surveillance function and where it could be focusing.
I think the focus right now really does have to be on the few
countries that are still at risk. Brazil is still at risk. Turkey
is still at risk. These are systemically important. Those countries
could be affected by the major global imbalances that we have
been talking about: exchange rates and current account deficits.
An adjustment of those imbalances, depending on the form it took,
could have some strong impacts upon countries that are at risk.
Then there are smaller countries that are also at risk. I am hesitating
a bit because I am not sure about how I would go about it. That
is testimony to the difficulty of the questions. Again, it is
partly a matter of internal resource allocation of the Fund, but
I think that the focus should be away from things that I think
the Fund should not be doing and towards the issues on which you
are focusing.
Professor Miller: One idea here
is competition. The problem with the Fund telling its bosses what
to do is precisely that bosses do not like to hear this kind of
thing from their economists. Often you find someone outside the
organisation may do the job, say the OECD. One could encourage
counter-assessments by the OECD as a challenge because I think
there is this internal problem. I should also mention that on
occasions there are problems of a conflict of interests. In these
risky cases like Brazil or Turkey, the IMF is often in there as
a big lender; it wants to get its money out. Sometimes its judgment
and its position is suspect because of a conflict of interest.
I think that is one issue that has to be taken account of, that
it may not be trusted by all the parties because it is a big lender.
That is unfortunate but maybe for reasons like that it is important
to have some other external sources of assessment as well.
Mr Woodward: Could I add that
I think that raises fundamental questions about the central role
that the IMF plays in the process of negotiating debt cancellation,
that essentially we have a process for debt cancellation which
is run not only by a creditor but by a creditor the majority of
whose shareholders, the majority of the control, is in the hands
of other creditors. In any national process you would not think
of that as a state of affairs. In terms of debt cancellation,
I think we need to move towards a process which is led by an organisation
independent both of debtors and of creditors, or at least balanced
between the two.
Professor Portes: In what way
did the Fund actually run or in any way seriously guide the debt
restructuring and debt cancellation process, as you put it, for
Argentina? Not at all. It goes back to what Marcus was saying:
the Fund in part had a substantial conflict of interest in that
situation. That was perceived by all the parties. For the Fund
to go in and say, "And this is what Argentina can afford
to pay, and, by the way, we are first in line" was not acceptable;
it certainly was not acceptable to the Argentines, and it would
not have been implementable.
Q37 Mr Todd: What you are highlighting
in this interesting little debate is that having analysed where
risk lies, because the IMF is a lender as well, identifying what
to do is complicated because there is an interest in it and it
is complicated by the shareholder mechanism of governance of the
IMF as well. Does it suggest that actually the IMF's brief of
action to deal with the risk is beyond its competence or is it
just that we are all adults and we all understand those complications,
and then we work around them in the rather traditionally British
way of doing things?
Professor Miller: There has been
a suggestion that the assessment of sustainability should be done
by the IDB (the Inter-American Development Bank) precisely to
avoid the conflict of interest. I do not think the IDB wants to
do it. They may have to get some economists over from the IMF
to help them with the task, but I think it illustrates the problem.
It is a delicate problem and, as I say, I think external sources
of assessment may be useful.
Mr Woodward: Can I clarify, in
the light of Professor Portes's comments? I was essentially referring,
if you like, to the 1980s-style debt crisis led by government
debts. The IMF plays a key role in recommending to the Paris Club
what terms of rescheduling or debt cancellation should be offered.
There is a very clear role. The 1990-style debt crisis where the
Paris Club is not involved is a somewhat different kettle of fish.
Q38 Peter Viggers: Dealing with the
mechanistic point on the manner in which the IMF is run, do you
think that it would be helpful if there were further clarity about
the deliberations of the Board of Governors? There are no minutes
made available, for instance. Would it be helpful if the method
of decision making were less opaque, more open and more two-way?
Professor Portes: That is an easy
question to answer: yes, sir.
Q39 Peter Viggers: Let us quit while
we are ahead! Funding for the IMF has fallen and private cash
flows have become more important in proportional terms. Is this
a sign that the IMF is less important than it used to be or do
you think there is prospectively a greater need now for the IMF
and that the low level of funding actually poses a danger?
Professor Miller: As I argued
in the paper submitted at the beginning, I think it reflects a
substantial change in the world, namely the liberalisation of
capital movements. That has just raised the game enormously. I
think it has suggested that the Fund size is not really adequate.
Therefore, what has happened, in fact, is that they have tried
to make bigger and bigger bail-outs until they failed. In the
case of Korea, it was interesting that they found they simply
could not assemble a big enough package and so the answer was
to get the banks to play the game as well and to get the banks
to stay in Korea, and so to get creditors to take some action.
Otherwise the IMF found it was simply trying to raise enough money
to allow all the big banks in the world to leave Korea at Christmastime.
That is a lot of money and more than the IMF could put together
and so you just persuade the banks to stay in. If it is only a
liquidity crisis, then the answer is to persuade people to leave
their money in Korea, which is what they did. I think there has
been a shift towards getting creditors to play a much bigger role
and not to have the IMF playing longstop, and I would encourage
that kind of role. For the last 10 years the IMF has been trying
to get creditors involved and taking losses or staying in crisis
countries, if it is a short-term crisis. Another possibility is
floating exchange rates, to persuade countries not to stay on
fixed exchange rates too long. So there is a panoply of responses
to a Pandora's Box.
Mr Woodward: My perspective on
it would be that the Fund is now facing a crisis which comes about
pretty much as a direct result of its failure to deal either with
the 1980s debt crisis or the 1990s financial crisis. Its membership
is increasingly divided between one set of countries that, as
a result of the failure still to deal with the 1980s debt crisis,
are no longer able to borrow from the Fund on its normal terms.
At the other end of the spectrum you have countries which are
more prone to financial crises, but the Asian crisis and the Latin
American crises of the 1990s shows that the instruments available
to the Fund and the policy packages it has available are not equipped
to deal with that, hence you have the build up of reserves, particularly
among Asian economies, to prevent having to go to the Fund. So
effectively you have countries which cannot afford to borrow from
the Fund and countries which do not want to borrow from the Fund,
but the Fund is dependent on its lending and the interest on its
lending to cover its administrative costs and that risks getting
squeezed out in between. In a sense this is something that could
come about as a result of excessive success from the Fund, if
it managed to maintain the international financial system so that
nobody faced a crisis and nobody needed to borrow, but it is a
result of its failures in that we have countries which either
cannot afford to borrow or which are going to make every effort
to avoid borrowing.
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